Alkermes plc (ALKS) Earnings Call Transcript & Summary

Let's get underway. Good afternoon. My name is Chris Shibutani, I'm a member of the Cowen biotech equity research team. We are very pleased once again to have Alkermes join us for our 40th annual conference. I think it's very clear that there are certain pursuits, in particular, addiction, CNS disease, psychiatric disease, immuno-oncology, where all of us recognize the incredible difficulty that's associated with this, whether it's science, whether it's even just trying to understand what is the definition of success. There's no simple LDL cholesterol number that they're trying to hit. There are objectives. They're constantly being in pursuit. They're constantly changing as we learn more and requires a degree of adaptability. In order to be able to manage a business with that, it takes some discipline and some strategy. This is a year where the stock is attractively valued at a point where the company is redefining their strategy as they're continually defining and redefining what the endpoints and the goals are, and we'll be in good position as investors to monitor as several assets continue to play out this year, perhaps more so than over the last year. Here to tell us with an update of the story, CEO, Richard Pops. Thank you, Richard.

Thank you, Chris, and good afternoon, everybody. That's an excellent summary of where the company is. If you haven't been paying attention to Alkermes in the last several months, you may have missed an intense amount of activity that's been going on within the company. This is $1 billion top line company that we built by developing important medicines. It sounds simple, and we're going to continue to develop important medicines. And what we've done over the past year, though, is take an intense look at the construction of the business in terms of the operating principles of the company, the pipeline and our strategy for the future, and we'll talk about that this afternoon a bit. I will make forward-looking statements. We always encourage you to take a look at the way we try to describe the risk factors in our periodic SEC filings. One thing that hasn't changed in this company over the last several years is the mission. This company is making a real-world impact in areas of public health that are -- affect millions of people's lives. So we say through our advocacy, not just our science and our medicines, but our role out in the community, Alkermes employees and Alkermes medicines are having a real-world impact, and we're extremely proud of that. This isn't a theory, this is something that's happening across the country every day. With that said, we've gone through a pretty intense period of focusing the business now on what are the key elements that are going to drive the future performance of the company. And they really segregate into 3 simple demarcations. One is expanding and driving the growth of our currently marketed products, our product portfolio of important medicines that are in the market. So the here and now. That's about execution. The second is about advancing the pipeline. And we were doing that along 2 areas. One is in CNS, where we've been for many years. And second is in our emerging capabilities in the context of oncology. And we're excited about both of these. And third is just operational, positioning the company for long-term growth and profitability. And we'll talk about that as well, some of the steps we've taken to assure the growth of profitability going forward. So let's start with the market commercial products. It's a single slide but an important slide because we talk about the 2 drugs that drive that growth, VIVITROL and ARISTADA. VIVITROL is a once-monthly extended-release opioid antagonist, and it's the only medication approved by the FDA for prevention of relapsed opioid dependence following opioid detoxification. It is remarkable that in the context of a major public health crisis, there are only 3 approved medicines for the treatment of opioid dependence, 2 of which are opioid replacement therapies, methadone and SUBOXONE, and 1 is VIVITROL, where you undergo detoxification and then monthly injections to prevent opioid relapse. So it's a distinctive product in the marketplace. It's been there a long time. We have been instrumental in creating essentially a new treatment system to accommodate the use of VIVITROL. It's an important medicine. It's -- about 125,000 people went on VIVITROL last year. And it's one of these medicines that is, on a daily basis, affecting not just those 125,000 patients but their spouses and their wives and their kids and their families and their communities, even. So we're going to keep going with VIVITROL. The future for VIVITROL is driven by increased funding into the opioid crisis by the U.S. government and by the states. It's used in alcohol dependence, and it's expanding use in the treatment of opioid dependence. ARISTADA is our long-acting injectable atypical antipsychotic. So this is a market that we were instrumental in building from the very beginning with our technologies embodied in important products that are in the marketplace. ARISTADA takes everything we've learned from making long-acting injectables and embodied in a product family that we think has really strong competitive advantages. It's the only product in -- where you can dose on day 1 with ARISTADA INITIO, and on the same day, initiate with a 2-month dose, so you can discharge a patient from the hospital in a single day or in a short visit with 2 months of protection to the community. And thereafter, 6 injections a year, maintaining therapeutic concentrations of an agent that is well-known to have tremendous safety and efficacy. This program is supported by the strong product family as well as