e10vq
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
December 31, 2006
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-14131
ALKERMES, INC.
(Exact name of registrant as
specified in its charter)
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|
|
PENNSYLVANIA
(State or other
jurisdiction of
incorporation or organization)
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23-2472830
(I.R.S. Employer
Identification No.)
|
88 Sidney Street, Cambridge,
MA
(Address of principal
executive offices)
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|
02139-4234
(Zip
Code)
|
Registrants telephone number including area code:
(617) 494-0171
(Former name, former address,
and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act.): Yes o No þ
The number of shares outstanding of each of the issuers
classes of common stock was:
|
|
|
|
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As of February 1,
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Class
|
|
2007
|
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Common Stock, $.01 par value
|
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100,578,967
|
|
Non-Voting Common Stock,
$.01 par value
|
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|
382,632
|
|
ALKERMES,
INC. AND SUBSIDIARIES
INDEX
2
PART 1.
FINANCIAL INFORMATION
|
|
Item 1.
|
Condensed
Consolidated Financial Statements:
|
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
|
|
|
|
|
|
|
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December 31,
|
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March 31,
|
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|
|
2006
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
share and per share
|
|
|
|
amounts)
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
83,224
|
|
|
$
|
33,578
|
|
Investments short-term
|
|
|
267,875
|
|
|
|
264,389
|
|
Receivables
|
|
|
62,381
|
|
|
|
39,802
|
|
Inventory, net
|
|
|
13,933
|
|
|
|
7,341
|
|
Prepaid expenses and other current
assets
|
|
|
6,673
|
|
|
|
2,782
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
434,086
|
|
|
|
347,892
|
|
|
|
|
|
|
|
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|
PROPERTY, PLANT AND EQUIPMENT:
|
|
|
|
|
|
|
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Land
|
|
|
301
|
|
|
|
301
|
|
Building and improvements
|
|
|
25,138
|
|
|
|
20,966
|
|
Furniture, fixtures and equipment
|
|
|
69,907
|
|
|
|
61,086
|
|
Equipment under capital lease
|
|
|
464
|
|
|
|
464
|
|
Leasehold improvements
|
|
|
34,664
|
|
|
|
45,842
|
|
Construction in progress
|
|
|
35,016
|
|
|
|
23,555
|
|
|
|
|
|
|
|
|
|
|
|
|
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165,490
|
|
|
|
152,214
|
|
Less: accumulated depreciation and
amortization
|
|
|
(48,523
|
)
|
|
|
(39,297
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and
equipment net
|
|
|
116,967
|
|
|
|
112,917
|
|
|
|
|
|
|
|
|
|
|
RESTRICTED INVESTMENTS
long-term
|
|
|
5,144
|
|
|
|
5,145
|
|
OTHER ASSETS
|
|
|
7,179
|
|
|
|
11,209
|
|
|
|
|
|
|
|
|
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TOTAL ASSETS
|
|
$
|
563,376
|
|
|
$
|
477,163
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS
EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
expenses
|
|
$
|
25,085
|
|
|
$
|
36,141
|
|
Accrued interest
|
|
|
2,985
|
|
|
|
3,239
|
|
Accrued restructuring costs
|
|
|
311
|
|
|
|
852
|
|
Unearned milestone
revenue current portion
|
|
|
39,037
|
|
|
|
83,338
|
|
Deferred revenue
current portion
|
|
|
200
|
|
|
|
200
|
|
Convertible subordinated
notes current portion
|
|
|
676
|
|
|
|
676
|
|
Long-term debt current
portion
|
|
|
1,287
|
|
|
|
1,214
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
69,581
|
|
|
|
125,660
|
|
|
|
|
|
|
|
|
|
|
NON-RECOURSE RISPERDAL CONSTA
SECURED 7% NOTES
|
|
|
156,026
|
|
|
|
153,653
|
|
CONVERTIBLE SUBORDINATED
NOTES LONG-TERM PORTION
|
|
|
|
|
|
|
124,346
|
|
LONG-TERM DEBT
|
|
|
629
|
|
|
|
1,519
|
|
UNEARNED MILESTONE
REVENUE LONG-TERM PORTION
|
|
|
119,259
|
|
|
|
16,198
|
|
DEFERRED REVENUE
LONG-TERM PORTION
|
|
|
19,266
|
|
|
|
750
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
6,378
|
|
|
|
6,821
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
371,139
|
|
|
|
428,947
|
|
|
|
|
|
|
|
|
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|
REDEEMABLE CONVERTIBLE PREFERRED
STOCK, par value, $0.01 per share; authorized and issued,
none and 1,500 shares at December 31, 2006 and
March 31, 2006, respectively (at liquidation preference),
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|
|
|
|
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|
15,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES:
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
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|
Capital stock, par value,
$0.01 per share; authorized, 4,550,000 shares
(includes 2,997,000 shares of preferred stock); issued, none
|
|
|
|
|
|
|
|
|
Common stock, par value,
$0.01 per share; authorized, 160,000,000 shares;
101,386,949 and 91,744,680 shares issued, 100,560,298 and
91,744,680 shares outstanding at December 31, 2006 and
March 31, 2006, respectively
|
|
|
1,014
|
|
|
|
917
|
|
Nonvoting common stock, par value,
$0.01 per share; authorized 450,000 shares; issued and
outstanding, 382,632 shares at December 31, 2006 and
March 31, 2006
|
|
|
4
|
|
|
|
4
|
|
Treasury stock, at cost
(823,677 shares and none at December 31, 2006 and
March 31, 2006, respectively)
|
|
|
(12,492
|
)
|
|
|
|
|
Additional paid-in capital
|
|
|
830,392
|
|
|
|
664,596
|
|
Deferred compensation
|
|
|
|
|
|
|
(374
|
)
|
Accumulated other comprehensive
income
|
|
|
365
|
|
|
|
1,064
|
|
Accumulated deficit
|
|
|
(627,046
|
)
|
|
|
(632,991
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
192,237
|
|
|
|
33,216
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS EQUITY
|
|
$
|
563,376
|
|
|
$
|
477,163
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing revenues
|
|
$
|
28,763
|
|
|
$
|
14,715
|
|
|
$
|
77,078
|
|
|
$
|
42,224
|
|
Royalty revenues
|
|
|
5,673
|
|
|
|
4,228
|
|
|
|
16,625
|
|
|
|
11,867
|
|
Research and development revenue
under collaborative arrangements
|
|
|
19,532
|
|
|
|
9,951
|
|
|
|
51,620
|
|
|
|
33,935
|
|
Net collaborative profit
|
|
|
8,445
|
|
|
|
12,524
|
|
|
|
29,798
|
|
|
|
24,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
62,413
|
|
|
|
41,418
|
|
|
|
175,121
|
|
|
|
112,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
|
12,989
|
|
|
|
6,077
|
|
|
|
34,149
|
|
|
|
14,954
|
|
Research and development
|
|
|
29,908
|
|
|
|
22,501
|
|
|
|
85,588
|
|
|
|
63,493
|
|
Selling, general and administrative
|
|
|
16,365
|
|
|
|
9,332
|
|
|
|
48,572
|
|
|
|
27,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
59,262
|
|
|
|
37,910
|
|
|
|
168,309
|
|
|
|
105,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
3,151
|
|
|
|
3,508
|
|
|
|
6,812
|
|
|
|
7,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,260
|
|
|
|
3,278
|
|
|
|
13,329
|
|
|
|
7,928
|
|
Interest expense
|
|
|
(4,141
|
)
|
|
|
(5,177
|
)
|
|
|
(13,648
|
)
|
|
|
(15,497
|
)
|
Derivative loss related to
convertible subordinated notes
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
|
|
(1,084
|
)
|
Other income (expense), net
|
|
|
89
|
|
|
|
113
|
|
|
|
212
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
208
|
|
|
|
(2,101
|
)
|
|
|
(107
|
)
|
|
|
(7,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
3,359
|
|
|
|
1,407
|
|
|
|
6,705
|
|
|
|
(578
|
)
|
INCOME TAXES
|
|
|
426
|
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
2,933
|
|
|
$
|
1,407
|
|
|
$
|
5,944
|
|
|
$
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
100,896
|
|
|
|
91,505
|
|
|
|
98,690
|
|
|
|
90,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
|
|
|
104,746
|
|
|
|
96,720
|
|
|
|
103,156
|
|
|
|
90,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,944
|
|
|
$
|
(578
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
22,218
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,838
|
|
|
|
7,856
|
|
Other non-cash charges
|
|
|
2,738
|
|
|
|
4,410
|
|
Derivative loss related to
convertible subordinated notes
|
|
|
|
|
|
|
1,084
|
|
Loss (gain) on sale of investments
|
|
|
510
|
|
|
|
(1,000
|
)
|
Gain on sale of equipment
|
|
|
(93
|
)
|
|
|
(54
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(11,079
|
)
|
|
|
(14,599
|
)
|
Inventory, prepaid expenses and
other current assets
|
|
|
(10,058
|
)
|
|
|
(5,096
|
)
|
Accounts payable, accrued expenses
and accrued interest
|
|
|
(11,205
|
)
|
|
|
9,444
|
|
Accrued restructuring costs
|
|
|
(393
|
)
|
|
|
(780
|
)
|
Unearned milestone revenue
|
|
|
58,760
|
|
|
|
128,526
|
|
Deferred revenue
|
|
|
18,516
|
|
|
|
|
|
Other long-term liabilities
|
|
|
202
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
84,898
|
|
|
|
129,719
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(24,728
|
)
|
|
|
(20,809
|
)
|
Proceeds from the sale of equipment
|
|
|
159
|
|
|
|
105
|
|
Purchases of short and long-term
investments
|
|
|
(217,453
|
)
|
|
|
(613,813
|
)
|
Sales and maturities of short and
long-term investments
|
|
|
214,193
|
|
|
|
478,933
|
|
Decrease in other assets
|
|
|
18
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(27,811
|
)
|
|
|
(155,489
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
5,868
|
|
|
|
3,077
|
|
Payment of debt
|
|
|
(817
|
)
|
|
|
(835
|
)
|
Purchase of treasury stock
|
|
|
(12,492
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
financing activities
|
|
|
(7,441
|
)
|
|
|
2,242
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
|
|
|
49,646
|
|
|
|
(23,528
|
)
|
CASH AND CASH
EQUIVALENTS Beginning of period
|
|
|
33,578
|
|
|
|
47,485
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS End of period
|
|
$
|
83,224
|
|
|
$
|
23,957
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,647
|
|
|
$
|
10,371
|
|
Cash paid for taxes
|
|
|
896
|
|
|
|
|
|
Noncash activities:
|
|
|
|
|
|
|
|
|
Conversion of
2.5% convertible subordinated notes into common stock
|
|
|
125,000
|
|
|
|
|
|
Conversion of redeemable
convertible preferred stock into common stock
|
|
|
|
|
|
|
15,000
|
|
Redemption of redeemable
convertible preferred stock
|
|
|
15,000
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
ALKERMES,
INC. AND SUBSIDIARIES
|
|
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, 2006 and
2005 are unaudited and have been prepared on a basis
substantially consistent with the audited financial statements
for the year ended March 31, 2006. In the opinion of
management, the condensed consolidated financial statements
include all adjustments that are necessary to present fairly the
results of operations for the reported periods. The
Companys condensed consolidated financial statements are
prepared in conformity with accounting principles generally
accepted in the United States of America (commonly referred to
as GAAP).
These financial statements should be read in conjunction with
the Companys audited consolidated financial statements and
notes thereto which are contained in the Companys Annual
Report on
Form 10-K/A
for the year ended March 31, 2006, filed with the
Securities and Exchange Commission (SEC).
The results of the Companys operations for any interim
period are not necessarily indicative of the results of the
Companys operations for any other interim period or for a
full fiscal year.
Principles of Consolidation The unaudited
condensed consolidated financial statements include the accounts
of Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes
Controlled Therapeutics, Inc. (ACT I); Alkermes
Acquisition Corp.; Alkermes Europe, Ltd.; Advanced Inhalation
Research, Inc. (AIR); and RC Royalty Sub LLC
(Royalty Sub). The assets of Royalty Sub are not
available to satisfy obligations of Alkermes and its
subsidiaries, other than the obligations of Royalty Sub
including Royalty Subs non-recourse
RISPERDAL®
CONSTA®
secured 7% notes (the Non-Recourse
7% Notes). Alkermes Controlled Therapeutics
Inc. II (ACT II) was dissolved on
July 31, 2006. Intercompany accounts and transactions have
been eliminated.
Use of Estimates The preparation of the
Companys unaudited 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 unaudited condensed consolidated financial
statements; and (3) the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from these estimates.
New
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurements (SFAS No. 157),
which establishes a framework for measuring fair value in GAAP
and expands disclosures about the use of fair value to measure
assets and liabilities in interim and annual reporting periods
subsequent to initial recognition. Prior to
SFAS No. 157, which emphasizes that fair value is a
market-based measurement and not an entity-specific measurement,
there were different definitions of fair value and limited
guidance for applying those definitions in GAAP.
SFAS No. 157 is effective for the Company on a
prospective basis for the reporting period beginning
April 1, 2008. The Company is in the process of evaluating
the impact of the adoption of SFAS No. 157 on its
financial statements and related disclosures.
In June 2006, the FASB issued FASB Interpretation
(FIN) No. 48, Accounting for
Uncertainty in Income Taxes
(FIN No. 48) an interpretation of
SFAS No. 109, Accounting for Income
Taxes. FIN No. 48 clarifies the accounting
for uncertainty in income taxes recognized in a companys
financial statements and prescribes a recognition threshold and
measurement process for financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. FIN No. 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition and
6
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
will become effective for the Company on April 1, 2007. The
Company is in the process of evaluating the impact of the
adoption of FIN No. 48 on its financial statements and
related disclosures.
|
|
2.
|
COLLABORATIVE
ARRANGEMENTS
|
Lilly
In December 2006, the Company and Eli Lilly and Company
(Lilly) entered into a commercial manufacturing
agreement for
AIR®
Inhaled Insulin (AIR Insulin). Under the agreement,
the Company is the exclusive commercial manufacturer and
supplier of AIR Insulin powder for the AIR Inhaled Insulin
System (AIR Insulin System). The agreement provides
for Lilly to fund all operating costs of the portion of the
Companys commercial-scale production facility used to
manufacture AIR insulin products, including the cost of AIR
Insulin products manufactured at the Companys facility. In
addition, Lilly funds the construction, development, validation
and scale-up
of a second manufacturing line at the facility to meet
post-launch requirements for AIR Insulin production. The Company
is responsible for overseeing the construction, development,
validation and
scale-up of
the second manufacturing line.
Under the agreement, Lilly supplies all bulk active
pharmaceutical product at no cost to the Company and is
responsible for product packaging. Lilly will reimburse the
Company for costs it previously incurred for the construction of
the second manufacturing line, and Lilly will own all equipment
purchased. The Company has the option to purchase this equipment
from Lilly at any time at Lillys then net book value or at
a negotiated purchase price not to exceed Lillys then net
book value upon termination of the commercial manufacturing
agreement.
