Alkermes plc (ALKS) Earnings Call Transcript & Summary

So let's get underway. Good afternoon, everybody. Welcome to Goldman Sachs Healthcare Conference Wednesday afternoon. My name is Chris Shibutani. I'm a member of the Goldman Sachs research team, pharmaceuticals and biotech. We are very excited to welcome Alkermes once again to join us. And I am very pleased and excited to be in-person, seated opposite Richard. Once again, Richard it's fantastic to see you.

Likewise.

Thank you for joining us. You're joined at this event by our Chief Financial Officer. Iain is out there, he's waving. And then, of course, Sandy, who everybody knows, keeps everybody on top of things as always, and the voice of reason and keeps everybody on schedule. So much appreciated, Sandy.

Richard, it's a journey. You and I go back many, many years. You probably don't even remember. I think it was an H&Q dinner in the late '90s when you were sitting and joining a group of people. So it's been for a long time that you've been part of this industry. And I want to bring that up a little bit, just keep a bigger picture here because you've actually played a role with things like the biotech industry, bio-industry organization. We're just having a bit of a shindig down in SoCal as well. We're trying to pretend to compete with us, give that a try. You've had that purview in terms of bigger picture about the industry and what we're playing. And I think it's a unique thing, and I don't mean to like surprise you about it, but I think it's one that you're comfortable giving voice to in terms of sort of how do you think the state of affairs is for the industry right now. And I ask in part because there's the lack of connectivity or disconnections between advancement and science, the condition of the industry stocks. And so, what's your view from that bigger picture purview that you've had and certainly as CEO of Alkermes now for as many years as you've been?

Well first of all, it's great to see you, Chris. Thank you for having us and congratulations on your role here at Goldman.

Thank you.

I think it's a super platform for you and the whole industry. I have been doing this for a long time. And one thing -- the benefit of time is you really can actually see the cyclicality play out over multiple cycles. And so, there's nothing surprising about what we're going through right now in this industry. You've been around it long enough. And so, the constant drum beat in the distance that you're always marching to is the advancement of the science. That isn't stopping. New knowledge is being created, new insights are being developed. And that's what's so exciting about this industry. And that's what attracted me to it and probably you as well. The stocks are part of it. That's an essential part of the ecosystem to fund it all. But inevitably, it goes from this despair to overexcitement and optimism, followed by the despair because things have failed a lot. Things take longer than you ever think they're going to take. But amidst all that chaos, amazing progress keeps being made. And our own company is an example of that, right? We've been through…

100%.

The universe has tried to kill us multiple times.

Yes.

But what keeps the company enriching and growing and renewing is the power of new medicines. And if you can continue to innovate and make important medicines, you're going to be fine and your shareholders are going to be fine and your employees are going to be fine. But what has changed in the 30 years or so I've been doing it, is the threshold for what defines a good medicine is rising. And I think that's good for everybody. And there used to be a whole specialty pharmacy model where you could take an old drug, dress it up in new clothes, put a sales force out and drive a profitable business. Those are gone. You need true innovation that's going to do things for patients and payers that hasn't been done before. If you can do that, you're going to be rewarded.

No, that certainly makes sense. And you both are simultaneously reading my mind and stealing my thunder because the natural segue was to that of thinking about the company. And in our view, I've worn different hats, either as a shareholder or an analyst with other firms and here. And once again, we have a connection to our research coverage. And I'm just so reminded about the many sort of cycles that the company has gone through. I was someone who is very passionate about the whole VIVITROL dynamic number of years back. And what's interesting is that this is, in my opinion, such an opportune time, both from a macro and a company-specific micro standpoint to take a look at Alkermes stock. Again, it's that whole backdrop of oh, we've been there, et cetera. But I've always thought about you and I go back to some other conferences where you and I have had some sit down chats and words that have always come to my mind when I think about the company of having some degree of courage and grit. Jeez, anybody who's going after CNS disease had better be there. Resilience, the consistency of the folks that you've had in various leadership positions and the positioning, and perhaps investors may decide that they want to get fatigue, but we see a really unique opportunity. And naturally the conversation, and I guess very much about the stock, is going to be about LYBALVI, which I feel is underappreciated. And under an earlier opalescent moniker, it was 3831. We were talking about all sorts of data points, et cetera. Now we're approved. Now we're launching. The rubber is meeting the road. And that road is on a journey that I think a lot of people are finding somewhat unexpected. This drug is doing quite well. Tell us about LYBALVI. I know you've always kind of had confidence, but are things going maybe better than you've expected so far? Or if they are, sort of like where has the street continued to underestimate things so far?