comparative data in randomized clinical trials versus placebo, as well as observational studies with other atypical antipsychotics in the marketplace. So there's a lot to support this. This is an area of underutilization in the U.S. Long-acting injectables have strong clinical and economic rationale for their use. They've been underutilized, but that use has been growing double digits over the last many years. And we think this is going to be an important product in our portfolio for a long time to come. Looking at the business as a whole, this $1 billion top line that I referred to is increasingly driven by the growth of these proprietary products. In the light blue is VIVITROL and the dark blue is ARISTADA. And the profile of the revenue line is also evolving over time. Most recently, with the approval of VUMERITY, which is a collaboration we have now with Biogen that they launched in Q4, which I'll tell you a little bit more about, and as we prepare for the launch of our oral proprietary antipsychotic ALKS 3831, we see this proprietary product top line continuing to grow over time. VUMERITY is interesting because this is a drug we discovered and developed and ultimately licensed to Biogen near the end of its development program. It's approved by the FDA at the end of last year. It's a novel next-generation oral fumarate. So it's designed to be a generational advance over to the massive market product, TECFIDERA. So Biogen is the commercial license holder, and they'll be commercializing it around the world. We derive a 15% royalty, and we manufacture the drug for them on a cost-plus basis. And the patent protection -- because it's a novel molecular entity, the patent protection extends deep into 2033, which allows new life cycle management opportunities for this area -- this class of molecules that might have been unavailable for a shorter patent life molecule like TECFIDERA. And what's interesting is that box on the right. Just the size of the multiple sclerosis market in a patient and a dollar volume, but also the number of patients who turn over in their medications each year. So I think our belief, and I think this is shared by Biogen, that a well-tolerated oral agent with the efficacy of TECFIDERA can be a very important product in this marketplace. And for us, starting from 0 with this being a 100% pure margin product, we received $150 million upon its approval and it will be profitable for us from the first mile sold. So as this evolves over time, this becomes a really interesting and important part of our P&L because of its high-margin attributes. In contrast, 3831 is a drug that we're going to sell ourselves because it builds on this presence that we have in psychiatry and specifically in schizophrenia with government payers embodied in both Medicare and in Medicaid across 50 states. So 3831 is an investigational new oral antipsychotic and it's designed to offer the efficacy of olanzapine, Zyprexa, without the associated weight gain, which is the principal impediment to its being used more broadly. It is -- and we've completed its development. We filed the NDA for both schizophrenia and bipolar I disorder in November, that NDA was accepted in January, and we expect an end of the year, this year, PDUFA date and launch in Q1 of next year. The picture on the bottom shows what it is. It's -- essentially, it's a bilayer oral tablet comprised of each of the normally marketed doses of olanzapine, co-formulated with our opioid receptor antagonist, samidorphan, which through all kinds of preclinical through clinical data has been shown to attenuate the weight gain effects associated with samidorphan. So in -- with olanzapine, I'm sorry. So in a way, think of it as it's reopening the possibility of using olanzapine for maintenance treatment of schizophrenia and in bipolar as well. And that's really important because there's a tremendous amount of muscle memory in the marketplace for the use of olanzapine in the treatment of schizophrenia and bipolar disease. And it actually extends beyond that. They're still being used. Despite the fact that olanzapine is not indicated first-line for schizophrenia because of its weight and metabolic liabilities, it's still used widely. 20% of prescriptions in schizophrenia are for olanzapine. Why? Because it's surpassingly efficacious and extremely well tolerated in the short term, prior to the manifestations of the excessive weight gain and metabolic liabilities. So there's a lot of rationale for the use of this drug. So if we've addressed the principal limitation of this drug through the co-formulation with some of the opioids receptor antagonist, and that's clear in the weight data that you've seen, we think there's a really compelling commercial opportunity here because in schizophrenia, there's a role in the marketplace for new agents, for sure, but we think the most dominant need in the marketplace is the role of new agents that deliver efficacy, surpassing the high levels of efficacy. And instead of having demonstrated that in first principles, we're able to leverage the known clinical profile of a medicine like olanzapine. So let's switch to the pipeline now briefly in both CNS and in oncology. But first, it's interesting to see how the company has evolved over time. Some of you in the audience, you've been around a long time. We started in the top left, we were a formulation drug delivery company. And that was taking -- from a scientific capability point of view, we're mostly looking at taking existing medications, modifying them in nontrivial ways to really confer really important patient benefits, but taking existing medications and working both with the proteins, peptides and small molecules. And that was quite successful. We built technologies that led to RISPERDAL CONSTA and