In the event that the AIR Insulin product is commercialized,
Lilly will purchase delivered product from the Company on a cost
plus fee basis. In addition to the manufacturing fee, the
Company earns royalties at a low double digit rate on net sales
of the AIR Insulin product by Lilly.
Lilly has the right to terminate the commercial manufacturing
agreement at any time following the fourth anniversary of the
effective date of the agreement by providing ninety days prior
written notice to the Company, subject to certain continuing
rights and obligations. The Company has the right to terminate
the commercial manufacturing agreement at any time within ninety
days after the end of any calendar year that is four or more
years after the launch of the first product, by providing ninety
days prior written notice to Lilly, if the manufacture of the
manufactured items purchased by Lilly in such calendar year
requires less than seventy-five percent of the capacity of the
manufacturing lines covered by the agreement. This termination
right is subject to certain continuing rights and obligations.
In addition, either party may terminate the agreement for any
material breach by the other party which is not cured within
ninety days of written notice of this material breach or within
a longer period that is reasonably necessary to effect this cure.
The term of the commercial manufacturing agreement continues
until expiration or termination of the development and license
agreement that the Company entered into with Lilly in April 2001
for the development of inhaled formulations of insulin and other
compounds.
Cephalon
In October 2006, the Company and Cephalon, Inc.
(Cephalon) entered into a binding amendment to each
of the existing license and collaboration agreement dated
June 23, 2005 between the parties (the License
Agreement), and the supply agreement dated June 23,
2005 between the parties (the Supply Agreement) (the
amendments taken together, the Amendments). Under
the Amendments, the parties agreed to revise the provisions set
forth in the License Agreement with respect to the first
$120.0 million of cumulative net losses of the
collaboration incurred prior to December 31, 2007, for
which the Company is responsible (the cumulative net loss
cap). Under the Amendments, Cephalon agreed to be
responsible for its own
VIVITROL®
related costs during the period August 1, 2006 through
December 31, 2006 and, consequently,
7
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during this period no such costs were charged by Cephalon to the
collaboration and against the cumulative net loss cap.
The Company is manufacturing VIVITROL on one manufacturing line
at the Companys manufacturing facility. Under the
Amendments, the parties agreed that Cephalon will purchase from
the Company two additional VIVITROL manufacturing lines (and
related equipment) under construction, which will continue to be
operated by the Company at its manufacturing facility. Through
December 31, 2006, the Company billed Cephalon
$18.7 million for the sale of the two manufacturing lines,
and the Company will bill Cephalon for future costs it incurs
related to the construction of the two manufacturing lines.
Cephalon has granted the Company an option, exercisable after
two years, to repurchase the manufacturing lines at the then net
book value of the assets.
Amounts received from Cephalon for the purchase of the physical
assets associated with the additional VIVITROL manufacturing
lines were recorded under the caption Deferred
revenue long-term portion in the consolidated
balance sheets and will be recognized as revenue over the
depreciable life of the assets in amounts equal to the related
asset depreciation. Future purchases of physical assets by
Cephalon will be accounted for the same way.
During the three months ended December 31, 2006, the
Company received a $4.6 million payment from Cephalon as
reimbursement for certain costs incurred by the Company prior to
October 2006 and charged to the collaboration, related to the
construction of the additional VIVITROL manufacturing lines,
consisting primarily of internal or temporary employee or
full-time equivalent (FTE)-related time. The payment
was recorded under the caption Unearned milestone
revenue in the consolidated balance sheets and will be
recognized as milestone revenue cost recovery under
the caption Net collaborative profit in accordance
with the Companys revenue recognition policy for VIVITROL.
The Company and Cephalon have agreed to increase the cumulative
net loss cap from $120.0 million to $124.6 million to
account for this reimbursement.
Beginning October 2006, all FTE-related costs incurred by the
Company that are reimbursable by Cephalon related to the
construction and validation of the VIVITROL manufacturing lines
are recorded as research and development revenue as incurred.
Indevus
In January 2007, the Company and Indevus Pharmaceuticals, Inc.
(Indevus) announced that they had entered into a
joint collaboration for the development of ALKS 27, an
inhaled formulation of trospium chloride for the treatment of
chronic obstructive pulmonary disease (COPD). The
announcement of this collaboration followed the completion of
extensive feasibility work, preclinical studies and a
phase 1 study in healthy volunteers. Preliminary results
from the phase 1 study showed that ALKS 27 was well
tolerated over a wide dose range, with no dose-limiting effects
observed.
ALKS 27 is an inhaled formulation of trospium chloride, a
muscarinic receptor antagonist that relaxes smooth muscle tissue
and has the potential to improve airflow in patients with COPD.
Trospium chloride is the active ingredient in
SANCTURA®,
Indevus currently marketed product for overactive bladder.
The formulation under development for ALKS 27 is specifically
designed for inhalation utilizing the Companys proprietary
AIR pulmonary delivery system.
The Company and Indevus plan to initiate a phase 2a
clinical study in the first half of 2007 designed to evaluate
the clinical efficacy of ALKS 27, administered once-daily,
in subjects with COPD. Pending results of the phase 2a
study, the companies plan to engage a partner for future
development and commercialization of ALKS 27.
8
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the joint collaboration, the Company and Indevus share
equally all costs of development and commercial returns on a
worldwide basis. The Company will perform all formulation work
and manufacturing. Indevus will conduct the clinical development
program.
Rensselaer
Polytechnic Institute
In September 2006, the Company and Rensselaer Polytechnic
Institute (RPI) entered into a license agreement
granting the Company exclusive rights to a family of opioid
receptor compounds discovered at RPI. These compounds represent
an opportunity for the Company to develop therapeutics for a
broad range of diseases and medical conditions, including
addiction, pain and other central nervous system disorders. The
Company will screen this library of compounds and plans to
pursue preclinical work of an undisclosed, lead oral compound
that has already been identified.
Under the terms of the agreement, RPI granted the Company an
exclusive worldwide license to certain patents and patent
applications relating to its compounds designed to modulate
opioid receptors. The Company will be responsible for the
continued research and development of any resulting product
candidates. The Company paid RPI a nonrefundable upfront payment
and will pay certain milestones relating to clinical development
activities and royalties on products resulting from the
agreement. All amounts paid to RPI under this license agreement
have been expensed and are included in research and development
expenses.
|
|
3.
|
COMPREHENSIVE
INCOME (LOSS)
|
Comprehensive income (loss) for the three and nine months ended
December 31, 2006 and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,933
|
|
|
$
|
1,407
|
|
|
$
|
5,944
|
|
|
$
|
(578
|
)
|
Unrealized (loss) gain on
available-for-sale
investments
|
|
|
(1,152
|
)
|
|
|
(52
|
)
|
|
|
(699
|
)
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
1,781
|
|
|
$
|
1,355
|
|
|
$
|
5,245
|
|
|
$
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
EARNINGS
(LOSS) PER COMMON SHARE
|
Basic earnings (loss) per common share is calculated based upon
net income (loss) available to holders of common shares divided
by the weighted average number of shares outstanding. For the
calculation of diluted earnings per common share, the Company
uses the weighted average number of shares outstanding, as
adjusted for the effect of potential outstanding shares,
including stock options, stock awards, redeemable convertible
preferred stock and convertible debt. For periods during which
the Company reports a net loss from operations, basic and
diluted net loss per common share are equal since the impact of
potential common shares would have an anti-dilutive effect.
9
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic and diluted earnings (loss) per common share are
calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,933
|
|
|
$
|
1,407
|
|
|
$
|
5,944
|
|
|
$
|
(578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding
|
|
|
100,896
|
|
|
|
91,505
|
|
|
|
98,690
|
|
|
|
90,826
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,723
|
|
|
|
4,180
|
|
|
|
3,633
|
|
|
|
|
|
Restricted stock awards
|
|
|
291
|
|
|
|
86
|
|
|
|
244
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
836
|
|
|
|
949
|
|
|
|
589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share equivalents
|
|
|
3,850
|
|
|
|
5,215
|
|
|
|
4,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted
earnings (loss) per common share
|
|
|
104,746
|
|
|
|
96,720
|
|
|
|
103,156
|
|
|
|
90,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts were not included in the calculation of
net income (loss) per common share because their effects were
anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
(In thousands)
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for interest
|
|
$
|
8
|
|
|
$
|
787
|
|
|
$
|
1,243
|
|
|
$
|
2,361
|
|
Adjustment for derivative loss
|
|
|
|
|
|
|
315
|
|
|
|
|
|
|
|
1,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8
|
|
|
$
|
1,102
|
|
|
$
|
1,243
|
|
|
$
|
3,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,196
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,835
|
|
2.5% convertible subordinated
notes
|
|
|
|
|
|
|
9,025
|
|
|
|
2,461
|
|
|
|
9,025
|
|
3.75% convertible
subordinated notes
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10
|
|
|
|
9,035
|
|
|
|
2,471
|
|
|
|
31,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventory, net is stated at the lower of cost or market value.
Cost was determined using the
first-in,
first-out method. Inventory, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
5,741
|
|
|
$
|
4,211
|
|
Work in process
|
|
|
4,500
|
|
|
|
2,345
|
|
Finished goods
|
|
|
4,669
|
|
|
|
1,629
|
|
|
|
|
|
|
|
|
|
|
Inventory, gross
|
|
|
14,910
|
|
|
|
8,185
|
|
Allowances
|
|
|
(977
|
)
|
|
|
(844
|
)
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
13,933
|
|
|
$
|
7,341
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
CONVERTIBLE
SUBORDINATED NOTES
|
2.5% Convertible Subordinated Notes On
June 15, 2006, the Company converted all of the outstanding
$125.0 million principal amount of the 2.5% convertible
subordinated notes due 2023 (the 2.5% Subordinated
Notes) into 9,025,271 shares of the Companys
common stock. The book value of the 2.5% Subordinated Notes at
the time of the conversion was $124.4 million. In
connection with the conversion, the Company paid approximately
$0.6 million in cash to satisfy a three-year interest
make-whole provision in the note indenture, which was recorded
as additional interest expense at the date of the conversion.
None of the 2.5% Subordinated Notes were outstanding as of
December 31, 2006, and no gain or loss was recorded on the
conversion of the 2.5% Subordinated Notes, which was executed in
accordance with the underlying indenture.
In connection with the 2004 restructuring program, in which the
Company and Genentech, Inc. announced the decision to
discontinue commercialization of NUTROPIN
DEPOT®
(the 2004 Restructuring), the Company recorded net
restructuring charges of approximately $11.5 million in the
year ended March 31, 2005. As of December 31, 2006,
the Company had paid in cash, written off, recovered and made
restructuring charge adjustments that aggregate approximately
$10.2 million in facility closure costs and
$0.1 million in employee separation costs in connection
with the 2004 Restructuring. The amounts remaining in the
restructuring accrual as of December 31, 2006 are expected
to be paid out through fiscal 2009 and relate primarily to
estimates of lease costs, net of sublease income, associated
with the exited facility.
The following table displays the restructuring activity during
the nine months ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
March 31,
|
|
|
Write-Downs and
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Adjustments(1)
|
|
|
Payments
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility closure and employee
separation
|
|
$
|
2,368
|
|
|
$
|
(792
|
)
|
|
$
|
(394
|
)
|
|
$
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,368
|
|
|
$
|
(792
|
)
|
|
$
|
(394
|
)
|
|
$
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of $0.3 million of non-cash write-downs and
$0.5 million of adjustments for sublease income due to the
Company under a facility sublease agreement related to facility
that the Company had closed in connection with the 2004
Restructuring. These adjustments are included in selling,
general and administrative expense. |
11
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
REDEEMABLE
CONVERTIBLE PREFERRED STOCK
|
In December 2002, the Company and Lilly expanded the
collaboration for the development of inhaled formulations of
insulin and hGH based on the Companys AIR pulmonary drug
delivery technology. In connection with the expansion, Lilly
purchased $30.0 million of the Companys 2002
redeemable convertible preferred stock, $0.01 par value per
share (the Preferred Stock) in accordance with a
stock purchase agreement dated December 13, 2002 (the
Stock Purchase Agreement). The Preferred Stock had a
liquidation preference of $10,000 per share and no
dividends were payable by the Company on these securities. Lilly
had the right to return the Preferred Stock in exchange for a
reduction in the royalty rate payable to the Company on future
sales of the AIR Insulin product by Lilly, if approved. The
Preferred Stock was convertible into the Companys common
stock at market price under certain conditions at the
Companys option, and automatically upon the filing of a
new drug application (NDA) with the Food and Drug
Administration (FDA) for an AIR Insulin product.
Under the expanded collaboration, the royalty rate payable to
the Company on future sales of the AIR Insulin product by Lilly,
if approved, was increased. The Company agreed to use the
proceeds from the issuance of the Preferred Stock primarily to
fund the AIR Insulin development program and to use a portion of
the proceeds to fund the AIR hGH development program. The
Company did not record research and development revenue on these
programs while the proceeds from the Preferred Stock funded this
development. The $30.0 million of research and development
expended by the Company was recognized as research and
development expense as incurred. All of the proceeds from the
sale of the Preferred Stock had been spent through fiscal year
2005.
The Preferred Stock was carried on the condensed consolidated
balance sheets at its estimated redemption value in the amount
of $0 million and $15.0 million as of
December 31, 2006 and March 31, 2006, respectively. In
October 2005, the Company converted 1,500 shares of the
Preferred Stock with a carrying value of $15.0 million into
823,677 shares of Company common stock. This conversion
secured a proportionate increase in the royalty rate payable to
the Company on future sales of the AIR Insulin product by Lilly,
if approved. In December 2006, Lilly exercised its right to put
the remaining 1,500 shares of the Companys
outstanding Preferred Stock, with a carrying value of
$15.0 million, in exchange for a reduction in the royalty
rate payable to the Company on future sales of the AIR Insulin
product by Lilly, if approved. At that time, the remaining
Preferred Stock was reclassified to shareholders equity in
the condensed consolidated balance sheets under the caption
Additional paid-in capital at its redemption value
of $15.0 million.
Because Lilly had a put right and the Preferred Stock could have
been returned in circumstances outside of the Companys
control, the Company accounted for the initial issuance of the
Preferred Stock as an equity instrument in temporary equity at
its initial issuance and redemption value. The Preferred Stock
remained in temporary equity until such time as the put right
was exercised, at which time it was reclassified to
shareholders equity. The Preferred Stock was carried on
the condensed consolidated balance sheets at its redemption
value, and the Company re-evaluated the redemption value on a
quarterly basis. The redemption value represented the estimated
present value of the reduction in royalties payable to the
Company by Lilly on future sales of the AIR Insulin product by
Lilly, if approved, in the event that Lilly exercised its right
to put the Preferred Stock or the Company exercised its right to
call the Preferred Stock. This value was based on an estimate of
future revenues generated by our partner Lilly for certain
products still in development and assumptions about the future
market potential for insulin based products, taking into
consideration progress on the Companys development
programs, the likelihood of product approvals and other factors.