So a year ago, at this time, we had just gotten FDA approval for LYBALVI in a tough environment. Remember, FDA was not doing inspections. We couldn't get CMC resolved because of the lack of person inspections. We navigated that extremely well and the drug was approved. We didn't launch the drug until November. Now remember, we're in the market every day with ARISTADA. This is a market we understand. So we took that time between June and November to hopefully let COVID dissipate a bit, so access would be improved, but also to understand the market that we were going to launch into specifically on a per territory basis because our belief was always somewhat different than the Streets, because it was informed by our presence in the day-to-day gritty world of serious mental illness in the U.S. And it's not a KOL world it is -- people on the front lines who use a lot of olanzapine and treat a lot of patients with a lot of generic medications. And we understood the hole we had to fill in order to have an important new medicine in this space. If I can take away one thing from today at your conference, what so gratifying is that we have back-to-back one-on-one's today. Most of the people on the buy side who're doing the work, they don't have to listen to us. They're calling doctors and they're asking the question to the doctors themselves who have enough experience with LYBALVI now to have a sense of its own profile. And its own profile is different than its label. We can promote it based on its label, and that's what we do to be compliant. The country, the doctors are using it now, and they use a lot of olanzapine and they're beginning to feather in LYBALVI now and they're saying to you all, this is going to be an important drug.

Yes, and that's interesting. I immediately have this thought about how sort of the vagaries and the complexities of the realm that you navigate from a research standpoint, CNS disease oh, the placebo really outperformed in stuff. That has worked against you historically. And so, we could sit there and say, on paper, not so good, whatever. Now on this commercialization front, what you articulated is indeed what we were learning and picking up on in our own due diligence process and the ongoing research that we continue to do in that we were so focused previously on 3831, the relative weight loss, the Phase II data on paper, what's the label, label, label? And that just becomes kind of like the shirt that goes on the jersey, the name, and then it goes into the real world and the flexing and the use of that. And this is not oncology by how many mgs per kilo times protocol. This is I guess, some element of working with the tools that we have with an extremely heterogeneous patient population and understanding how even individual patients may vary over the course of time and the recognition of the positioning of this as a very valid tool is something that continues to really come across. So before I continue to spool away in this way that's really been kind of surprising to us, I'll get a little bit more grounded, let's talk about some stats. First quarter earnings call, you gave us some sense to where were things were at. We launched kind of in November, we got a view through March, you communicated that end of April, early May. You started to talk about where are these initial patients coming from. I think then the split was roughly 50-50 between kind of the legacy olanzapine product because certainly LYBALVI has something more to add as well as the branded products, other drugs in the category. Is this 50-50 sourcing of the patients who have been on something and are now cycling and trying something else, trying LYBALVI, about the same? What are the trends? What's going on there?

So I think this will be dynamic Chris, over the first couple of years of launch. In the beginning, the source of business, as you indicated, about half of the patients were coming from olanzapine. That stands to reason because many physicians would be saying, here's a patient I would have on olanzapine or would put on olanzapine, let's try LYBALVI and see how it plays out.

Yes.

That actually niches LYBALVI further in the treatment paradigm that it needs to be because right now, people are getting to olanzapine late because of -- so as people get experienced with the drug, our belief is that it will be used earlier in the switching paradigm, recognizing switching is happening on an ongoing basis there. So today yes, I still think about half of the business is coming from olanzapine. The rest is coming from other generics, other brandeds, and even some from the LAIs.

Okay. Then let's talk about indications. Here again, we're talking about on paper and what's really happening in the real world. So 2 indications. The initial first quarter update commentary was that roughly 50-50 split between the schizophrenia and the bipolar indication. And within bipolar, we have a breakdown between sort of treatment in the acute setting as well as in the maintenance setting. Help me squeegee around where my distribution of modeling can be going in terms of indications.

