Highlighted are the following stocks: Alkermes (
ALKS), Cephalon (
CEPH) and Eli Lilly (
LLY).
Alkermes Enters Into Uncharted Territory
We downgrade Alkermes (
ALKS) shares from Hold to Sell based on the financial performance in fiscal 3rd quarter of 2009 ended December 31, 2008 and the bleak outlook of the company in the next few quarters. Our price target is $8.00.
Alkermes reported fiscal 3Q09 results on Feb 5, 2009 that were less than our expectations.
Total revenues for the quarter ended December 31, 2008 were $155.7 million. Excluding the one-time revenue of $120.7 million related to the termination of commercialization rights to Vivitrol by Cephalon (
CEPH), total revenue should be $34.9 million, down 31% compared to $50.8 million for the same period in 2007, and $4 million short of our estimate of $39 million.
Although cash position is relatively strong with $423.6 million in cash and investments at December 31, 2008, the company turned a loss in the 3rd quarter of 2009 excluding the one-time revenue from Cephalon. Net loss was $8.3 million or a diluted loss per share of $0.09, including $3.3 million in share-based compensation expense. For the same period in 2008, net loss was $2.4 million or a diluted loss per share of $0.02, which included $5.2 million in share-based compensation expense.
We expect revenue in the 4Q09 will continue to decline by 44% to $34.7 million. Total revenue for the fiscal 2009 should decline by 18% to $197 million excluding the $120.7 million one-time revenue from Cephalon. Revenue will grow slowly during the fiscal 2010 to 2013 periods.
The company faces tough challenges in the coming quarters following a series of negative business developments, and the outlook is not rosy.
In March 2008, Eli Lilly (
LLY) terminated the AIR Insulin Program. Eli Lilly partnered this program with Alkermes to use its pulmonary drug delivery technology. The AIR Insulin program was the company's late stage diabetes program for type I diabetes patients. Termination of the AIR Insulin program has resulted in a loss of annual R&D funding of over $50 million for Alkermes. The termination has negatively impacted the company's top-line growth since March 2008.
In December 2008, Cephalon, Inc. terminated commercialization rights to Vivitrol (naltrexone for extended-release injectable suspension) in the US. Vivitrol is the company's second product approved by the FDA for the treatment of alcohol dependence. Sales have been disappointing since its launch in June 2006. Without Cephalon's marketing muscle, we believe Vivitrol sales will continue to suffer in the coming quarters and possibly years.
Sales growth of Risperdal Consta, from which Alkermes generates manufacturing and royalty revenue and which is the biggest revenue contributor, has been diminishing in the last three fiscal quarters of 2009, and will continue to decline due to heavy competition in the schizophrenia market.
Exenatide LAR approval may be delayed by the FDA due to the side effect of pancreatitis found in patients on Byetta therapy. Exenatide LAR is the company's only late development program after the termination of AIR Insulin program.
We think the company has entered into an uncharted territory. With shrinking revenue and profitability, the risk/reward profile has shifted to the risk side for the company.