Certain of these assumptions were highly subjective and required
the exercise of management judgment.
The Company considers its agreements with Lilly for the
development of inhaled formulations of insulin and the Stock
Purchase Agreement a single arrangement (the
Arrangement). As the Arrangement contains elements
of funded research and development activities, the Company
determined that the Arrangement should be accounted for as a
financing arrangement under SFAS No. 68,
Research and Development Arrangements.
12
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2006, Lilly exercised its right to put the remaining
1,500 shares of the Companys outstanding Preferred
Stock, with a carrying value of $15.0 million, in exchange
for a reduction in the royalty rate payable to the Company on
future sales of the AIR Insulin product by Lilly, if approved.
At that time, the remaining Preferred Stock was reclassified to
shareholders equity in the condensed consolidated balance
sheets under the caption Additional paid-in capital
at its redemption value of $15.0 million (see Note 8).
In June 2006, the Company converted all of its outstanding 2.5%
Subordinated Notes into 9,025,271 shares of the
Companys common stock (see Note 6).
In September 2005, the Companys Board of Directors
authorized a share repurchase program up to $15.0 million
of common stock to be repurchased in the open market or through
privately negotiated transactions. The repurchase program has no
set expiration date and may be suspended or discontinued at any
time. During the nine months ended December 31, 2006 and
since September 2005, the Company had repurchased
823,677 shares at a cost of approximately
$12.5 million under the program.
|
|
10.
|
SHARE-BASED
COMPENSATION
|
Effective April 1, 2006, the Company adopted the provisions
of SFAS No. 123(R), Share-Based
Payment (SFAS No. 123(R)) which
is a revision of SFAS No. 123 Accounting for
Stock-Based Compensation and supersedes accounting
principles board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
(APB No. 25). Under the provisions of
SFAS No. 123(R), share-based compensation cost is
measured at the grant date based on the fair value of the award
and is recognized as an expense over the employees
requisite service period (generally the vesting period of the
equity grant).
Prior to April 1, 2006, the Company accounted for
share-based compensation to employees in accordance with APB
No. 25 and related interpretations, and the Company also
followed the disclosure requirements of SFAS No. 123.
The Company has elected to adopt the provisions of
SFAS No. 123(R) using the modified prospective
transition method, and recognizes share-based compensation cost
on a straight-line basis over the requisite service periods of
awards. Under the modified prospective transition method,
share-based compensation expense is recognized for the portion
of outstanding stock options and stock awards granted prior to
the adoption of SFAS No. 123(R) for which service has
not been rendered, and for any future grants of stock options
and stock awards. The Company recognizes share-based
compensation cost for awards that have graded vesting on a
straight-line basis over the requisite service period of each
separately vesting portion.
The following table presents share-based compensation expense
for continuing operations included in the Companys
unaudited condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
(In thousands)
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
$
|
931
|
|
|
$
|
2,094
|
|
Research and development
|
|
|
1,897
|
|
|
|
6,965
|
|
Selling, general and administrative
|
|
|
4,672
|
|
|
|
13,159
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation
expense
|
|
$
|
7,500
|
|
|
$
|
22,218
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, $0.4 million of share-based
compensation cost was capitalized and recorded under the
caption, Inventory, net in the unaudited condensed
consolidated balance sheet.
13
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company estimates the fair value of stock options on the
grant date using the Black-Scholes option-pricing model.
Assumptions used to estimate the fair value of stock options are
the expected option term, expected volatility of the
Companys common stock over the options expected
term, the risk-free interest rate over the options
expected term and the Companys expected annual dividend
yield. The Company believes that the valuation technique and the
approach utilized to develop the underlying assumptions are
appropriate in calculating the fair values of the Companys
stock options granted in the three and nine months ended
December 31, 2006. Estimates of fair value may not
represent actual future events or the value to be ultimately
realized by persons who receive equity awards.
The Company used historical data as the basis for estimating
option terms and forfeitures. Separate groups of employees that
have similar historical stock option exercise and forfeiture
behavior were considered separately for valuation purposes. The
ranges of expected terms disclosed below reflect different
expected behavior among certain groups of employees. Expected
stock volatility factors were based on a weighted average of
implied volatilities from traded options on the Companys
common stock and historical stock price volatility of the
Companys common stock, which was determined based on a
review of the weighted average of historical weekly price
changes of the Companys common stock. The risk-free
interest rate for periods commensurate with the expected term of
the share option was based on the United States
(U.S.) treasury yield curve in effect at the time of
grant. The dividend yield on the Companys common stock was
estimated to be zero as the Company has not paid and does not
expect to pay dividends. The exercise price of option grants
equals the average of the high and low of the Companys
common stock traded on the NASDAQ Global Market on the date of
grant.
During the three and nine months ended December 31, 2006,
the fair value of each stock option grant was estimated on the
grant date with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
Expected option term
|
|
|
4 -5 years
|
|
|
|
4 - 5 years
|
|
Expected stock volatility
|
|
|
50
|
%
|
|
|
50
|
%
|
Risk-free interest rate
|
|
|
4.45% - 4.61
|
%
|
|
|
4.45% - 5.07
|
%
|
Expected annual dividend yield
|
|
|
|
|
|
|
|
|
Upon adoption of SFAS No. 123(R), the Company
recognized a benefit of approximately $0.02 million as a
cumulative effect of a change in accounting principle resulting
from the requirement to estimate forfeitures on the
Companys restricted stock awards at the date of grant
under SFAS No. 123(R) rather than recognizing
forfeitures as incurred under APB No. 25. An estimated
forfeiture rate was applied to previously recorded compensation
expense for the Companys unvested restricted stock awards
to determine the cumulative effect of a change in accounting
principle. The cumulative benefit, net of tax, was immaterial
for separate presentation in the unaudited condensed
consolidated statement of operations and was included in
operating income in the quarter ended June 30, 2006.
14
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had previously adopted the provisions of
SFAS No. 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure through disclosure only. The
following table illustrates the effects on net income (loss) and
earnings (loss) per common share, basic and diluted, for the
three and nine months ended December 31, 2005 as if the
Company had applied the fair value recognition provisions of
SFAS No. 123 to share-based employee awards.
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
Net income
(loss) as reported
|
|
$
|
1,407
|
|
|
$
|
(578
|
)
|
Add: employee share-based
compensation expense as reported in the unaudited condensed
consolidated statement of operations
|
|
|
47
|
|
|
|
162
|
|
Deduct: employee share-based
compensation expense determined under the fair-value method for
all options and awards
|
|
|
(5,540
|
)
|
|
|
(16,651
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro-forma
|
|
$
|
(4,086
|
)
|
|
$
|
(17,067
|
)
|
|
|
|
|
|
|
|
|
|
Reported earnings (loss) per
common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.01
|
)
|
Pro-forma loss per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
(0.19
|
)
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.19
|
)
|
The fair value of each option grant was estimated on the grant
date using the Black-Scholes option pricing model with the
following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
Expected option term
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected stock volatility
|
|
|
49
|
%
|
|
|
50
|
%
|
Risk-free interest rate
|
|
|
4.35
|
%
|
|
|
4.08
|
%
|
Expected annual dividend yield
|
|
|
|
|
|
|
|
|
Stock
Options and Award Plans
The Companys stock option plans (the Plans)
provide for issuance of nonqualified and incentive stock options
to employees, officers and directors of, and consultants to, the
Company. Stock options generally expire ten years from the grant
date and generally vest ratably over a four-year period, except
for grants to the non-employee directors and part-time employee
directors, which vest over six months. With the exception of one
plan, under which the option exercise price may be below the
fair market value, but not below par value, of the underlying
stock at the time the option is granted, the exercise price of
stock options granted under the Plans may not be less than 100%
of the fair market value of the common stock on the measurement
date of the option grant. The measurement date for accounting
purposes is the date that all elements of the grant are fixed.
The Compensation Committee of the Board of Directors is
responsible for administering the Companys equity plans
other than the non-employee director stock plans. The Limited
Compensation
Sub-Committee
has the authority to make individual grants of options to
purchase shares of common stock under certain of the
Companys stock option plans to employees of the Company
who are not subject to the reporting requirements
15
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the Securities Exchange Act. The Limited Compensation
Sub-Committee
has generally approved new hire employee stock option grants of
up to the limit of its authority. Until July 2006, such
authority was limited to 5,000 shares per individual grant.
In July 2006, this limit was raised by the Compensation
Committee to 25,000 shares per individual grant and limited
to employees who are not subject to the reporting requirements
of the Securities Exchange Act and who are below the level of
Vice President of the Company.
The Compensation Committee has established procedures for the
grant of options to new employees. Within the limits of its
authority, the Limited Compensation
Sub-Committee
grants options to new hires that commenced their employment with
the Company the prior month on the first Wednesday following the
first Monday of each month (or the first business day thereafter
if such day is a holiday) (the New Hire Grant Date).
New hire grants that exceed the authority of the Limited
Compensation
Sub-Committee
will be granted on the New Hire Grant Date by the Compensation
Committee as a whole.
The Compensation Committee has also established procedures for
regular grants of stock options to Company employees. The
Compensation Committee considers the grant of stock options
twice a year at meetings held in conjunction with meetings of
the Companys Board of Directors regularly scheduled around
May and November. The measurement date for the May option grants
will not be less than forty-eight hours after the announcement
of the Companys fiscal year-end results, and the
measurement date for the November option grants will not be less
than forty-eight hours after the announcement of the
Companys second quarter fiscal year results.
The Board of Directors administers the stock option plans for
non-employee directors.
Under the 1990 Omnibus Stock Option Plan, (the 1990
Plan) limited stock appreciation rights
(LSARs) may be granted to all or any portion of
shares covered by stock options granted to directors and
executive officers. LSARs may be granted with the grant of a
nonqualified stock option or at any time during the term of such
option but may only be granted at the time of the grant in the
case of an incentive stock option. The grants of LSARs are not
effective until six months after their date of grant. Upon the
occurrence of certain triggering events, including a change of
control, the options with respect to which LSARs have been
granted shall become immediately exercisable and the persons who
have received LSARs will automatically receive a cash payment in
lieu of shares. As of December 31, 2006, there were no
LSARs outstanding under the 1990 Plan. No LSARs were granted
during the three and nine months ended December 31, 2006
and 2005.
The Company has also adopted restricted stock award plans (the
Award Plans) which provide for awards to certain
eligible employees, officers and directors of, and consultants
to, the Company of up to a maximum of 1,300,000 shares of
common stock. Awards may vest based on cliff vesting or graded
vesting and vest over various periods. As of December 31,
2006, the Company has reserved a total of 646,724 shares of
common stock for issuance upon release of awards that have been
or may be granted under the Award Plans.
The Company generally issues common stock from previously
authorized but unissued shares to satisfy option exercises and
restricted stock awards.
16
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the stock option and restricted
stock award activity during the nine months ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Restricted Stock Awards Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(In years)
|
|
|
Outstanding at March 31, 2006
|
|
|
18,733,823
|
|
|
$
|
16.09
|
|
|
|
6.71
|
|
|
|
91,000
|
|
|
$
|
8.15
|
|
Granted
|
|
|
2,427,930
|
|
|
|
16.97
|
|
|
|
|
|
|
|
297,500
|
|
|
|
18.99
|
|
Exercised
|
|
|
(547,830
|
)
|
|
|
10.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,425
|
)
|
|
|
17.39
|
|
Cancelled
|
|
|
(547,615
|
)
|
|
|
16.16
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
11.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31,
2006
|
|
|
20,066,308
|
|
|
$
|
16.35
|
|
|
|
6.37
|
|
|
|
287,075
|
|
|
$
|
16.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
13,427,747
|
|
|
$
|
16.52
|
|
|
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable stock options under the Plans as of
December 31, 2006 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
|
(In years)
|
|
|
|
|
|
|
|
|
$ 0.30 - $ 7.69
|
|
|
2,540,554
|
|
|
|
5.17
|
|
|
$
|
6.57
|
|
|
|
2,483,505
|
|
|
$
|
6.54
|
|
7.72 - 12.16
|
|
|
2,723,869
|
|
|
|
5.80
|
|
|
|
10.71
|
|
|
|
2,126,926
|
|
|
|
10.58
|
|
12.19 - 14.57
|
|
|
3,250,774
|
|
|
|
8.21
|
|
|
|
13.75
|
|
|
|
1,261,950
|
|
|
|
13.58
|
|
14.76 - 16.24
|
|
|
2,746,812
|
|
|
|
7.85
|
|
|
|
15.03
|
|
|
|
1,322,388
|
|
|
|
14.99
|
|
16.28 - 18.60
|
|
|
3,672,372
|
|
|
|
6.39
|
|
|
|
17.61
|
|
|
|
2,167,102
|
|
|
|
17.12
|
|
18.61 - 28.30
|
|
|
2,886,077
|
|
|
|
6.39
|
|
|
|
21.28
|
|
|
|
1,820,026
|
|
|
|
21.31
|
|
28.40 - 96.88
|
|
|
2,245,850
|
|
|
|
3.88
|
|
|
|
31.24
|
|
|
|
2,245,850
|
|
|
|
31.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.30 - $ 96.88
|
|
|
20,066,308
|
|
|
|
6.37
|
|
|
$
|
16.35
|
|
|
|
13,427,747
|
|
|
$
|
16.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company has reserved a total
of 22,219,052 shares of common stock for issuance upon
exercise of stock options that have been or may be granted under
the Plans.
17
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the activity for unvested stock
options and restricted stock awards for the nine months ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted
|
|
|
|
Unvested Stock Options
|
|
|
Stock Awards
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at March 31, 2006
|
|
|
7,373,398
|
|
|
$
|
16.97
|
|
|
|
91,000
|
|
|
$
|
8.15
|
|
Granted
|
|
|
2,427,930
|
|
|
|
16.97
|
|
|
|
297,500
|
|
|
|
18.99
|
|
Vested
|
|
|
(2,721,046
|
)
|
|
|
19.60
|
|
|
|
(99,425
|
)
|
|
|
17.39
|
|
Cancelled
|
|
|
(441,721
|
)
|
|
|
15.05
|
|
|
|
(2,000
|
)
|
|
|
11.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
6,638,561
|
|
|
$
|
16.02
|
|
|
|
287,075
|
|
|
$
|
16.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of stock options
granted during the nine months ended December 31, 2006 and
2005 was $8.16 and $8.18, respectively. The aggregate intrinsic
value of stock options exercised during the nine months ended
December 31, 2006 and 2005 was $3.9 million and
$3.6 million, respectively. As of December 31, 2006,
the aggregate intrinsic value of stock options outstanding and
exercisable was $25.5 million and $23.4 million,
respectively. The intrinsic value of a stock option is the
amount by which the market value of the underlying stock exceeds
the exercise price of the stock option.