So this is encouraging to us. And I'm not going to say unexpected, but I didn't expect it either in that half of the business coming from bipolar already. Remember, the clinical program that led to registration was focused on schizophrenia, both on the weight side and the efficacy side, bridged to the bipolar indication by virtue of PK linkage as well as concomitant studies with valproic acid as well as lithium. Taking on faith what we learned from the market research, the doctors would see that it was transferable and indeed that's the case. The doctor is saying, "Look, we don't need separate bipolar clinical data to be convinced that the drug is useful in bipolar." In the fullness of time, I think that split will probably tend a little bit more towards bipolar as the drug gets bigger and bigger over time. But I think for the time being, I think that rough half-and-half split is probably right.

And if you think about the character of the patient and sort of who you would as the manufacturer of the company to actually deliver product to, it's fair to say that broadly speaking, the bipolar patient population might have a better track record in terms of adherence as well as the whole notion of sort of a maintenance mindset in terms of therapeutic approach. You're going to be taking this for a longer period of time. Is it a more reliable patient population? So if you had to choose, see I got one pill left, let's hope that it goes in that direction. Does that make sense from a modeling perspective?

I'd like to say that that translates into longer adherence on branded medications. I don't think it really does. If it does, it's probably fairly subtle. One thing that was clear to us though, is that the willingness to accept weight gain on olanzapine in the bipolar patient was less than you would see in schizophrenia, much more sensitive to that dynamic. But I think that the difficult thing about these chronic, progressive mental illness diagnosis is that adherence to medications in general is not great, which is of course, parenthetically why the LAIs are so important in this space and should always stay important. But the vast majority of the market remains oral and will stay that way with fairly poor compliance rates.

Okay. Further to the launch, the necessary discussions about access. Talk to us how progress is happening there, from that perspective. I think in general, there has been an understanding that there certainly might be plans which require step-throughs in order to get to LYBALVI. Talk about what you're seeing with access and in particular, are you seeing a requirement to have to step through olanzapine before going to LYBALVI?

So before I make a comment that says that our access is tracking well, let me precede that by -- when I say that in our indication, that means there's always restricted access. There's not a single patient who's going to go on a branded antipsychotic, ours or anybody else's, who has not been forced to fail multiple generics. So you might [Technical Difficulty] and almost all of them come out of the bottom of the funnel, having failed multiple generics. So what it really does from an operational perspective is not limit the size of your market. It limits the prescribing audience that you're going to go after [Technical Difficulty] a previous failure on medication, a medical exception, a preauthorization, something like that. Because not every office does that. So it's really an operational constraint that [Technical Difficulty] which we are hoping for, which is to be pari passu with other oral branded, which is failure on one or more generics. At the beginning of the launch, there were a couple places that said, well, you have to go on less than gain weight. We very quickly got rid of that because it's [Technical Difficulty] all of them are one or more generics.

Okay. And how are we thinking about net pricing, particularly how it's shaping up as we're progressing through the launch in this year and maybe also longer-term and maybe you can comment [Technical Difficulty]

[Technical Difficulty] the math and also the operations, because we said from beginning, the first 18 months or so are a process of working through and burning in your various access channels. And there are 3 principal ones. There's Medicare, mainly LIS patients under Medicare that are do eligible. There's Medicaid and there's commercial. And equilibrium will probably be a 1/3 of the business coming from each of those. Today, the government channels, Medicare and Medicaid largely have access through their written stipulation that I said before, failing on oral generics. The commercial channel is very different. Many of the plants have NBC code block right away. You can even see this on your computer, like LYBALVI doesn't exist. And there's a couple of different ways to engineer your launch. You can go and then try to lead with gross-to-nets to buy your way on to the formula, which we've chosen not to do, because that tends to be a one-way eval. Once you give up the gross-to-nets, you don't ever get the math. The alternative way, which was what we're doing is just try to drive demand in that channel by copay assistance, helping physicians get prescription filled with medical exceptions and so on to gain clinical use in that physician population. So they're going to be -- so the plant understands they're going to be filling this prescription, and ultimately they're going to want to contract, because they're not getting any rebate dollars in that regard, which puts you in a better position for negotiating your contracts say, in the second half of this year rather than leading with your chin with gross-to-net discounts. So that's why people were favorably impressed with our gross-to-nets in Q1. My point of view on that was we're talking about $12 million of sales. It's small numbers still. And a couple of million dollars here or there can swing the percentage in such a way that it's not indicative of a central tenancy. We don't know yet until we get through the first 12, 18 months. After that, it's done. Then our contracts are generally in place, you know and you can model from there.