INVEGA SUSTENNA, the J&J atypical franchise, VIVITROL and BYDUREON with our polymer-based delivery systems. Over time then, we started to realize that the -- it was a bit of a constraint to have to create new manufacturing processes and technologies to confer the benefits we're looking for, for patients. So we began to segue into making new molecular entities, building these sensibilities of the delivery systems into the molecules themselves through prodrugs and new chemical entity chemistries. And I'm going to say that has been similarly successful from a technical point of view with ARISTADA, a prodrug of aripiprazole, designed for long acting injectables; VUMERITY, the novel and an improved fumaric acid derivative; ALKS 3831 that we just talked about as well as ALKS 4230, which we'll talk a little bit more about. But the evolution continues. We're always a little bit ahead of where everybody is looking because the environment, I think the universe, is demanding even more innovation and innovativeness from pharmaceutical companies. So today, when you go to our laboratories, we're really looking at new molecules, exploring new biology that derives from things that we've learned along the way, but with a focus now on small molecules and on some of these engineered proteins as well. Focused in psychiatry, neurodegeneration and in oncology. So it's been a really exciting meander, segue. This company is never the same 2 years in a row as we follow the science and we build on the successes that we've been working for so many years. Segueing into oncology is the question we get all the time because was it a deliberate decision to add in a new therapeutic area? Actually, no, it derived from the work that we're doing with the protein engineering within the company. And we felt comfortable doing it from an operational perspective because we've built fully integrated capabilities in the -- building our CNS business over time, from R&D formulation, manufacturing, clinical trials operations in U.S. and Europe, regulatory affairs, medical affairs, commercial, patient engagement. So with all that in place, adding in new capabilities in oncology, it was relatively straightforward. I'd say the yellow check is where we spend a lot of time operationally, which is clinical trial operations. Oncology requires new relationships with new sites, not just in the U.S. but outside the U.S. and that's an area of emphasis for us as we build our ability to enroll more and more patients into our program as the drug gets more and more visibility and credibility. And we'll cross the commercial bridge when we get to it, but it's a focus for us as we go forward because we also think that 4230 is substrate for a collaboration, a significant collaboration as the data begin to establish just how widely applicably -- applicable 4230 could be in combination with other immuno-oncology agents as well as other more traditional small molecule oncolytic agents. So the pipeline right now, a bit of it can be captured in this slide with 3831 at the NDA stage, 4230 advancing very rapidly now in a broad program and our new platform of selective HDAC inhibitors for a number of different psychiatric and neurodegenerative conditions moving along quickly. And I'll tell you a little bit about some of those. So the cytokines, our technology is captured in this drug 4230, which is the ribbon diagram on the right. It's a novel engineered fusion protein designed to leverage the antitumor effects [ or are established for ] interleukin-2, while engineering out some of the deleterious effects of IL-2 that lead to -- it's difficult to -- as an agent for common use in the treatment of various cancers. So it's a single, stable polypeptide designed specifically to bind intermediate affinity receptor that IL-2 signals through. The clinical program has gone from almost a painfully slow monotherapy dose escalation to begin to establish the first principles of this drug to now where it's blossomed into a very robust program called the ARTISTRY program. And we're beginning to roll out data from this program. The simple schematic that describes this drug is shown here. The 2 blue circles are 2 different cell types, a regulatory T cell and CD8+ or natural killer T cells. The difference between the receptors for IL-2 on both are shown at the top. The high affinity receptor is characterized by those 3 components, the alpha, the beta and the gamma chain that bind IL-2 in a very high affinity interaction. CD8, cNKs don't have that alpha chain. They only have 2 components, the dimeric receptor. So it's a lower affinity interaction. But that's actually the preferential interaction that we want to drive with a novel IL-2. So other people have taken other approaches to derivatize IL-2, so it tends to bind more preferentially to that lower affinity interaction, which is often called a CD122-biased ligand. We took a very different approach and I think a really clever approach, which is instead of engineering different chemical moieties onto the IL-2, we actually took that alpha chain, that sequencing, we then created a fusion protein of IL-2 plus that alpha chain. And that's what the yellow construct looks like. So that's IL-2 with its alpha chain welded to it. So as such, you can't bind in a high affinity receptor because of steric hindrance. It's -- that parking spot is occupied, but it binds beautifully with the intermediate affinity receptor. And that has -- that theory now has been translated into data, both in terms of the in vitro data, the human data now, looking at the appropriate cellular expansion of CD8+ cells and NK cells without a corresponding increase in regulatory T cells. So in terms of proof of pharmacology, we feel like we're well past that now. Now we're testing this as an