As of December 31, 2006, there was $23.1 million and
$3.2 million of total unrecognized compensation cost
related to unvested share-based compensation arrangements
granted under the Companys Plans and Award Plans,
respectively. This cost is expected to be recognized over a
weighted average period of approximately 1.5 years and
1.5 years for the Companys Plans and Award Plans,
respectively.
Cash received from option exercises under the Companys
Plans during the nine months ended December 31, 2006 was
$5.9 million.
Due to the Companys full valuation allowance on its
deferred tax assets and carryforwards, the Company did not
record any tax benefits from option exercises under the
share-based payment arrangements during the three and nine
months ended December 31, 2006 and 2005.
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. As of
December 31, 2006, the Company determined that the deferred
tax assets may not be realized and a full valuation allowance
has been recorded.
The provision for income taxes in the amount of approximately
$0.4 million and $0.8 million for the three and nine
months ended December 31, 2006, respectively, related to
the U.S. alternative minimum tax (AMT). Tax
recognition of a portion of the nonrefundable payment received
from Cephalon during fiscal 2006 was deferred to fiscal 2007
when it will be recognized in full. Utilization of tax loss
carryforwards is limited in the calculation of AMT. As a result,
a federal tax charge is reflected for fiscal 2007. The current
AMT liability is available as a credit against future tax
obligations upon the full utilization or expiration of the
Companys net operating loss carryforward.
On August 16, 2006, a purported shareholder derivative
lawsuit, captioned Maxine Phillips vs. Richard Pops
et al. and docketed as CIV-06-2931, was filed
ostensibly on the Companys behalf in Middlesex County
18
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Superior Court, Massachusetts. The complaint in that lawsuit
alleged, among other things, that, in connection with certain
stock option grants made by the Company, certain of the
Companys directors and officers committed violations of
state law, including breaches of fiduciary duty. The complaint
named the Company as a nominal defendant, but did not seek any
monetary relief from the Company. The lawsuit sought recovery of
damages allegedly caused to the Company as well as certain other
relief. On September 13, 2006, the plaintiff voluntarily
dismissed this action without prejudice.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned Thomas Bennett, III vs. Richard
Pops et al. and docketed as CIV-06-3606, was filed
ostensibly on the Companys behalf in Middlesex County
Superior Court, Massachusetts. The complaint in that lawsuit
alleges, among other things, that, in connection with certain
stock option grants made by the Company, certain of the
Companys directors and officers committed violations of
state law, including breaches of fiduciary duty. The complaint
names Alkermes as a nominal defendant, but does not seek any
monetary relief from the Company. The lawsuit seeks recovery of
damages allegedly caused to the Company as well as certain other
relief, including an order requiring the Company to take action
to enhance its corporate governance and internal procedures. On
January 31, 2007, the defendants served the plaintiff with
a motion to dismiss the complaint.
The Company has received four letters, allegedly sent on behalf
of owners of its securities, which claim, among other things,
that certain of the Companys officers and directors
breached their fiduciary duties to the Company by, among other
allegations, allegedly violating the terms of the Companys
stock option plans, allegedly violating generally accepted
accounting principles in the United States of America by failing
to recognize compensation expenses with respect to certain
option grants during certain years, and allegedly publishing
materially inaccurate financial statements relating to the
Company. The letters demand, among other things, that the
Companys board of directors (the Board) take
action on the Companys behalf to recover from the current
and former officers and directors identified in the letters the
damages allegedly sustained by the Company as a result of their
alleged conduct, among other amounts. The letters do not seek
any monetary recovery from the Company itself. The
Companys Board appointed a special independent committee
of the Board to investigate, assess and evaluate the allegations
contained in these and any other demand letters relating to the
Companys stock option granting practices and to report its
findings, conclusions and recommendations to the Board. The
special independent committee was assisted by independent
outside legal counsel. In November 2006, based on the results of
its investigation, the special independent committee of the
Board concluded that the assertions contained in the demand
letters lacked merit, that nothing had come to its attention
that would cause it to believe that there are any instances
where management of the Company or the Compensation Committee of
the Company had retroactively selected a date for the grant of
stock options during the 1995 through 2006 period, and that it
would not be in the best interests of the Company or its
shareholders to commence litigation against the Companys
current or former officers or directors as demanded in the
letters. The findings and conclusions of the special independent
committee of the Board have been presented to and adopted by our
Board.
19
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Alkermes, Inc. (as used in this section, together with our
subsidiaries, us, we or our)
is a biotechnology company that develops innovative medicines
designed to yield better therapeutic outcomes and improve the
lives of patients with serious disease. We currently have two
commercial products:
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection], the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia, and marketed worldwide by Janssen-Cilag
(Janssen), a wholly owned division of Johnson &
Johnson; and
VIVITROL®
(naltrexone for extended-release injectable suspension), the
first and only once-monthly injectable medication approved for
the treatment of alcohol dependence and marketed in the
U.S. primarily by Cephalon, Inc. Our pipeline includes
extended-release injectable, pulmonary, and oral products for
the treatment of prevalent, chronic diseases such as central
nervous system disorders, addiction and diabetes. Our
headquarters are in Cambridge, Massachusetts, and we operate
research and manufacturing facilities in Massachusetts and Ohio.
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with collaborative arrangements as we expand the
development of our proprietary product candidates, including
costs related to preclinical studies, clinical trials and
facilities expansion. Our costs, including research and
development costs for our product candidates and sales,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
Forward-Looking
Statements
Any statements herein or otherwise made in writing or orally by
us with regard to our expectations as to financial results and
other aspects of our business may constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to,
statements concerning future operating results, the achievement
of certain business and operating goals, manufacturing revenues,
research and development spending, plans for clinical trials and
regulatory approvals, spending relating to selling and marketing
and clinical development activities, financial goals and
projections of capital expenditures, recognition of revenues,
and future financings. These statements relate to our future
plans, objectives, expectations and intentions and may be
identified by words like believe,
expect, designed, may,
will, should, seek, or
anticipate, and similar expressions.
Although we believe that our expectations are based on
reasonable assumptions within the bounds of our knowledge of our
business and operations, the forward-looking statements
contained in this document are neither promises nor guarantees;
and our business is subject to significant risk and
uncertainties and there can be no assurance that our actual
results will not differ materially from our expectations. These
forward looking statements include, but are not limited to,
statements concerning: the achievement of certain business and
operating milestones and future operating results and
profitability; continued revenue growth from RISPERDAL CONSTA;
the successful commercialization of VIVITROL; recognition of
milestone payments from our partner Cephalon related to the
future sales of VIVITROL; the successful continuation of
development activities for our programs, including long-acting
release (LAR) formulation of exenatide
(exenatide LAR),
AIR®
Inhaled Insulin (AIR Insulin) and AIR parathyroid
hormone (AIR PTH); the successful manufacture of our
products and product candidates, including RISPERDAL CONSTA and
VIVITROL at a commercial scale, and the successful manufacture
of exenatide LAR by Amylin Pharmaceuticals, Inc.
(Amylin); the building of a selling and marketing
infrastructure for VIVITROL by ourselves or our partner
Cephalon; and the successful
scale-up,
establishment and expansion of manufacturing capacity. Factors
which could cause actual results to differ materially from our
expectations set forth in our forward-looking statements
include, among others: (i) manufacturing and royalty
revenues for RISPERDAL CONSTA may not continue to grow,
particularly because we rely on our partner, Janssen, to
forecast and market this product; (ii) we may be unable to
manufacture RISPERDAL CONSTA in sufficient quantities and with
sufficient yields to meet Janssens requirements or to add
additional production capacity for RISPERDAL CONSTA, or
unexpected events could interrupt manufacturing operations at
our RISPERDAL CONSTA facility, which is the sole
20
source of supply for that product; (iii) we may be unable
to manufacture VIVITROL economically or in sufficient quantities
and with sufficient yields to meet our own or our partner
Cephalons requirements or add additional production
capacity for VIVITROL, or unexpected events could interrupt
manufacturing operations at our VIVITROL facility, which is the
sole source of supply for that product; (iv) we and our
partner Cephalon may be unable to develop the selling and
marketing capabilities,
and/or
infrastructure necessary to jointly support the
commercialization of VIVITROL; (v) we and our partner
Cephalon may be unable to commercialize VIVITROL successfully;
(vi) VIVITROL may not produce significant revenues;
(vii) due to the nature of our collaboration with Cephalon
and because we have limited selling, marketing and distribution
experience, we rely primarily on our partner Cephalon to
successfully commercialize VIVITROL in the U.S.;
(viii) third party payors may not cover or reimburse
VIVITROL; (ix) we may be unable to
scale-up and
manufacture our product candidates, including exenatide LAR, AIR
Insulin, AIR PTH, ALKS 27, ALKS 29 and extended-release
naltrexone, commercially or economically; (x) we may not be
able to source raw materials for our production processes from
third parties; (xi) we may not be able to successfully
transfer manufacturing technology for exenatide LAR to Amylin
and Amylin may not be able to successfully operate the
manufacturing facility for exenatide LAR; (xii) our product
candidates, if approved for marketing, may not be launched
successfully in one or all indications for which marketing is
approved and, if launched, may not produce significant revenues;
(xiii) we rely on our partners to determine the regulatory
and marketing strategies for RISPERDAL CONSTA and our other
partnered, non-proprietary programs; (xiv) RISPERDAL
CONSTA, VIVITROL and our product candidates in commercial use
may have unintended side effects, adverse reactions or incidents
of misuse and the U.S. Food and Drug Administration
(FDA) or other health authorities could require post
approval studies or require removal of our products from the
market; (xv) our collaborators could elect to terminate or
delay programs at any time and disputes with collaborators or
failure to negotiate acceptable new collaborative arrangements
for our technologies could occur; (xvi) clinical trials may
take more time or consume more resources than initially
envisioned; (xvii) results of earlier clinical trials may
not necessarily be predictive of the safety and efficacy results
in larger clinical trials; (xviii) our product candidates
could be ineffective or unsafe during preclinical studies and
clinical trials, and we and our collaborators may not be
permitted by regulatory authorities to undertake new or
additional clinical trials for product candidates incorporating
our technologies, or clinical trials could be delayed or
terminated; (xix) after the completion of clinical trials
for our product candidates and the submission for marketing
approval, the FDA or other health authorities could refuse to
accept such filings or could request additional preclinical or
clinical studies be conducted, each of which could result in
significant delays or the failure of such product to receive
marketing approval; (xx) even if our product candidates
appear promising at an early stage of development, product
candidates could fail to receive necessary regulatory approvals,
be difficult to manufacture on a large scale, be uneconomical,
fail to achieve market acceptance, be precluded from
commercialization by proprietary rights of third parties or
experience substantial competition in the marketplace;
(xxi) technological change in the biotechnology or
pharmaceutical industries could render our products
and/or
product candidates obsolete or non-competitive;
(xxii) difficulties or set-backs in obtaining and enforcing
our patents and difficulties with the patent rights of others
could occur; (xxiii) we may continue to incur losses in the
future; (xxiv) the effect of our adoption of Statement of
Financial Accounting Standard (SFAS)
No. 123(R),Share-Based Payment on our
results of operations depends on a number of factors, many of
which are out of our control, including estimates of stock price
volatility, option terms, interest rates, the number and type of
stock options and stock awards granted during the reporting
period, as well as other factors; (xxv) we face potential
liabilities and diversion of managements attention as a
result of an ongoing informal SEC inquiry into, and private
litigation relating to, our past practices with respect to
equity incentives; (xxvi) we may not recoup any of our
$100.0 million investment in Reliant Pharmaceuticals, LLC
(Reliant); and (xxvii) we may need to raise
substantial additional funding to continue research and
development programs and clinical trials and other operations
and could incur difficulties or setbacks in raising such funds.
The forward-looking statements made in this document are made
only as of the date hereof and we do not intend to update any of
these factors or to publicly announce the results of any
revisions to any of our forward-looking statements other than as
required under the federal securities laws.
21
Collaborative
Arrangements
Lilly
In December 2006, we and Eli Lilly and Company
(Lilly) entered into a commercial manufacturing
agreement for AIR Insulin. Under the agreement, we are the
exclusive commercial manufacturer and supplier of AIR Insulin
powder for the AIR Inhaled Insulin System (AIR Insulin
System). The agreement provides for Lilly to fund all
operating costs of the portion of our commercial-scale
production facility used to manufacture AIR Insulin products,
including the cost of AIR Insulin products manufactured at the
facility. In addition, Lilly funds the construction,
development, validation and
scale-up of
a second manufacturing line at the facility to meet post-launch
requirements for AIR Insulin production. We are responsible for
overseeing the construction, development, validation and
scale-up of
the second manufacturing line.
Under the agreement, Lilly supplies all bulk active
pharmaceutical product to us at no cost and is responsible for
product packaging. Lilly will reimburse us for costs we
previously incurred for the construction of the second
manufacturing line, and Lilly will own all equipment purchased.
We have the option to purchase this equipment from Lilly at any
time at Lillys then net book value or at a negotiated
purchase price not to exceed Lillys then net book value
upon termination of the commercial manufacturing agreement.
In the event that the AIR Insulin product is commercialized,
Lilly will purchase delivered product from us at cost plus a
fee. In addition to the manufacturing fee, we earn royalties at
a low double digit rate on net sales of the AIR Insulin product
by Lilly.
Lilly has the right to terminate the commercial manufacturing
agreement at any time following the fourth anniversary of the
effective date of the agreement by providing ninety days prior
written notice to us, subject to certain continuing rights and
obligations. We have the right to terminate the commercial
manufacturing agreement at any time within ninety days after the
end of any calendar year that is four or more years after the
launch of the first product, by providing ninety days prior
written notice to Lilly, if the manufacture of the manufactured
items purchased by Lilly in such calendar year requires less
than seventy-five percent of the capacity of the manufacturing
lines covered by the agreement. This termination right is
subject to certain continuing rights and obligations. In
addition, either party may terminate the agreement for any
material breach by the other party which is not cured within
ninety days of written notice of this material breach or within
a longer period that is reasonably necessary to effect this cure.
The term of the commercial manufacturing agreement continues
until expiration or termination of the development and license
agreement that we entered into with Lilly in April 2001 for the
development of inhaled formulations of insulin and other
compounds.
Cephalon
In October 2006, we and Cephalon entered into a binding
amendment to each of the existing license and collaboration
agreement dated June 23, 2005 between the parties (the
License Agreement) and the supply agreement dated
June 23, 2005 between the parties (the Supply
Agreement) (the amendments taken together, the
Amendments). Under the Amendments, the parties
agreed to revise the provisions set forth in the License
Agreement with respect to the first $120.0 million of
cumulative net losses of the collaboration incurred prior to
December 31, 2007, for which we are responsible (the
cumulative net loss cap). Under the Amendments,
Cephalon agreed to be responsible for its own VIVITROL related
costs during the period August 1, 2006 through
December 31, 2006 and, consequently, during this period no
such costs were charged by Cephalon to the collaboration and
against the cumulative net loss cap.