Got it. Okay. That's helpful. Anything else that I should ask about LYBALVI or that you've been talking to folks about, or any sources of cognitive dissonance related to that product in particular from conversations today?

Well, I often say you have to hold 2 thoughts simultaneously, the idea that the launch can be gradual and that the peak sales can be quite high. And these psychiatry products have a tendency, as you know, they last a long time and psychiatrists gets set in their ways and they use medications. And if there's a raise on their revered product, if it fills a niche -- and none of these products are the perfect product. They all have -- but if it fills a niche in a place where there's so much churn and so much unmet patient need, they can have really long lives. And so we think we're going to be in this LYBALVI business for a long time.

Okay. That makes sense. I've often talked to people in the business and they said, "Well, you know, you analysts kind of -- you're decent at predicting peak sales, but you really suck at launch trajectories." I would argue that currently, I'm in debate with my peers because we have a higher peak sales estimate for you guys for LYBALVI. And so maybe we're not so good at peak sales or the group is, but we shall certainly see, but it's very exciting to see, and that's been the threat of opportunity for investors to take another look at Alkermes' stock. I'd like to keep it in the world of psychiatry, let's talk about ARISTADA, long-acting injectables, a fairly mature product. It's been in a category that's been kind of competitive, but we're still seeing some very respectable mid-teens kind of growth. What is driving that growth? Is it kind of a share opportunity? You and I have talked over the years about how in the U.S., in particular, this notion of using a long-acting injectable in this patient population. There's always been some sort of tension points and maybe the penetration is up further to go, and you see like higher penetration outside the U.S. and Europe, et cetera. Talk about dynamics for long-acting injectables and ARISTADA in particular.

So there's a compelling clinical reason for the use of long-acting injectables in schizophrenia. And that's supported by clinical data as well as payer data. Even in the face of that, they're still remarkably underutilized. And to put some numbers on it, Chris, these won't be exact, but something like 200,000 doctors write oral olanzapine, about 6,500 doctors inject ARISTADA. So the number of physicians, psychiatrists, who actually administer injections in their office, is very small. And so there's a dedicated cohort of physicians who've understood the LAI story, and it's been growing healthily double-digits for a number of years now. J&J was the pioneer with our technology. Now COVID put a real meat axe to both the VIVITROL and the ARISTADA business, long-acting injectables, requiring office visits and -- that wasn't happening during COVID. So that growth stopped, and now it's resumed. The reason it's resumed is because it's really good medicine. And ARISTADA in particular, because of 2 features: INITIO, which allows you to initiate in the hospital, coupled with our 1064 dose, which is a 2-month dose, which means 6x a year an intervention, and you have therapeutic concentrations of the medicine rather than 365 decisions for a patient with psychosis to make every year. And it makes sense intuitively, but it's also backed up with just outcomes data over time. So I think that ARISTADA has a lot of life ahead of it. And I'm hopeful that more and more patients in the U.S. get access to long-acting injectable medicines.

And as you talk about this actually, you're an important source of insight into the commercial interface in psychiatry as we're coming out of pandemic. We also cover company Neurocrine, and with tardive dyskinesia, INGREZZA, their lead product is very much led by sort of the practice tendencies and the dynamics that are happening. Our psychiatrists seeing people in-person, they love their telehealth and we're still seeing a lot of stickiness. Kevin was talking about 50% still elements of use there. What is your team seeing in terms -- and you also have the audacity to launch coming out of -- coming out of the pandemic kind of thing to that whole crowd.

Well, first, I'll say I'm on the Board of Neurocrine, so I'm conflicted here. I love the company. I think it's a brilliant drug, and they've done a great job in the midst of a pandemic, navigating this. Because you're right, a lot of physicians aren't back in the office. The NPs, they're back. I know they're heroes on the front lines of this. But a lot of the doctors are very happy with the reimbursed structure. And now as the emergency -- the public health emergency dissipates, we'll see some reversion back to some. But it will never be back to what it was before, I don't believe.