oncolytic agent, as an agent in combination in [ biased monotherapy ] for the treatment of people with cancer. And that program is robust and moving with great speed now. There's 3 components to the program, 2 of which are the most important. Those are ARTISTRY-1 and ARTISTRY-2. ARTISTRY-1 investigates this -- the intravenous dosing of ALKS 4230. We started there because that's how IL-2 PROLEUKIN is administered daily, intravenously for 5 days. So as a comparator, when we first got into the clinic, we wanted to see if, indeed, using the same dosing regimen of an IL-2 mutant, whether we would see better tolerability with the equivalent expansion of the desired cell types. That program has 3 pieces to it. We started with the monotherapy dose escalation until we achieved a recommended Phase II dose. And then we opened up monotherapy expansion, where we're looking at trying to recapitulate the monotherapy efficacy that you would see in renal cell or in melanoma with 4230. And then a combination with pembrolizumab. So looking at the combos with I-O component in tumor types that are approved for pembro, but importantly, in places where pembro is not approved or has not shown the levels of efficacy. Moving quickly behind that program is the subcutaneous embodiment of 4230. So instead of daily intravenous regimen, this is once-weekly or once every 3 weeks administration of 4230, and it follows a fairly similar path. We're dose escalating now in the subcutaneous arm, patients will be on monotherapy for the first 6 weeks and then the option to move on to pembro. As we achieve a recommended Phase II dose, we'll open up the program then for monotherapy in combinations with pembro. Separately, we announced the collaboration with the Hutch on a multi-center study looking at head and neck cancer as well with intravenous 4230. But we can see, over time, essentially, the intravenous program giving way to the subcu program, if the safety, tolerability and efficacy continue to bear out as they have so far in the program. So just on the most recent earnings call, we were able to talk a little bit about what we're seeing in the subcutaneous arm because investors have had so much interest in this piece of it. And as of February 11, 11 of the 19 patients who dosed in those dose escalation cohorts continued on treatments with 5 patients over 6 months of treatment. It's interesting because patients who come into a subcu dose escalation monotherapy protocol are patients that are rapidly progressing and failed other lines of therapy. So disease stabilization is actually a really interesting first indication for us of biological activity. 9 of 11 patients who completed their first scans demonstrated a stable disease in those scans. And again, I'd say that's necessary but insufficient, but highly necessary. We need to start seeing this type of activity early on in the program. And it's -- we're seeing the drug behaving as we would, but the pharmacokinetic profile is consistent from with what we would have modeled from the IV, and we're seeing the desired expansion of the desired cell types. So, so far, so good on the subcu program. You can expect to hear more about the IV program and the subcu program, periodic updates throughout the year. So let's shift now to what we're doing in the brain because this is an area that we're extremely excited about. And this is about these compounds that are called selective histone deacetylase inhibitors, HDAC inhibitors. So I'll give you a little bit of a biology lesson along the way because many investors haven't had exposure to this space. So the picture on the right is a depiction of what's called the synapse, the space between, the way neurons communicate with each other, with the axon coming from 1 neuron at the top, meeting the dendrite or the extension from another neuron, and the space between is where the neurochemical action occurs that allows modulation of signal across the brain. You got about 100 trillion of these synapses in your brain. And the formation of new synapses, which happens on an ongoing basis, is called synaptogenesis. And the loss of synapses in the context of disease are called synaptopathies. And interestingly, irrespective of the disease etiology, Alzheimer's, there's Huntington's or even orphan diseases, notwithstanding why you're losing it or having the degenerative process, if they're characterized by synaptopathy, loss of synapses, there's an opportunity to preserve and extend or maintain function if you can drive the formation of new synaptic connections. And there was a company that we were paying attention to for a number of years called Rodin Therapeutics and when they crossed a certain threshold of scientific evidence, we made the move and acquired them at the end of last year. So synaptopathies are interesting because they range a whole spectrum of diseases from psychiatric diseases, where we have a lot of experience in schizophrenia and depression, through some of the classic major neurodegenerative diseases like Huntington's and Alzheimer's disease, down to some of the developmental, more orphan indications. So these diseases are all characterized, they have a common feature of synaptic loss and dysfunction. So if you can have agents that can preserve and improve synaptic connection, they have the ability to be used across a number of different diseases. Here is just a simple example. In the setting of Alzheimer's disease, where on the left, you have 3 panels there looking at a single neuron. In the control, you see that's a neuron with the spines coming out of it, that's where the sites of the synapses and the connections would be. In the middle patient, you see that's a cognitively normal patient with Alzheimer's disease, with classic Alzheimer's pathology, but their cognition