We are manufacturing VIVITROL on one manufacturing line at our
manufacturing facility. Under the Amendments, the parties agreed
that Cephalon will purchase from us our two additional VIVITROL
manufacturing lines (and related equipment) under construction,
which will continue to be operated by us at our manufacturing
facility. Through December 31, 2006, we billed Cephalon
$18.7 million for the sale of the two manufacturing lines,
and we will bill Cephalon for future costs we incur related to
the construction of the two manufacturing lines. Cephalon has
granted us an option, exercisable after two years, to repurchase
the manufacturing lines at the then net book value of the assets.
22
Amounts we received from Cephalon for the purchase of the
physical assets associated with the additional VIVITROL
manufacturing lines were recorded under the caption
Deferred revenue long-term portion in
the consolidated balance sheets and will be recognized as
revenue over the depreciable life of the assets in amounts equal
to the related asset depreciation. Future purchases of physical
assets by Cephalon will be accounted for the same way.
During the three months ended December 31, 2006, we
received a $4.6 million payment from Cephalon as
reimbursement for certain costs we incurred prior to October
2006 and charged to the collaboration, related to the
construction of the additional VIVITROL manufacturing lines,
consisting primarily of internal or temporary employee or
full-time equivalent (FTE)-related time. The payment
was recorded under the caption Unearned milestone
revenue in the consolidated balance sheets and will be
recognized as milestone revenue cost recovery under
the caption Net collaborative profit in accordance
with our revenue recognition policy for VIVITROL. We and
Cephalon have agreed to increase the cumulative net loss cap
from $120.0 million to $124.6 million to account for
this reimbursement.
Beginning October 2006, all FTE-related costs we incur that are
reimbursable by Cephalon related to the construction and
validation of the additional VIVITROL manufacturing lines are
recorded as research and development revenue as incurred.
Indevus
In January 2007, we and Indevus Pharmaceuticals, Inc.
(Indevus) announced that we had entered into a joint
collaboration for the development of ALKS 27, an inhaled
formulation of trospium chloride for the treatment of chronic
obstructive pulmonary disease (COPD). The
announcement of this collaboration followed the completion of
extensive feasibility work, preclinical studies and a
phase 1 study in healthy volunteers. Preliminary results
from the phase 1 study showed that ALKS 27 was well
tolerated over a wide dose range, with no dose-limiting effects
observed.
ALKS 27 is an inhaled formulation of trospium chloride, a
muscarinic receptor antagonist that relaxes smooth muscle tissue
and has the potential to improve airflow in patients with COPD.
Trospium chloride is the active ingredient in
SANCTURA®,
Indevus currently marketed product for overactive bladder.
The formulation under development for ALKS 27 is specifically
designed for inhalation utilizing our proprietary AIR pulmonary
delivery system.
We and Indevus plan to initiate a phase 2a clinical study
in the first half of 2007 designed to evaluate the clinical
efficacy of ALKS 27, administered once-daily, in subjects
with COPD. Pending results of the phase 2a study, the
companies plan to engage a partner for future development and
commercialization of ALKS 27.
Under the joint collaboration, we and Indevus share equally all
costs of development and commercial returns on a worldwide
basis. We will perform all formulation work and manufacturing.
Indevus will conduct the clinical development program.
Rensselaer
Polytechnic Institute
In September 2006, we and Rensselaer Polytechnic Institute
(RPI) entered into a license agreement granting us
exclusive rights to a family of opioid receptor compounds
discovered at RPI. These compounds represent an opportunity for
us to develop important therapeutics for a broad range of
diseases and medical conditions, including addiction, pain and
other central nervous system (CNS) disorders. We
will screen this library of compounds and plan to pursue
preclinical work of an undisclosed, lead oral compound that has
already been identified.
Under the terms of the agreement, RPI granted us an exclusive
worldwide license to certain patents and patent applications
relating to its compounds designed to modulate opioid receptors.
We will be responsible for the continued research and
development of any resulting product candidates. We paid RPI a
nonrefundable upfront payment and will pay certain milestones
relating to clinical development activities and royalties on
products resulting from the agreement. All amounts paid to RPI
under this license agreement have been expensed and are included
in research and development expenses.
23
Product
Developments
RISPERDAL
CONSTA
In December 2006 we announced that the Japanese organization of
our partner Janssen submitted a new drug application
(NDA) to the Pharmaceuticals and Medical Devices
Agency (PMDA) for marketing approval of RISPERDAL
CONSTA in Japan.
In October 2006, the results of an observational study conducted
among a population of United States veterans were presented at
the American Psychiatric Associations 58(th) Institute of
Psychiatric Services. In this study, patients with schizophrenia
or schizoaffective disorder taking RISPERDAL CONSTA were
observed to have fewer psychiatric-related hospitalizations, and
additionally fewer psychiatric-related inpatient days per month,
improved antipsychotic medication compliance, and lower total
monthly medical costs, as compared to their experience prior to
initiating treatment with RISPERDAL CONSTA.
In this study, healthcare claims data were analyzed from 106
eligible patients with schizophrenia or schizoaffective disorder
in the Ohio Veterans Affairs (VA) Healthcare System.
Patients ranged in age from
30-85 years
old and were mostly male. Eligible patients must have had at
least four doses of RISPERDAL CONSTA during the analysis period.
The primary analysis was based on a comparison of the
patients own psychiatric-related hospitalizations and
psychiatric-related healthcare resource utilization pre- and
post- initiation of treatment with the therapy. The period of
time reviewed for each patient prior to RISPERDAL CONSTA
treatment was equal to the available period of follow up after
treatment initiation. In this manner, each patient served as his
or her own control.
VIVITROL
In June 2006, VIVITROL became commercially available in the
United States.
AIR
Insulin
In December 2006, we and Lilly entered into a commercial
manufacturing agreement for AIR Insulin. Under the agreement, we
are the exclusive commercial manufacturer and supplier of AIR
Insulin powder for the AIR Insulin System. The agreement
provides for Lilly to fund all operating costs of the portion of
our commercial-scale production facility used to manufacture AIR
Insulin products, including the cost of AIR Insulin products
manufactured at the facility. In addition, Lilly funds the
construction, development, validation and
scale-up of
a second manufacturing line at the facility to meet post-launch
requirements for AIR Insulin production. We are responsible for
overseeing the construction, process development, validation and
scale-up of
the second manufacturing line.
In June 2006, we and Lilly reported new study results of the
companies investigational AIR Insulin System, including
the first published analysis of the effect of COPD on inhaled
insulin absorption and action; the importance to patients of
simple, patient-directed training of an inhaled insulin system;
and dosing flexibility with the AIR Insulin System. These study
findings were presented at the American Diabetes
Associations 66th Annual Scientific Sessions in
Washington, D.C. This Phase 1 study is the first
published analysis of the effect of COPD on inhaled insulin
absorption and action and was designed to evaluate the impact
that compromised lung function has on inhaled insulin dose
delivery. As expected in a patient population with compromised
lung function, the absorption and action of AIR Insulin was
reduced by a consistent amount in the presence of COPD. The
results also demonstrated that AIR Insulin was able to deliver
similar results on different days in patients with or without
COPD and was generally well-tolerated.
In June 2006, we and Lilly announced the completion of patient
enrollment in a pivotal safety study required for registration
of the AIR Insulin System. The goal of the study was to more
fully define the safety and efficacy of the AIR Insulin System
in patients with type one diabetes. This study was part of a
comprehensive Phase 3 clinical program that began in July
2005, and which includes pivotal efficacy studies and additional
long-term safety studies in both type one and type two patients
with diabetes.
24
Exenatide
LAR
In June 2006, we, Amylin and Lilly announced detailed results
from a safety and efficacy study of the long-acting release
(LAR) formulation of
BYETTA®
(exenatide) injection. Data from the study demonstrated that
86 percent of patients using the higher of two doses of the
once-weekly formulation of exenatide were able to achieve
recommended levels of glucose control, as measured by hemoglobin
A1C (A1C), with an average improvement of
approximately two percent compared to placebo. These study
findings were presented at the Annual Meeting of the European
Association for the Study of Diabetes (EASD) in Copenhagen. The
study was conducted in 45 patients with type two diabetes
unable to achieve adequate glucose control with metformin or a
diet and exercise regimen. The patients received a once-weekly
subcutaneous injection of exenatide LAR (either 0.8 mg or
2.0 mg) or placebo. After 15 weeks of treatment there
was a
12-week
safety monitoring period during which no study medication was
administered. Dose-dependent improvements in A1C and weight loss
were observed at 15 weeks.
ALKS
29
ALKS 29 is a new product candidate for the treatment of alcohol
dependence. In October 2006, we announced the expansion of our
addiction drug franchise to include a program to develop oral
products for the treatment of addiction. As part of this
initiative, we have commenced enrollment in a clinical trial for
an undisclosed oral compound, ALKS 29. The Phase 1/2
multi-center, randomized, double-blind, placebo-controlled
clinical study is designed to assess the efficacy and safety of
ALKS 29 in alcohol dependent patients. We intend to enroll
150 patients in the eight-week study. Patients will be
segmented into several dose groups and will receive daily oral
administrations of ALKS 29.
ALKS
27
In January 2007, we and Indevus announced that we had entered
into a joint collaboration for the development of ALKS 27 for
the treatment of COPD. The announcement of this collaboration
followed the completion of extensive feasibility work,
preclinical studies and a phase 1 study in healthy
volunteers. Preliminary results from the phase 1 study
showed that ALKS 27 was well tolerated over a wide dose range,
with no dose-limiting effects observed.
ALKS 27 is an inhaled formulation of trospium chloride, a
muscarinic receptor antagonist that relaxes smooth muscle tissue
and has the potential to improve airflow in patients with COPD.
Trospium chloride is the active ingredient in
SANCTURA®,
Indevus currently marketed product for overactive bladder.
The formulation under development for ALKS 27 is specifically
designed for inhalation utilizing our proprietary AIR pulmonary
delivery system.
We and Indevus plan to initiate a phase 2a clinical study
in the first half of 2007 designed to evaluate the clinical
efficacy of ALKS 27, administered once-daily, in subjects
with COPD. Pending results of the phase 2a study, the
companies plan to engage a partner for future development and
commercialization of ALKS 27.
Extended-release
naltrexone
In December 2006, we announced positive results from a
Phase 2 exploratory study of injectable extended-release
naltrexone in opioid-using adults not physically dependent on
opioids, which showed that the two highest doses tested
demonstrated opioid blockade for 28 days. The clinical data
from this study will be used to support the further development
of extended-release naltrexone for the treatment of opioid
dependence, a serious chronic brain disease. This pilot study
was conducted at the Johns Hopkins University School of Medicine
and the National Institute on Drug Abuse (NIDA), two
leading institutions in the treatment of addiction.
Critical
Accounting Policies
As fully described in the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section of our Annual Report on
Form 10-K/A
for the year ended March 31, 2006, we consider
25
our critical accounting policies to be as follows. We refer the
reader to our Annual Report on
Form 10-K/A
for more information on these policies.
|
|
|
|
|
Revenue recognition;
|
|
|
|
Cost of goods manufactured;
|
|
|
|
Research and development expenses;
|
|
|
|
Restructuring charges;
|
|
|
|
Warrant valuation;
|
|
|
|
Accrued expenses;
|
|
|
|
Derivatives embedded in certain debt securities; and
|
|
|
|
Income taxes.
|
We have added the following to our critical accounting policies
discussed in our Annual Report on
Form 10-K/A
for the year ended March 31, 2006.
Share-based Compensation. Effective
April 1, 2006, we account for share-based compensation in
accordance with SFAS No. 123(R). Under
SFAS No. 123(R), share-based compensation reflects the
fair value of share-based awards measured at the grant date, is
recognized as an expense over the employees requisite
service period (generally the vesting period of the equity
grant) and is adjusted each period for anticipated forfeitures.
We estimate the fair value of stock options on the grant date
using the Black-Scholes option-pricing model. Assumptions used
to estimate the fair value of stock options are the expected
option term, expected volatility of our Companys common
stock over the options expected term, the risk-free
interest rate over the options expected term and our
Companys expected annual dividend yield. Certain of these
assumptions are highly subjective and require the exercise of
management judgment. Our management must also apply judgment in
developing an estimate of awards that may be forfeited.
We elected to adopt the provisions of SFAS No. 123(R)
using the modified prospective transition method, and we
recognize share-based compensation cost on a straight-line basis
over the requisite service periods of awards. Under the modified
prospective transition method, share-based compensation expense
is recognized for the portion of outstanding stock options and
stock awards granted prior to the adoption of
SFAS No. 123(R) for which service has not been
rendered, and for any future grants of stock options and stock
awards. We recognize share-based compensation cost for awards
that have graded vesting on a straight-line basis over the
requisite service period of each separately vesting portion.
Measurement of Redeemable Convertible Preferred
Stock. Our redeemable convertible preferred
stock, $0.01 par value per share (the Preferred
Stock), was carried on the condensed consolidated balance
sheets at its estimated redemption value while it was
outstanding. We re-evaluated the redemption value of the
Preferred Stock on a quarterly basis, and any increases or
decreases in the redemption value of this redeemable security,
of which there were none, would have been recorded as charges or
credits to shareholders equity in the same manner as
dividends on nonredeemable stock, and would have been effected
by charges or credits against retained earnings or, in the
absence of retained earnings, by charges or credits against
additional paid-in capital. Any increases or decreases in the
redemption value of the Preferred Stock, of which there were
none, would have decreased or increased income applicable to
common shareholders in the calculation of earnings per common
share and would not have had an impact on reported net income or
cash flows. The Preferred Stock was not a traded security,
therefore, market quotations were not available, and the
estimate of redemption value was based upon an estimation
process used by management. The process of estimating the
redemption value of a security with features such as those
contained within the Preferred Stock was complex and involved
multiple assumptions about matters such as future revenues
generated by our partner Lilly for certain products still in
development and assumptions about the future market potential
for insulin based products, taking into consideration progress
on our development programs, the likelihood of product approvals
and other factors. Certain of these assumptions were highly
subjective and required the exercise of management judgment.
26
Results
of Operations
Net income in accordance with accounting principles generally
accepted in the United States of America (commonly referred to
as GAAP) for the three months ended
December 31, 2006 was $2.9 million, or $0.03 per
common share basic and diluted, as compared to net
income of $1.4 million, or $0.02 per common
share basic and $0.01 per common
share diluted, for the three months ended
December 31, 2005.
Net income in accordance with GAAP for the nine months ended
December 31, 2006 was $5.9 million, or $0.06 per
common share basic and diluted, as compared to a net
loss of $0.6 million, or a net loss of $0.01 per
common share basic and diluted, for the nine months
ended December 31, 2005.