Can I believe into possibly picking up a percentage that will still always have the telehealth when we get to our new normal 2025?

I don't want to guess. It's totally driven by reimbursement policy. So it's a CMS call rather than what their instincts will be. This is the hydraulics of money.

Yes, okay, a binomial equation. I'll let you get away with at this time. I'll keep asking another time.

But keep your eye on Washington, on there.

Sure.

And just on the other side is of course, for much of America, there are many counties in America where there aren't psychiatrists.

Yes.

So telehealth is going to be essential for rural parts of America. So it's a foundation. Our belief and I think I can speak for Neurocrine in the same way is that telehealth is absolutely called for. But telehealth, the definition of telehealth should be a combination of in-person visits on a periodic basis, coupled with supplemental telehealth, but just the idea that telehealth, which is often, as you know, telehealth is not a high bandwidth video interaction. Often, it's a cell phone call that isn't helping anybody.

Right. Exactly. So I want to touch upon recent events with ASCO, nemvaleukin updated data there. You hosted an opportunity to update with some people. Progress continues apace. I love that word apace. It applies to this instance. It's an asset that has never really been core to your mission. You've always been very candid about articulating that you had sort of like the horsepower to be able to take a certain distance and that an optimal situation perhaps would be that you would partner. Still the case? We're entering -- and I asked this in part because we have artistry is at 6 and 7 in particular, that are potentially registrational, some interesting response rates that give some promise from the ovarian cancer side. Would you continue to take this all the way if it doesn't partner? So is it still full steam ahead, the please join, or how do we think about decision-making with that asset?

Well, you should know we gave an investor presentation at ASCO. And at the end, there was a question-and-answer session. Only one question was allowed and it was yours.

I know. And that was a 3-part question.

We've heard feedback from everybody.

Oh, really?

Only one got to ask a question and it was Chris Shibutani, why is that?

Oh, no, gosh.

It was a good question, though.

And all the other covering analysts are usually texting me all this. I said, what the... Yes, okay, fine. I made the most of it. Thank you, Sandy.

That was a really important ASCO for us because we've been nothing if not consistent about articulating nemvaleukin's place in this IL-2 landscape. But what you realize that the whole landscape is dominated by Nektar and BEMPEG. Was that going to be an important drug, yes or no? And with the clearing event of that -- of the resolution of that, it actually allows light to come through some of the other saplings in the forest. And among those, nemvaleukin is the most advanced. And it's the only one with definitive monotherapy activity with dose-dependent peripheral expansion of the desired cell types with attenuation of the hallmark toxicity of IL-2 with a combination of efficacy with pembro and pembro unapproved tumor types, and it's got all the features. The way we have engineered the program in our hands on a stand-alone basis is what we call the land and expand. Land means what we're going to do on our own P&L, subject to constraints that we've self-imposed in order to drive increased profitability over time. That means registrational studies in mucosal melanoma as monotherapy to explicitly show its monotherapy activity, combo with pembro in platinum-resistant ovarian in combination with Merck, we're doing it with Merck. Those 2, we will fund all the way to the end, assuming that nobody ever shows up to partner. But the promise of an IL-2 therapy, of course, is the breadth of its potential applicability. We will expand the program, hopefully, via collaboration with third-parties. That's why this ASCO was so important to say, okay, it's not a question, what do you think about IL-2s in general? Here's nemvaleukin, is now a late-stage oncology asset. Judge it on its own merits and let's see where it can go.

Got it. So the mucosal melanoma, just to put it out there and get people familiar with the vernacular is, I think, ARTISTRY-6?

Correct.

And platinum-resistant ovarian is ARTISTRY-7?

Correct.

So 6 and 7. How is enrollment going?

It's just ramping up now. I'd say this is probably the biggest COVID effect that we've seen across our operations, ours and other oncology companies. Site initiation outside the U.S. and in the U.S. has just been slower. So it's ramping up. This was an important ASCO in that regard too, because so many of the investigators are together at ASCO. So we expect to be enrolling all through 2022, initiating sites and enrolling.