is relatively normal. And you contrast that with the patient on the right, where you've got a neuron with fewer spines, that's an Alzheimer's patient with demonstrated clinical dementia, fewer synaptic connections. And of course, that's just one little example to whet your appetite. It's not hardly group data. But on the right, it's more extensively quantitative from human samples, where you're looking at disease severity from controls to mild, moderate, severe on the X axis a function of how much synaptic loss they have in their brain slices. And more severe diseases correlate with more loss of synapses. So there's an exciting therapeutic area, exciting therapeutic target, because you're not trying to develop a new treatment for Alzheimer's disease, it's dependent upon getting the underlying causal pathology right. You're simply trying to improve synaptic connection throughout the context of that disease. So the growth of new synapses in the brain is under epigenetic control, which means in the nucleus, there is an exquisite control that controls the expression of the proteins that are associated with the new synaptic connections. And for those of you who haven't been around epigenetics' simple cartoon, your cells are filled with massive amounts of DNA, each cell has about 2 meters of DNA in it. If you took all the DNA in your body and stretched it end-to-end, they would go to Pluto like 70x. It's remarkable. So how do you actually transcribe that much -- first, how do you get into a cell and then how do you actually transcribe it. The way you get into a cell is by packing it into a Zip drive. It's -- DNA is wrapped tightly around histones, which are shown in the blue. And they've compacted into the nucleus zone. And under epigenetic control, the cell opens up parts of the nucleus and allows DNA to open up to be read and transcribed. And that happens often under this control. And one of the ways is through acetylation -- methylation, acetylation. In this case, acetylation is viewed as the yellow -- the molecules, the yellow molecules attached to the histones, changes the polarity, opens up the DNA for transcription. So histone deacetylases take the acetylase there and close the DNA back up. So a double negative. Conversely, a histone deacetylase inhibitor allows that DNA to open up and be read and transcribed. And there's actually an extensive literature that histone deacetylases can drive new synaptic formation in the brain. That literature has shown at the molecular level that it changes the gene expression and expression of certain proteins like BDNF. It -- structurally, you can see the formation of morphine synapses with HDAC inhibitors, and then functionally, how the brain behaves in the presence of additional. So there's just a lot of literature here. What was unknown was, really, could you separate the known hematologic toxicities of HDAC inhibitors? Because they're approved for the treatment of cancer but they tend to suppress red cells and platelets, so unusable in the brain. So the question that we were interested in is can you separate their effects on the brain from the effects on the blood cells. And what Rodin figured out was instead of creating inhibitors of the classic isoforms of the HDACs, these HDACs actually occur in the nucleus in combination with multiprotein complexes. And one that's specific for neurons is called CoREST. And so our inhibitors are on these HDAC complex selective inhibitors. And the program is really, really moving. We're working on brain-penetrant CoREST-selective molecules that have shown to have a positive effect on synaptic formation without the associated hematologic toxicities. So we're looking forward to nominating these and getting them into the clinic, hopefully nominating our first candidates for clinical development at the end of this year. And I'll finish just by saying this idea about focusing on developing the company structurally in order to maximize profitability and growth in the long term has these multiple elements we focused on last year. On the pipeline, first, on the revenue growth, making sure that VIVITROL and ARISTADA meet their commercial objectives and continue to grow in the marketplace, adding VUMERITY and 3831 into the mix now as the revenue line continues to grow and change in complexion. On the pipeline, the 4230 program is central in terms of the spend and the return on that spend and the decisions that we'll make about it as we hit milestones in 2020 and introducing this HDAC inhibitor platform, which I think is going to yield multiple clinical candidates. On the capital allocation side, acquiring Rodin Therapeutics with capital that we have, but also focusing our investments in R&D. If you watched us last year, you watched us cone down a bit. We've been exploring a number of different areas in R&D, and we made the call last summer where we're going to put the significant amount of our resources behind these programs in CNS and in oncology. In terms of the cost structure, the last -- in the fourth quarter or end of the third quarter, we introduced this restructuring in order to focus and take about $150 million of spend in order to drive non-GAAP profitability from here on out, essentially just makes the plane that much lighter to lift off the runway as we approach ongoing increasing profitability. And just on the governance side, as we move into oncology, broadening our Board to bring in somebody with true bona fides in the oncology space as well as a former public company CFO with a real focus on value creation and long-term profitability. So we've been busy, and we think that 2020 is going to be an exceptional year for us. So I'll finish there, Chris, and thank you very much.

Great. Thank you very much. The breakout is in the Harvard Room.