Total revenues were $62.4 million and $175.1 million
for the three and nine months ended December 31, 2006,
respectively, as compared to $41.4 million and
$112.9 million for the three and nine months ended
December 31, 2005, respectively.
Total manufacturing revenues were $28.8 million and
$77.1 million for the three and nine months ended
December 31, 2006, respectively, as compared to
$14.7 million and $42.2 million for the three and nine
months ended December 31, 2005, respectively. The increase
in manufacturing revenues for the three and nine months ended
December 31, 2006, as compared to the same periods in 2005,
was due to increased shipments of RISPERDAL CONSTA to Janssen
and shipments of VIVITROL to our partner Cephalon.
RISPERDAL CONSTA manufacturing revenue was $23.6 million
and $63.6 million for the three and nine months ended
December 31, 2006, respectively, as compared to
$14.7 million and $42.2 million for the three and nine
months ended December 31, 2005, respectively. The increase
in RISPERDAL CONSTA revenues in the three and nine months ended
December 31, 2006, as compared to the same periods in 2005,
was due to increased shipments of the product to Janssen to
satisfy demand. Under our manufacturing and supply agreement
with Janssen, we earn manufacturing revenues upon shipment of
product by us to Janssen based on a percentage of Janssens
net sales price. This percentage is based on the anticipated
volume of units shipped to Janssen in any given calendar year,
with a minimum manufacturing fee of 7.5%. We anticipate that we
will earn manufacturing revenues at 7.5% of Janssens net
sales price for RISPERDAL CONSTA in the fiscal year ending
March 31, 2007 and beyond. We earned manufacturing revenues
at an average of 7.5% of Janssens net sales price in the
fiscal year ended March 31, 2006.
VIVITROL manufacturing revenue was $5.2 million and
$13.5 million for the three and nine months ended
December 31, 2006, respectively. We began shipping VIVITROL
to our partner Cephalon for the first time during the quarter
ended June 30, 2006 and therefore we did not record any
manufacturing revenue related to VIVITROL for any periods in
fiscal 2006. Under our agreements with Cephalon, we bill
Cephalon at cost for finished commercial product shipped to
them. VIVITROL manufacturing revenue for the three and nine
months ended December 31, 2006 included $0.5 million
and $1.2 million, respectively, of milestone revenue
related to manufacturing profit on VIVITROL. This equates to a
10% profit margin on sales of VIVITROL to Cephalon. We
recognized this revenue for the first time during the quarter
ended June 30, 2006 as we began shipping VIVITROL to
Cephalon.
Total royalty revenues were $5.7 million and
$16.6 million for the three and nine months ended
December 31, 2006, respectively, based on RISPERDAL CONSTA
sales of approximately $226 million and $664 million,
respectively, as compared to $4.2 million and
$11.9 million for the three and nine months ended
December 31, 2005, respectively, based on RISPERDAL CONSTA
sales of approximately $169 million and $474 million,
respectively. The increase in royalty revenues for the three and
nine months ended December 31, 2006, as compared to the
same periods in 2005, was due to an increase in global sales of
RISPERDAL CONSTA by Janssen. Under our license agreements with
Janssen, we record royalty revenues equal to 2.5% of
Janssens net sales of RISPERDAL CONSTA in the quarter when
the product is sold by Janssen, based upon net sales reports
furnished by Janssen.
Research and development revenue under collaborative
arrangements was $19.5 million and $51.6 million for
the three and nine months ended December 31, 2006,
respectively, as compared to $10.0 million and
$33.9 million for the three and nine months ended
December 31, 2005, respectively. The increase in research
27
and development revenue for the three and nine months ended
December 31, 2006, as compared to the same periods in 2005,
was primarily due to increases in revenues related to work
performed on the AIR Insulin and exenatide LAR programs and
revenues related to work performed on the construction and
validation of additional VIVITROL manufacturing lines at our
Ohio manufacturing facility under the Amendments with Cephalon.
Research and development revenue for the three and nine months
ended December 31, 2006 included revenue of
$2.1 million for FTE-related costs we incurred that were
reimbursable by Cephalon under the Amendments for the
construction and validation of the additional VIVITROL
manufacturing lines. Research and development revenue for the
nine months ended December 31, 2005 included
$9.0 million for a milestone payment we received from Lilly
in September 2005 in conjunction with the initiation of the
Phase 3 clinical program for AIR Insulin.
Net collaborative profit was $8.4 million and
$29.8 million for the three and nine months ended
December 31, 2006, respectively. For the three and nine
months ended December 31, 2006, we recognized
$7.3 million and $50.8 million of milestone
revenue cost recovery, respectively, to offset net
losses incurred on VIVITROL by both us and Cephalon. This
consisted of $7.2 million and $25.7 million of
expenses that we incurred on behalf of the collaboration during
the three and nine months ended December 31, 2006,
respectively, $0 million and $24.8 million of net
losses incurred by Cephalon on behalf of the collaboration
during the three and nine months ended December 31, 2006,
respectively, and $0.1 million and $0.3 million of
expenses that we incurred outside the collaboration during the
three and nine months ended December 31, 2006,
respectively, for which we were solely responsible. In addition,
following FDA approval of VIVITROL, we recognized
$1.2 million and $3.8 million for the three and nine
months ended December 31, 2006, respectively, of milestone
revenue related to the licenses provided to Cephalon to
commercialize VIVITROL. During the three and nine months ended
December 31, 2006, we made payments of $0 million and
$24.8 million, respectively, to Cephalon to reimburse their
net losses on VIVITROL. In the aggregate, net collaborative
profit of $8.4 million and $29.8 million for the three
and nine months ended December 31, 2006, respectively,
consisted of approximately $8.4 million and
$54.6 million of milestone revenue, respectively, partially
offset by the $0 million and $24.8 million,
respectively, of payments we made to Cephalon to reimburse their
net losses on VIVITROL.
Net collaborative profit was $12.5 million and
$24.9 million for the three and nine months ended
December 31, 2005, respectively. For the three and nine
months ended December 31, 2005, we recognized
$17.9 million and $31.5 million of milestone
revenue cost recovery, respectively, to offset net
losses incurred on VIVITROL by both us and Cephalon. This
consisted of $6.1 million and $12.6 million of
expenses that we incurred on behalf of the collaboration during
the three and nine months ended December 31, 2005,
respectively, $5.4 million and $6.6 million of net
losses incurred by Cephalon on behalf of the collaboration
during the three and nine months ended December 31, 2005,
respectively, and $6.4 million and $12.3 million of
expenses that we incurred with respect to our efforts to obtain
FDA approval of VIVITROL during the three and nine months ended
December 31, 2005, respectively, for which we were solely
responsible. We did not recognize any milestone revenue related
to the licenses provided to Cephalon to commercialize VIVITROL
during the three and nine months ended December 31, 2005.
During the three and nine months ended December 31, 2005,
we made payments of $5.4 million and $6.6 million to
Cephalon, respectively, to reimburse their net losses on
VIVITROL. In the aggregate, net collaborative profit of
$12.5 million and $24.9 million for the three and nine
months ended December 31, 2005, respectively, consisted of
$17.9 million and $31.5 million of milestone revenue,
respectively, partially offset by the $5.4 million and
$6.6 million, respectively, of payments we made to Cephalon
to reimburse their net losses on VIVITROL.
28
Following is a summary of net collaborative profit for the three
and nine months ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Milestone revenue cost
recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alkermes expenses incurred on
behalf of the collaboration
|
|
$
|
7,199
|
|
|
$
|
6,078
|
|
|
$
|
25,672
|
|
|
$
|
12,634
|
|
Cephalon net losses incurred on
behalf of the collaboration
|
|
|
|
|
|
|
5,362
|
|
|
|
24,816
|
|
|
|
6,556
|
|
Alkermes expenses for which
Alkermes was solely responsible
|
|
|
51
|
|
|
|
6,446
|
|
|
|
348
|
|
|
|
12,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total milestone
revenue cost recovery
|
|
|
7,250
|
|
|
|
17,886
|
|
|
|
50,836
|
|
|
|
31,474
|
|
Milestone revenue
licenses
|
|
|
1,195
|
|
|
|
|
|
|
|
3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total milestone
revenue cost recovery and licenses
|
|
|
8,445
|
|
|
|
17,886
|
|
|
|
54,614
|
|
|
|
31,474
|
|
Payments made to Cephalon to
reimburse their net losses
|
|
|
|
|
|
|
(5,362
|
)
|
|
|
(24,816
|
)
|
|
|
(6,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collaborative profit
|
|
$
|
8,445
|
|
|
$
|
12,524
|
|
|
$
|
29,798
|
|
|
$
|
24,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In April 2006, we received a nonrefundable milestone payment of
$110.0 million from Cephalon following approval of VIVITROL
by the FDA. The payment was deemed to be arrangement
consideration in accordance with Emerging Issues Task Force
00-21,
Revenue Arrangements with Multiple Deliverables
(EITF
00-21).
The payment was recorded in our unaudited condensed consolidated
balance sheets under the caption Unearned milestone
revenue long-term portion. The classification
between the current and long-term portions of unearned milestone
revenue was based on our estimate of whether the related
milestone revenue was expected to be recognized during or beyond
the 12-month
period following December 31, 2006, respectively.
We are responsible for the first $124.6 million of
cumulative net losses incurred on VIVITROL through
December 31, 2007. Through December 31, 2006, the
cumulative net losses incurred by us and Cephalon on VIVITROL,
against this cumulative net loss cap, were $91.5 million,
of which $45.5 million was incurred by us on behalf of the
collaboration and $46.0 million was incurred by Cephalon on
behalf of the collaboration.
Pursuant to the Amendments discussed under Collaborative
Arrangements Cephalon above, Cephalon
was responsible for its own VIVITROL-related costs during the
period August 1, 2006 through December 31, 2006, and
for this period no such costs were charged by Cephalon to the
collaboration and against the cumulative net loss cap.
Accordingly, we did not reimburse Cephalon for any of their
VIVITROL-related costs during this period.
Our estimates of the fair value of deliverables under our
agreements with Cephalon are reviewed
periodically and adjusted, as appropriate. Our methodologies for
estimating the fair values are discussed under our
Critical Accounting Policies in the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section of our Annual
Report on
Form 10-K/A
for the year ended March 31, 2006. We have adjusted the
estimate of the deliverable shared profits and losses on
the products from the previous estimate of
$144.0 million to $144.4 million. This adjustment
reflect the latest estimate of future product net losses. The estimate of the
deliverable manufacturing of the products is $77.8 million. We
have adjusted the estimate of the deliverable development
and licenses for the products from the previous estimate
of $48.0 million to $52.4 million. The estimate of this deliverable is based on the residual method of
deriving fair value under the aforementioned accounting policies.
29
Cost of goods manufactured was $13.0 million and
$34.1 million for the three and nine months ended
December 31, 2006, respectively, as compared to
$6.1 million and $15.0 million for the three and nine
months ended December 31, 2005, respectively. The increase
in cost of goods manufactured for the three and nine months
ended December 31, 2006, as compared to the same periods in
2005, was due to increased shipments of RISPERDAL CONSTA to
Janssen, shipments of VIVITROL to Cephalon and to share-based
compensation expense resulting from the adoption of
SFAS No. 123(R) beginning April 1, 2006. Cost of
goods manufactured for the three and nine months ended
December 31, 2006 included share-based compensation expense
in the amount of $0.9 million and $2.1 million,
respectively.
Cost of goods manufactured for RISPERDAL CONSTA was
$8.2 million and $21.8 million for the three and nine
months ended December 31, 2006, respectively, as compared
to $6.1 million and $15.0 million for the three and
nine months ended December 31, 2005, respectively. The
increase in cost of goods manufactured for RISPERDAL CONSTA
during the three and nine months ended December 31, 2006,
as compared to the same periods in 2005, was due to increased
shipments of the product to satisfy demand.
Cost of goods manufactured for VIVITROL was $4.8 million
and $12.3 million for the three and nine months ended
December 31, 2006, respectively. We began shipping VIVITROL
to our partner Cephalon for the first time during the quarter
ended June 30, 2006 and therefore we did not record any
manufacturing revenue related to VIVITROL for any periods in
fiscal 2006. Cost of goods manufactured for the three and nine
months ended December 31, 2006 included $1.5 million
of unabsorbed manufacturing costs related to VIVITROL. These
costs consisted of current period manufacturing costs allocated
to cost of goods manufactured which were related to
underutilized VIVITROL manufacturing capacity.
Research and development expenses were $29.9 million and
$85.6 million for the three and nine months ended
December 31, 2006, respectively, as compared to
$22.5 million and $63.5 million for the three and nine
months ended December 31, 2005, respectively. The increase
for the three and nine months ended December 31, 2006, as
compared to the same periods in 2005, was primarily due to
increased personnel-related costs, raw materials used during
work performed on our product candidates, increased cost for
third party packaging of clinical drug product and to
share-based compensation expense in the amount of
$1.9 million and $7.0 million, respectively, resulting
from the adoption of SFAS No. 123(R) beginning
April 1, 2006.
A significant portion of our research and development expenses
(including laboratory supplies, travel, dues and subscriptions,
recruiting costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not
tracked by project as they benefit multiple projects or our drug
delivery technologies in general. Expenses incurred to purchase
specific services from third parties to support our
collaborative research and development activities are tracked by
project and are reimbursed to us by our partners. We generally
bill our partners under collaborative arrangements using a
single full-time equivalent or hourly rate. This rate has been
established by us based on our annual budget of employee
compensation, employee benefits and the billable
non-project-specific costs mentioned above and is generally
increased annually based on increases in the consumer price
index. Each collaborative partner is billed using a full-time
equivalent or hourly rate for the hours worked by our employees
on a particular project, plus any direct external research
costs, if any. We account for our research and development
expenses on a departmental and functional basis in accordance
with our budget and management practices.
Selling, general and administrative expenses were
$16.4 million and $48.6 million for the three and nine
months ended December 31, 2006, respectively, as compared
to $9.3 million and $27.4 million for the three and
nine months ended December 31, 2005, respectively. The
increase for the three and nine months ended December 31,
2006, as compared to the same period in 2005, was primarily due
to share-based compensation expense in the amount of
$4.7 million and $13.1 million, respectively,
resulting from the adoption of SFAS No. 123(R)
beginning April 1, 2006, and to increases in selling and
marketing costs related to VIVITROL.
Interest income was $4.3 million and $13.3 million for
the three and nine months ended December 31, 2006,
respectively, as compared to $3.3 million and
$7.9 million for the three and nine months ended
December 31, 2005, respectively. The increase for the three
and nine months ended December 31, 2006, as compared to the
same periods in 2005, was primarily due to higher interest rates
earned during the periods
30
and higher average cash and investment balances held due to the
non-refundable payments we received from Cephalon in the amounts
of $160.0 million and $110.0 million in June 2005 and
April 2006, respectively.