Right. And as you gathered with folks at ASCO, still relatively fresh in the wake of the disappointment from the Nektar, BEMPEG data, et cetera. What do you tell people as we look forward in terms of potential read across from that differentiation just for clarity in terms of how you consider nemvaleukin to be distinct?

I don't think they're correlated, actually. And it's not just my opinion. They were effectively testing a different hypothesis with IL-2. The intellectual precursor of nemvaleukin is high-dose IL-2. And so the way form of presentation, the dosing regimen, the peripheral expansion of the desired cell types, the monotherapy efficacy, and that was never shown with BEMPEG. They were testing a different hypothesis. So in effect, the primary design criteria of nemvaleukin was not to create a new oncology agent, is to attenuate the capillary leak and pulmonary edema that was associated with hospitalization of high-dose IL-2. You did that by changing the specificity to the intermediate affinity receptor, duplex rather than the triplex. And that's what the molecule was designed to do, and that's what it does. So interestingly, it's done exactly what we designed it to do through dose escalation. Dose escalation seem dose-dependent expansion in the desired cell types in the periphery. It was never shown with BEMPEG. Monotherapy activity that drives from that, never shown with BEMPEG. And the attenuation of the hallmark toxicity, so check, check, check. The hole in the program right now is we haven't answered the question, what's the commercial dosing regimen? Because daily IV times 5 is not optimized. That's the original PROLEUKIN dose. So we're in the clinic with 2 additional doses now once a week subcu and a less frequent IV dosing schedule in a Bayesian design, what would be the least frequent intervention every 3 weeks.

And is that ARTISTRY-2 and ARTISTRY-3? Do I have my nomenclature correct?

That's ARTISTRY-3 that's looking at the IV, and ARTISTRY-2 is subcu.

Subcu. And do you feel as if those are the ones that are needed, that those are kind of linchpins and the potential mindset of partners?

Like maybe. I mean, there can be early adopters that -- I think the intellectual bridge from daily IV times 5 to less frequent IV is fairly modelable, whereas I think the subcu is more empirical. I think you need to see those data. So we'll do both.

Okay. Good. We then love VIVITROL. VIVITROL, some really smart people back in the Cephalon days, tried to commercialize this in the alcohol treatment setting. We saw maybe 3 to 6 years going back, that opportunity for opioid addiction, extremely important problem, extremely difficult ecosystem to navigate. And now as we're coming through, coming along on alcohol treatment, why? What's different now?

It's fascinating, isn't it? When they write the book on VIVITROL, it will be -- it's unlike any other pharmaceutical product, et cetera, because it's not about reps calling on doctors who treat patients with disease. It's about a societal issue. It's inter-digitated with the criminal justice system, with public health systems, with other comorbid diseases. It's a Gordian knot. And if it doesn't kill me itself, when I die, I'll be very proud of what we did with VIVITROL.

Right.

Because nobody else would have -- 120,000 people are going to benefit from VIVITROL this year. It's priced low. It's priced in a way that it can be used in public health systems, in places where they don't have a lot of resources. It's a medicine whose FDA label says it prevents relapse to opioid dependence, yet it's completely underutilized in this space.

Yes.

Because the public health policy in our country has almost entirely shifted toward harm reduction and which is the use of replacement opioids, clean needle, safe injection sites, things like that, which have an important public health benefit, but there are many patients who would benefit from detoxification and antagonist therapy. So whereas we found ourselves sailing into the wind in opioid against these prevailing public health sentiments; in alcohol, the prevailing headwinds back in the Cephalon days was nobody used medicine for alcohol, it was A.A. 12 steps. But now there's just a much more widespread understanding of -- what's called medication-assisted treatment, combination of psychosocial counseling plus medicine in order to treat these serious chronic addictive. So alcohol is a bigger public health problem than opioids, as you know, just based on a GDP on a dollars basis. It's just -- it's so endemic that we don't pay as much attention to it, but it wreaks havoc on people's lives. So your casual drinker is not going to be a VIVITROL patient, the patient who needs to make a significant change in their life in order to deal with the devastating condition, and more and more doctors are using it. And because so many doctors were exposed to it through the opioids, I think there's a lot more familiarity with VIVITROL. So we see real room for growth in that way as well.