Interest expense was $4.1 million and $13.6 million
for the three and nine months ended December 31, 2006,
respectively, as compared to $5.2 million and
$15.5 million for the three and nine months ended
December 31, 2005, respectively. The decrease for the three
and nine months ended December 31, 2006, as compared to the
same periods in 2005, was primarily due to the conversion of our
2.5% convertible subordinated notes due 2023 (the
2.5% Subordinated Notes) in June 2006. Interest
expense for the nine months ended December 31, 2006
includes a one-time interest charge of $0.6 million for a
payment we made in June 2006 in connection with the conversion
of our 2.5% Subordinated Notes to satisfy the three-year
interest make-whole provision in the note indenture. We incur
approximately $4.0 million of interest expense each quarter
on the non-recourse RISPERDAL CONSTA secured 7% notes (the
Non-Recourse 7% Notes) through the period until
principal repayment starts on April 1, 2009.
Derivative loss related to convertible subordinated notes for
the three and nine months ended December 31, 2006 was $0,
as compared to a loss of $0.3 million and $1.1 million
for the three and nine months ended December 31, 2005,
respectively. As discussed in our Annual Report on
Form 10-K/A
for the year ended March 31, 2006, we are no longer
required to account for the make-whole provision included in our
2.5% Subordinated Notes as a separate financial instrument.
In addition, in June 2006 the 2.5% Subordinated Notes were
converted to common stock and the related make-whole features
were settled. Derivative loss represented changes in the fair
value of the three-year interest make-whole provision included
in our 2.5% Subordinated Notes prior to their conversion.
Other income (expense), net was net income of $0.1 million
and $0.2 million for the three and nine months ended
December 31, 2006, respectively, as compared to net income
of $0.1 million and $1.0 million for the three and
nine months ended December 31, 2005, respectively. Other
income (expense), net primarily consists of income or expense
recognized on changes in the fair value of warrants of public
companies held by us in connection with collaboration and
licensing arrangements, which were recorded under the caption
Other assets on the unaudited condensed consolidated
balance sheets. The recorded value of such warrants can
fluctuate significantly based on fluctuations in the market
value of the underlying securities of the issuer of the warrants.
Income taxes were $0.4 million and $0.8 million for
the three and nine months ended December 31, 2006,
respectively. We did not record a provision for income taxes for
the three and nine months ended December 31, 2005. The
provision for income taxes for the three and nine months ended
December 31, 2006 related to the U.S. alternative
minimum tax. Utilization of tax loss carryforwards is limited in
the calculation of AMT. As a result, a federal tax charge is
reflected for fiscal 2007. The current AMT liability is
available as a credit against future tax obligations upon the
full utilization or expiration of our net operating loss
carryforward.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
Financial
Condition
Cash and cash equivalents were $83.2 million and
$33.6 million as of December 31, 2006 and
March 31, 2006, respectively. Investments
short-term were $267.9 million and $264.4 million as
of December 31, 2006 and March 31, 2006, respectively.
During the nine months ended December 31, 2006, combined
cash and cash equivalents and short-term investments increased
by $53.1 million to $351.1 million, primarily due to
the receipt of a $110.0 million non-refundable milestone
payment from Cephalon on April 27, 2006 following FDA
approval of VIVITROL, partially offset by cash used to fund our
operations, to acquire fixed assets, to service our debt and to
purchase our common stock under our stock repurchase program.
We invest in cash equivalents, U.S. government obligations,
high-grade corporate notes and commercial paper, with the
exception of our $100.0 million investment in Reliant, and
warrants we received in connection with our collaborations and
licensing activities. Our investment objectives, other than our
investment in Reliant and our warrants, are, first, to assure
liquidity and conservation of capital and, second, to obtain
investment income. We held approximately $5.1 million of
U.S. government obligations classified as restricted
long-term
31
investments as of December 31, 2006 and March 31 2006,
which are pledged as collateral under certain letters of credit
and lease agreements.
All of our investments in debt securities were classified as
available-for-sale
and were recorded at fair value. Fair value was determined based
on quoted market prices.
Receivables were $62.4 million and $39.8 million as of
December 31, 2006, and March 31, 2006, respectively.
The increase of $22.6 million during the nine month period
was primarily due to increased development revenues related to
the AIR Insulin, AIR PTH and exenatide LAR programs and to the
timing of payments received from our partners with respect to
these programs, amounts due from Lilly for the reimbursement of
costs we previously incurred for the construction of the second
manufacturing line at our commercial-scale production facility
for inhaled medications, and amounts due from Cephalon for
VIVITROL product deliveries and reimbursement for costs we
incurred on the construction of the two VIVITROL manufacturing
lines.
Inventory, net was $13.9 million and $7.3 million as
of December 31, 2006, and March 31, 2006,
respectively. This consisted of RISPERDAL CONSTA inventory of
$7.1 million and $4.8 million as of December 31,
2006 and March 31, 2006, respectively, and VIVITROL
inventory of $6.8 million and $2.5 million as of
December 31, 2006 and March 31, 2006, respectively.
The increase in inventory, net of $6.6 million during the
nine months ended December 31, 2006, was primarily due to
increases in VIVITROL raw materials and work in process
inventories, increases in RISPERDAL CONSTA finished goods
inventory related to the timing of shipments to Janssen, and to
the capitalization of share-based compensation cost to inventory
in the amount of $0.4 million resulting from the adoption
of SFAS No. 123(R).
Convertible subordinated notes long-term portion was
$0 and $124.3 million as of December 31, 2006 and
March 31, 2006, respectively. In June 2006, we converted
all of our outstanding 2.5% Subordinated Notes into
9,025,271 shares of the Companys common stock.
Unearned milestone revenue current and long-term
portions, combined, were $158.3 million and
$99.5 million as of December 31, 2006 and
March 31, 2006, respectively. The increase during the nine
months ended December 31, 2006 was due to the receipt of a
$110.0 million non-refundable milestone payment from
Cephalon in April 2006 following FDA approval of VIVITROL and
the receipt of $4.6 million from Cephalon, pursuant to the
Amendments, as reimbursement for certain costs that we incurred
prior to October 2006 and charged to the collaboration, reduced
by approximately $54.6 million and $1.2 million of
milestone revenue we recognized under the captions Net
collaborative profit and Manufacturing
revenues, respectively, in the unaudited condensed
consolidated statement of operations during the nine month
period ended December 31, 2006.
Deferred revenue current and long-term portions,
combined, were $19.5 million and $1.0 million as of
December 31, 2006, and March 31, 2006, respectively.
In the three months ended December 31, 2006 we recorded
$18.7 million of deferred revenue long-term
portion related to the purchase by Cephalon of the two VIVITROL
manufacturing lines currently under construction.
Redeemable convertible preferred stock was $0 and
$15.0 million as of December 31, 2006 and
March 31, 2006, respectively. In December 2006, Lilly
exercised its right to put the remaining 1,500 shares of
our outstanding Preferred Stock, with a carrying value of
$15.0 million, in exchange for a reduction in the royalty
rate payable to us on future sales of the AIR Insulin product by
Lilly, if approved. At that time, the remaining Preferred Stock
was reclassified to shareholders equity in the condensed
consolidated balance sheets under the caption Additional
paid-in capital at its redemption value of
$15.0 million. See Note 8 to the unaudited condensed
consolidated financial statements for additional information on
our Preferred Stock.
Treasury stock, at cost was $12.5 million and $0 as of
December 31, 2006, and March 31, 2006, respectively.
In September 2005, our Companys Board of Directors
authorized a share repurchase program up to $15.0 million
of common stock to be repurchased in the open market or through
privately negotiated transactions. The repurchase program has no
set expiration date and may be suspended or discontinued at any
time. During the nine months ended December 31, 2006 and
since September 2005, we had repurchased 823,677 shares at
a cost of approximately $12.5 million under the program.
32
Liquidity
and Capital Resources
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with collaborative arrangements and as we expand the
development of our proprietary product candidates, including
costs related to preclinical studies, clinical trials and
facilities expansion. Our costs, including research and
development costs for our product candidates and sales,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
We believe that our current cash and cash equivalents and
short-term investments, combined with our unused equipment lease
line, anticipated interest income and anticipated revenues will
generate sufficient cash flows to meet our anticipated liquidity
and capital requirements through at least December 31, 2007.
We may continue to pursue opportunities to obtain additional
financing in the future. Such financing may be sought through
various sources, including debt and equity offerings, corporate
collaborations, bank borrowings, arrangements relating to assets
or other financing methods or structures. The source, timing and
availability of any financings will depend on market conditions,
interest rates and other factors. Our future capital
requirements will also depend on many factors, including
continued scientific progress in our research and development
programs (including our proprietary product candidates), the
magnitude of these programs, progress with preclinical testing
and clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting
and enforcing patent claims, competing technological and market
developments, the establishment of additional collaborative
arrangements, the cost of manufacturing facilities and of
commercialization activities and arrangements and the cost of
product in-licensing and any possible acquisitions and, for any
future proprietary products, the sales, marketing and promotion
expenses associated with marketing such products.
We may need to raise substantial additional funds for
longer-term product development, including development of our
proprietary product candidates, regulatory approvals and
manufacturing and sales and marketing activities that we might
undertake in the future. There can be no assurance that
additional funds will be available on favorable terms, if at
all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research and
development programs
and/or
obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of
our technologies, product candidates or future products.
Capital expenditures were $24.7 million for the nine months
ended December 31, 2006. Our capital expenditures were
primarily related to the purchase of equipment to make
improvements to and expand our manufacturing facility in Ohio.
Our capital expenditures for equipment, facilities and building
improvements have been financed to date primarily with proceeds
from bank loans and the sales of debt and equity securities.
Under the provisions of our existing loans, General Electric
Capital Corporation (GE) and Johnson &
Johnson Finance Corporation have security interests in certain
of our capital assets. Under our commercial manufacturing
agreement with Lilly for AIR Insulin, in the quarter ended
March 31, 2007, we expect to receive $11.5 million
from Lilly as payment for the purchase of certain assets related
to the construction of a second manufacturing line at our
commercial-scale production facility for inhaled medications.
Our 3.75% convertible subordinated notes due 2007 (the
3.75% Subordinated Notes) mature on
February 15, 2007. We expect to repay the $0.7 million
principal amount of the 3.75% Subordinated Notes on the
maturity date. See Note 7 to the Consolidated Financial
Statements in our Annual Report on
Form 10-K/A
for the fiscal year ended March 31, 2006 for information on
the 3.75% Subordinated Notes.
Pursuant to the Amendments discussed under Collaborative
Arrangements Cephalon above, Cephalon
was responsible for its own VIVITROL-related costs during the
period August 1, 2006 through December 31, 2006, and
for this period no such costs were charged by Cephalon to the
collaboration and against the cumulative net loss cap.
Accordingly, we did not reimburse Cephalon for any of its
VIVITROL-related costs during this period. Also under the
Amendments, the parties agreed that Cephalon would purchase from
us our
33
two VIVITROL manufacturing lines under construction (and related
equipment). Through December 31, 2006, we had billed
Cephalon $18.7 million for the sale of the two
manufacturing lines. We will bill Cephalon for future costs
incurred related to the construction and validation of the two
manufacturing lines.
In December 2002, we and Lilly expanded our collaboration for
the development of inhaled formulations of insulin and hGH based
on our AIR pulmonary drug delivery technology. In connection
with the expansion, Lilly purchased $30.0 million of our
Preferred Stock. In October 2005, we converted 1,500 shares
of the Preferred Stock with a carrying value of
$15.0 million into 823,677 shares of our
Companys common stock. This conversion secured a
proportionate increase in the royalty rate payable to us on
future sales of the AIR Insulin product by Lilly, if approved.
In December 2006, Lilly exercised its right to put the remaining
1,500 shares of our outstanding Preferred Stock, with a
carrying value of $15.0 million, in exchange for a
reduction in the royalty rate payable to us on future sales of
the AIR Insulin product by Lilly, if approved. See Note 2
Collaborative Arrangements Lilly
to the unaudited condensed consolidated financial statements for
information on royalties payable to us on sales of the AIR
Insulin product by Lilly.
The Preferred Stock was carried on the condensed consolidated
balance sheets at its estimated redemption value in the amount
of $0 million and $15.0 million as of
December 31, 2006 and March 31, 2006, respectively.
Following Lillys exercise of its put right, the Preferred
Stock was reclassified to shareholders equity in the
condensed consolidated balance sheets under the caption
Additional paid-in capital at its redemption value
of $15.0 million.
While the Preferred Stock was outstanding, we re-evaluated its
redemption value on a quarterly basis. Any increases or
decreases in the redemption value of the Preferred Stock, of
which there were none, would have been recorded as charges or
credits to shareholders equity in the same manner as
dividends on nonredeemable stock, and would have been effected
by charges or credits against retained earnings or, in the
absence of retained earnings, by charges or credits against
additional paid-in capital. Any increases or decreases in the
redemption value of the Preferred Stock, of which there were
none, would have decreased or increased income applicable to
common shareholders in the calculation of earnings per common
share and would not have had an impact on reported net income or
cash flows.
Contractual
Obligations
The contractual cash obligations disclosed in our Annual Report
on
Form 10-K/A
for the year ended March 31, 2006 have not changed
materially except for the elimination of our obligations related
to the 2.5% Subordinated Notes, which we converted into
common stock on June 15, 2006 (see Note 6 to the
unaudited condensed consolidated financial statements).
Off-Balance
Sheet Arrangements
As of December 31, 2006, we were not a party to any
off-balance sheet financing arrangements, other than operating
leases.
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Item 3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
We hold financial instruments in our investment portfolio that
are sensitive to market risks. Our investment portfolio,
excluding our investment in Reliant, and warrants we receive in
connection with our collaborations and licensing activities, is
used to preserve capital until it is required to fund
operations. Our short-term and restricted long-term investments
consist of U.S. government obligations, high-grade
corporate notes and commercial paper. These debt securities are:
(i) classified as
available-for-sale;
(ii) are recorded at fair value; and (iii) are subject
to interest rate risk, and could decline in value if interest
rates increase. Due to the conservative nature of our short-term
and long-term investments and our investment policy, we do not
believe that we have a material exposure to interest rate risk.
Although our investments, excluding our investment in Reliant,
are subject to credit risk, our investment policies specify
credit quality standards for our investments and limit the
amount of credit exposure from any single issue, issuer or type
of investment.
34
We also hold certain marketable equity securities, including
warrants to purchase the securities of publicly traded companies
we collaborate with, that are classified as
available-for-sale
and recorded at fair value under the caption Other
assets in the condensed consolidated balance sheets. These
marketable equity securities are sensitive to changes in
interest rates. Interest rate changes would result in a change
in the fair value of these financial instruments due to the
difference between the market interest rate and the rate at the
date of purchase of the financial instrument. A 10% increase or
decrease in market interest rates would not have a material
impact on the condensed consolidated financial statements.