Yes, totally agree with you, fascinating product. That Gordian knot treaded its way through all sorts of kind of oddball of due diligence. We were talking to the Barnstable prison facility and talking about all of those processes and trying to understand how we can use. So it still continues to fascinate. So fascinating also is the current title of the May corporate deck, advancing key business priorities. Oh, my god, this feels like sharp pencils and I'm going to put my glasses on. So involved with that is the whole notion of going profitable, setting goals that we're going to go for, really, really important. And if you think about investor mandates, it's like tell me a story led by a product that's like on the inflection point of profitability. We got one for you. How are you going to do more than advance these key business priorities but execute upon these key business priorities and get those '25, '26 profitability targets?

So if you're lucky enough to build a company that can survive, get drugs approved by the FDA and not lose the company to somebody buying it from when you actually don't know how it works. You have to make the transition from being an R&D-focused, raise capital spend it, to how do you actually run an efficient business. In many ways, Alkermes has gone through over the past couple of years, what a number of companies have to go through now in a tough tape, which is actually preparing for expanding profitability. You have to do that by identifying the revenue components, but just as importantly, you have to identify the cost components. And I think that the efficiencies on the spending side and particularly the leverage we're seeing with the LYBALVI launch on top of the commercial infrastructure that we built for VIVITROL and ARISTADA, that's being manifested in the way we can model the expanded profitability of the company going forward. So it's an important point for investors, which is now we're managing the business. We see the virtue of constraining spending in certain places to drive additional profitability. It actually creates more business flexibility.

Right. And yet lifeblood is new products and pipeline and R&D spend. Can you talk to how you might be marching some of those resources, protecting them perhaps? We don't have time to talk about some of the early pipeline opportunities here. You have the orexin inhibitor. You have other assets, the HDAC, I think that will become more part of the vocabulary as we get into 2023 after we're like, oh, LYBALVI is a great product, what do you got for me next kind of thing. But R&D spending as a component of that profitability equation there, talk to what else are you spending besides on nemva?

Well let me just say it this way. It's a longer conversation, but competitive allocation of capital in your R&D budget is a good thing. It forces rank ordering and prioritization. And what's made it through the cut for us, nemvaleukin, orexin-2 receptor agonist for narcolepsy and what we're doing on our HDAC inhibitors right now as well as our other engineered cytokines behind nemvaleukin, IL-12 and IL-18 in particular. And the cutoff is pretty fierce beneath that. And you have to -- there's some earlier-stage stuff that's fighting for legitimacy, and we'll see whether it makes the cut.

Okay. Got it. And capital allocation-wise, where does cost cutting and business development and potential M&A of appropriate size fit into your thinking right now?

2022 is about executing on LYBALVI launch and the commercial. So we'll be opportunistic if things present themselves. Bad markets usually open up opportunities, but usually not right away. So I think our commercial infrastructure is proving itself now. So as we move into '23 and beyond, I think it can expand, it can carry more products, so we'll be looking for that.

Okay. And then I know there's limitations to what you can say with the ongoing dispute with J&J, at least to the extent that when people should be paying attention to, because so much part of the messaging I'm having is pay attention to the story, and that's always one thing. It's like well, when should I be aware of this, is that we sort of are beating to scratch.

Well, what we try to do for investors is say, get out of the equation, focus. So we took it out of the guidance and you can see the robustness of the business without it. We entirely believe we're entitled to those royalties. We're going into arbitration and we're going to go in there expecting to win. But that's up to the arbitration panel, unfortunately. But we almost -- think about it conceptually, non-GAAPing. Even if we want, non-GAAPing is back out, because it's not the future of the company. 2024 was the end of the U.S. royalties anyway. 2026, they're tapering off OUS, it's just money, and it's money that we are entitled to, and we'll fight for it. And if we get it, that will be a good thing.

Yes. No, I think the Street recognized and appreciated the prudence with which you removed that from the equation from the guidance perspective so that we can stay clear eyed about this transition and the profitability, which I think is such an important part of that equation. So terrific to get the update, so many things going on, a real focal point and an opportunity, I think, for folks. Richard, great to see you. Thank you so much.

Great to see you. Stay well. I'll see you soon.

Great. Thank you, everybody.