The process of estimating the fair value of a security with
features such as those contained within our Preferred Stock is
complex and involves multiple assumptions regarding factors such
as future revenues generated by our partner for certain products
still in development, judgments which may be made by the parties
to the security, and assumptions about the future market
potential for insulin based products. Certain of these
assumptions are highly subjective and require the exercise of
management judgment.
As of December 31, 2006, the fair value of our Non-Recourse
7% Notes and our 3.75% convertible subordinated notes
(the 3.75% Subordinated Notes) approximate the
carrying values. The interest rates on these notes, and our
capital lease obligations, are fixed and therefore not subject
to interest rate risk. A 10% increase or decrease in market
interest rates would not have a material impact on the condensed
consolidated financial statements.
As of December 31, 2006, we have a term loan in the amount
of $1.7 million that bears a floating interest rate equal
to the one-month London Interbank Offered Rate
(LIBOR) plus 5.45%. A 10% increase or decrease in
market interest rates would not have a material impact on the
condensed consolidated financial statements.
Foreign
Currency Exchange Rate Risk
The royalty revenues we receive on RISPERDAL CONSTA are a
percentage of the net sales made by our collaborative partner.
Some of these sales are made in foreign countries and are
denominated in foreign currencies. The royalty payment on these
foreign sales is calculated initially in the foreign currency in
which the sale is made and is then converted into
U.S. dollars to determine the amount that our collaborative
partner pays us for royalty revenues. Fluctuations in the
exchange ratio of the U.S. dollar and these foreign
currencies will have the effect of increasing or decreasing our
royalty revenues even if there is a constant amount of sales in
foreign currencies. For example, if the U.S. dollar
strengthens against a foreign currency, then our royalty
revenues will decrease given a constant amount of sales in such
foreign currency.
The impact on our royalty revenues from foreign currency
exchange rate risk is based on a number of factors, including
the exchange rate (and the change in the exchange rate from the
prior period) between a foreign currency and the
U.S. dollar, and the amount of sales by our collaborative
partner that are denominated in foreign currencies. We do not
currently hedge our foreign currency exchange rate risk.
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Item 4.
|
Controls
and Procedures
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures
|
As of December 31, 2006, our management, with the
participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls
and procedures pursuant to
Rule 13a-15(b)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). In designing and
evaluating our disclosure controls and procedures, our
management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and our
management necessarily applied its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Due to the identification of a material weakness in internal
control over financial reporting related to the Companys
accounting for stock-based compensation that resulted in the
restatement of previously issued financial statements, as
described in our Annual Report on
Form 10-K/A
for the fiscal year ended March 31, 2006, our Chief
Executive Officer and Chief Financial Officer concluded that, as
of December 31, 2006, our disclosure controls and
procedures were not effective in
35
ensuring that material information required to be disclosed by
us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange
Commissions rules and forms, including ensuring that such
material information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
The Public Company Accounting Oversight Boards Auditing
Standard No. 2 defines a material weakness as a significant
deficiency, or a combination of significant deficiencies, that
results in there being a more than remote likelihood that a
material misstatement of the annual or interim financial
statements will not be prevented or detected. Management
previously identified a material weakness in internal control
over financial reporting related to the accounting for
stock-based compensation, as reported in Item 9A of our
Form 10-K/A
for the fiscal year ended March 31, 2006. Specifically, we
did not design and implement controls necessary to provide
reasonable assurance that the measurement date for stock option
grants was appropriately determined. As a result, the
measurement date used for certain option grants was not
appropriate resulting in those grants not being accounted for in
accordance with GAAP. This material weakness resulted in the
restatement of previously issued financial statements as
described in our Annual Report on
Form 10-K/A
for the fiscal year ended March 31, 2006. This deficiency
was determined to be a material weakness due to the actual
misstatements identified, the potential for additional material
misstatements to have occurred as a result of the deficiency and
the lack of other mitigating controls.
To address the material weakness described above, we implemented
the following new stock option granting controls and procedures
during the quarter ended September 30, 2006 related to the
granting of new hire and annual stock option grants, restricted
stock awards and annual director stock option grants. We are
continuing our efforts to improve and strengthen our internal
controls over financial reporting to ensure that all of our
internal controls over financial reporting are adequate and
effective.
Stock option grants and restricted stock awards are now made on
preset dates. New hire grants are made monthly on the first
Wednesday following the first Monday of every month. Annual
stock option grants are made on preset dates in November and May
to correspond to our Board of Directors meetings; provided, that
the date of measurement for the May grants will not be less than
48 hours after the release of earnings for our fiscal year,
and the date of measurement for the November grants will not be
less than 48 hours after the announcement of the
Companys second quarter fiscal year results. A final list
of proposed stock option grants and restricted stock awards will
be delivered to the Compensation Committee prior to the
Committee meeting. At the Compensation Committee meeting,
whether in person or by telephone, the Committee will approve
the final stock option grants
and/or
restricted stock awards. While the Board disfavors the use of
written consents in the grant of stock options and restricted
stock awards other than for new hire grants made by the Limited
Compensation
Sub-Committee,
the Compensation Committee may, when it deems appropriate, take
such action by written consent. Except for new hire grants, all
written consents granting stock options or restricted stock
awards will be effective upon the date of the last signature;
all signatures on written consents shall be dated. New hire
grants shall be effective on the later of the first Wednesday
following the first Monday of every month or the date of the
last signature on the written consent. The human resource
representative attending the Compensation Committee meeting
shall mark as final contemporaneously
with its approval by the Compensation Committee the
list of stock option grants and restricted stock awards and will
promptly send such list to the legal and finance departments for
recordkeeping. Finance promptly distributes stock option grant
or restricted stock award certificates to grant recipients
notifying them of the grant.
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(b)
|
Change
in Internal Control over Financial Reporting
|
During the period covered by this report, there have been no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting, other
than those described above relating to our accounting for
stock-based compensation.
36
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings
|
On August 16, 2006, a purported shareholder derivative
lawsuit, captioned Maxine Phillips vs. Richard Pops
et al. and docketed as CIV-06-2931, was filed
ostensibly on our behalf in Middlesex County Superior Court,
Massachusetts. The complaint in that lawsuit alleged, among
other things, that, in connection with certain stock option
grants made by us, certain of our directors and officers
committed violations of state law, including breaches of
fiduciary duty. The complaint named us as a nominal defendant,
but did not seek monetary relief from us. The lawsuit sought
recovery of damages allegedly caused to us as well as certain
other relief. On September 13, 2006, the plaintiff
voluntarily dismissed this action without prejudice.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned Thomas Bennett, III vs. Richard
Pops et al. and docketed as CIV-06-3606, was filed
ostensibly on our behalf in Middlesex County Superior Court,
Massachusetts. The complaint in that lawsuit alleges, among
other things, that, in connection with certain stock option
grants made by us, certain of our directors and officers
committed violations of state law, including breaches of
fiduciary duty. The complaint names us as a nominal defendant,
but does not seek monetary relief from us. The lawsuit seeks
recovery of damages allegedly caused to us as well as certain
other relief, including an order requiring us to take action to
enhance our corporate governance and internal procedures. On
January 31, 2007, the defendants served the plaintiff with
a motion to dismiss the complaint.
We have received four letters, allegedly sent on behalf of
owners of our securities, which claim, among other things, that
certain of our officers and directors breached their fiduciary
duties to us by, among other allegations, allegedly violating
the terms of our stock option plans, allegedly violating
generally accepted accounting principles in the United States of
America by failing to recognize compensation expenses with
respect to certain option grants during certain years, and
allegedly publishing materially inaccurate financial statements
relating to us. The letters demand, among other things, that our
board of directors (the Board) take action on our
behalf to recover from the current and former officers and
directors identified in the letters the damages allegedly
sustained by us as a result of their alleged conduct, among
other amounts. The letters do not seek any monetary recovery
from us. Our Board appointed a special independent committee of
the Board to investigate, assess and evaluate the allegations
contained in these and any other demand letters relating to our
stock option granting practices and to report its findings,
conclusions and recommendations to the Board. The special
independent committee was assisted by independent outside legal
counsel. In November 2006, based on the results of its
investigation, the special independent committee of the Board
concluded that the assertions contained in the demand letters
lacked merit, that nothing had come to its attention that would
cause it to believe that there are any instances where
management of the Company or the Compensation Committee of the
Company had retroactively selected a date for the grant of stock
options during the 1995 through 2006 period, and that it would
not be in our best interests or the best interests of our
shareholders to commence litigation against our current or
former officers or directors as demanded in the letters. The
findings and conclusions of the special independent committee of
the Board have been presented to and adopted by our Board.
The following Risk Factor should be read in conjunction with the
Risk Factors disclosed in our Annual Report on
Form 10-K/A
for the year ended March 31, 2006.
We
face risks related to an ongoing informal SEC inquiry into, and
private litigation relating to, our past practices with respect
to equity incentives.
In May 2006, we were mentioned in a third-party report
suggesting that we were at moderate risk for options backdating
(the Report) with respect to our annual grants of
options to all employees of the Company dated October 28,
1999 and November 20, 2000. Shortly after the Report
appeared, we were contacted by the Securities and Exchange
Commission (SEC) with respect to our option
practices for the years mentioned in the Report. We have
cooperated fully with the SECs informal inquiry. As a
result of the
37
appearance of the Report, and concurrent with the SECs
informal inquiry, the audit committee of the Board of Directors
undertook an investigation into our option practices for the
period 1999 to 2000 as well as for 2001 and 2002. The review was
conducted with the assistance of outside legal counsel and
outside accounting consultants. The audit committee has
completed its investigation and has concluded that nothing has
come to its attention that would cause it to believe that there
were any instances where management of the Company or the
compensation committee of the Company retroactively selected a
date for the grant of stock options during the 1999 through 2002
period. Also, management reviewed its option grant practices for
the period from 2003 to date. As a result of these reviews, we
have restated our consolidated balance sheets as of
March 31, 2006 and 2005, our consolidated statements of
operations for the years ended March 31, 2005 and 2004, our
consolidated statements of cash flows for the years ended
March 31, 2005 and 2004, our consolidated statements of
changes in stockholders equity for the years ended
March 31, 2006, 2005 and 2004, and the related disclosures.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned Thomas Bennett, III vs. Richard
Pops et al. and docketed as CIV-06-3606, was filed
ostensibly on our behalf in Middlesex County Superior Court,
Massachusetts. The complaint in that lawsuit alleges, among
other things, that, in connection with certain stock option
grants made by us, certain of our directors and officers
committed violations of state law, including breaches of
fiduciary duty. The complaint names us as a nominal defendant,
but does not seek monetary relief. The lawsuit seeks recovery of
damages allegedly caused to us as well as certain other relief,
including an order requiring us to take action to enhance our
corporate governance and internal procedures.
We have received four letters, allegedly sent on behalf of
owners of our securities, which claim, among other things, that
certain of our officers and directors breached their fiduciary
duties to us by, among other allegations, allegedly violating
the terms of our stock option plans, allegedly violating
generally accepted accounting principles by failing to recognize
compensation expenses with respect to certain option grants
during certain years, and allegedly publishing materially
inaccurate financial statements relating to us. The letters
demand, among other things, that our board of directors take
action on our behalf to recover from the current and former
officers and directors identified in the letters the damages
allegedly sustained by us as a result of their alleged conduct,
among other amounts. The letters do not seek any monetary
recovery from us. Our board of directors appointed a special
independent committee of the Board to investigate, assess and
evaluate the allegations contained in these and any other demand
letters relating to our stock option granting practices and to
report its findings, conclusions and recommendations to the
Board. See Part II, Item 1 (Legal Proceedings)
in this
Form 10-Q
for additional information related to the investigation
conducted by the special independent committee of our Board.
At this point we are unable to predict what, if any,
consequences these issues relating to our option grants may have
on us. The filing of our restated financial statements to
correct the discovered accounting errors may not resolve the
informal SEC inquiry into our grants of employee stock options,
and the SEC may or may not agree with the adjustments we have
made to our financial statements. There could be considerable
legal and other expenses associated with the SEC inquiry and any
private litigation, including that described above, that might
be filed relating to these issues.
The above matters and any other similar matters could divert
managements attention from other business concerns. Such
matters could also result in harm to our reputation and
significant monetary liability for the Company, and require that
we take other actions not presently contemplated, any or all of
which could have a material adverse effect on our business,
results of operations, or financial condition.
38
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
A summary of our stock repurchase activity for the nine months
ended December 31, 2006 is set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Value of Shares
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Purchased as
|
|
|
That May Yet
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Part of a Publicly
|
|
|
be Purchased
|
|
Period
|
|
Purchased(a)
|
|
|
per Share
|
|
|
Announced Program(a)
|
|
|
Under the Program
|
|
|
|
(in thousands, except share and per share amounts)
|
|
|
April 1 through June 30
|
|
|
134,630
|
|
|
$
|
19.52
|
|
|
|
134,630
|
|
|
$
|
12,373
|
|
July 1 through
September 30
|
|
|
689,047
|
|
|
|
14.32
|
|
|
|
689,047
|
|
|
|
2,508
|
|
October 1 through
October 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,508
|
|
November 1 through
November 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,508
|
|
December 1 through
December 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total as of
December 31, 2006
|
|
|
823,677
|
|
|
$
|
15.17
|
|
|
|
823,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In September 2005, our Board of Directors authorized a share
repurchase program of up to $15.0 million of common stock
to be repurchased in the open market or through privately
negotiated transactions. The repurchase program has no set
expiration date and may be suspended or discontinued at any
time. We publicly announced the share repurchase program in our
press release for the fiscal 2006 second quarter financial
results dated November 3, 2005. |
In addition to the stock repurchases above, we purchased, by
means of employee forfeitures, 31,307 shares during the
nine months ended December 31, 2006 at an average price of
$18.11 to pay withholding taxes on employee stock awards.
(a) List of Exhibits:
Exhibit Index
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.1
|
|
1998 Equity Incentive Plan.
|
|
10
|
.2
|
|
1999 Stock Option Plan.
|
|
10
|
.3
|
|
2002 Restricted Stock Award Plan.
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
32
|
.1
|
|
Certification pursuant to 18
U.S.C. Section 1350, as adopted pursuant to
Section 906 of the
Sarbanes-Oxley
Act of 2002 (furnished herewith).
|
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ALKERMES, INC.
(Registrant)
Richard F. Pops
Chief Executive Officer and Director
(Principal Executive Officer)
James M. Frates
Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: February 8, 2007
40
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
|
|
|
10
|
.1
|
|
1998 Equity Incentive Plan.
|
|
10
|
.2
|
|
1999 Stock Option Plan.
|
|
10
|
.3
|
|
2002 Restricted Stock Award Plan.
|
|
31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
|
32
|
.1
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the
Sarbanes-Oxley
Act of 2002 (furnished herewith).
|
41