Alkermes plc (ALKS) Earnings Call Transcript & Summary

[Operator Instructions] At this time, it is my pleasure to turn the program over to your host, Dan Lundquist.

Good morning, everybody. I'm Dan Lundquist, BofA's health care specialist, and I'm pleased to be kicking off the inaugural biotech conference today. I'm standing in for Jason Gerberry, who cannot be here this morning. It's my pleasure to introduce Richard Pops, the CEO of Alkermes as our first speaker today. For the audience, feel free to use the chat box to submit any potential questions you may have. With that, I'll hand it over to Richard for any introductory remarks, and then we'll jump right into Q&A. Richard?

Morning, Dan, good to see you. And good morning, everybody. I'm glad to kick this off for you all. So I guess I'll just say a couple of things. If you haven't been paying attention to what's happening in Alkermes, you probably should start. It's an exciting time for the company because the maturation of a couple of aspects of the business that led to some major structural decisions in the company, namely the idea of separating the oncology business from the CNS business, which is driven really by the maturation of both. CNS business now a year into the launch of our newest drug, LYBALVI, is really emerging as a really differentiated commercial psychiatry CNS-focused business. And the oncology side with our engineered cytokines and the value of biologic medicines in the wake of Inflation Reduction Act and the maturation of our Nemvaleukin, which is now probably the most advanced of the IL-2 variants that remain in clinical trials. It deserves a stand on its own as well. So we're excited to go into 2023, where we can see these 2 separate entities emerging revealing the value of both. On the CNS side, the focus will be the continuing launch of LYBALVI, which I'm sure we'll talk about, Dan, as well as our new pipeline candidate that just entered the clinic, RXR Receptor Agonist. And then on the oncology side, of course, Nemvaleukin in registration-enabling studies in platinum-resistant ovarian cancer as well as in mucosal melanoma, along with engineered IL-12 and IL-18 in the wings in a field that had a number of participants, but there's been a lot of attrition based on the molecular design differences between the molecules. And we still feel like Nemvaleukin has a really, really strong profile, which is not just based on our instincts but based on data that we've generated in the clinic so far, which is reviewable by investors, of course. So maybe I'll stop there. And Dan, I'll let you lead the discussion.

Excellent. So EVOLVE, start at the top, launched much better than initial investor expectations. So let's spend a little bit of time here. If we think about the current sales mix, about 50-50 between bipolar and schizophrenia, but it sounds like you've been seeing greater growth opportunities on the bipolar side, which is a motivating factor for starting the DTC campaign targeting those patients. Is that a fair statement? And maybe kind of just talk about how you think about mix going forward?

I suppose I'd modify it slightly in the sense the schizophrenia opportunities is a major opportunity, obviously. And if you back up, the primary virtue of revolving in the marketplace is its efficacy. This is olanzapine without some of the associated weight gain and metabolic liabilities. And so the power of olanzapine is the efficacy. So that makes it a very viable monotherapy opportunity in schizophrenia because of its strength, but also olanzapine's effect in mood disorders is well understood, albeit not as widely used because of the late liabilities on that. So I think that there's the efficacy proof point that schizophrenia provides is very valuable. But if you look historically at the major brands in these markets, bipolar is a critical element of becoming a blockbuster brand. And so we're really gratified to see the uptake in bipolar. And indeed, that will be a focus of the bipolar campaign that you'll see on more broadcast TV will be bipolar focused.

And as we think about the decision to implement the EVOLVE DTC program, you had mentioned getting out there and engaging with the bipolar patient, how important is it to activate that patient to seek out treatment? Should investors construe the DTC as a response to any challenge in growing the market? Or is it simply leveraging the success that you've seen with other antipsychotics that employ DTC approaches as well?

Yes. It's the exact opposite of a challenge. We were waiting for the proof points that first-year launch to show that it made sense to actually lean into the launch and broaden the awareness in the utilization of EVOLVE DTC campaign. The reason that so many of the big brands, all of the big brands in the space have done DTC is because it works. And the prerequisites for launching a DTC campaign are a combination of the utilization the drug already has. It's awareness in the marketplace across the country, access through the major payment channels, so patients can get it if they request it and just physician breadth. you don't want someone to walk into a physician's office asking for EVOLVE they've not heard of it and the payer doesn't have access to it. So that first year was about hitting metrics that we had set internally to make sure that we have physician breadth and access that was adequate and also just testing the profile of the drug in the real world, because if it didn't have the profile in the real world that supported becoming a big drug, why spend aggressively against it. But we're quite satisfied. I think external observers are as well. EVOLVE in the real world is behaving really, really well. And it supports the idea of leaning into the investment. The view of DTC spend in this space, and it's actually not pioneering intellectually. There's a lot of drugs that preceded this. You're essentially spending sales SG&A dollars in exchange for revenue growth in subsequent years. And it's pretty reliable if you do the campaigns correctly in a sustained basis, you will drive the top line.

And in terms of that cost and the ROI, there could obviously be a range of investments to potentially expand if you're seeing more positive response to the program. Would you say that you will kind of maintain the reins on titrating that spend based on how that ROI is coming in, in the real world?

There's a certain table stakes that you need to play in order to make sure that you're building national awareness of the brand. But remember, when we talk about DTC, we're not just talking about the broadcast television that you'll see sometimes when you turn on the TV in the morning or there's a major digital campaign underneath it as well. So the 2 layers of the cake, broadly speaking, are this almost less targeted awareness, broadcast TV. EVOLVE, EVOLVE, EVOLVE. Teaching people about the name EVOLVE and its indication. Beneath that, then you've got very targeted digital assets that are targeting prescribers, payers, patients in using tools that are quite modern and available that weren't available a long time ago. So I think that the way we view with the DTC campaign is that it will be successful. The testing is more around the messaging, making sure that the messages that you're creating in your creative is relating to patients. So those get tuned over time. But it's not something that you do once and then you back off, you lean into it and it becomes a part of the spend. And the earlier you started in a life cycle of a product, imagine just drawing 2 curves with the space between the upper curve and lower curve, you're capturing more of that area into the curve that earlier you start in the life of the product. You don't want to start so early before you have the access and the breadth in place, as I mentioned before, once you do you're investing for the future.

Right. Makes sense. Maybe a couple just one last one on bipolar and then maybe one on kind of what you've seen in terms of the product differentiation. But if we think about the bipolar opportunity, our understanding is the more predominant symptom is depression versus less frequent and sporadic episodes of mania. Can you talk about this practical distinction of having a label like Zyprexa for bipolar manic or mixed episodes versus a drug like LATUDA or CAPLYTA, which are indicated for depressive episodes associated with bipolar?

I think both are important, but it's a really important distinction because I think because of the label, the indicated label for the most recent brands for bipolar depression, they've been a lot of energy to educate physicians on bipolar depression. Except bipolar is bipolar, that's the diagnosis. And so mixed and mania, mixed and manic episodes are really important moments when actually medications get switched. And so when patients present for treatment, these mixed and maintenance indications are really important by far as well. So we really like that distinction between simply the bipolar depression indication, which is important for certain patients. But when you query physicians and you ask, okay, is the patient presenting only with bipolar or are there other symptoms that are associated with depression? Are there other symptoms associated? You'll often hear about agitation and mania and things like that. So it gives EVOLVE differentiated positioning in the market and also builds on that reputation and efficacy power of olanzapine.

Right. Makes sense. And something you touched on earlier in your comments just in terms of how patients of HCPs can true the weight attenuation with EVOLVE. Do you feel like you're getting a handle on the duration of therapy and how long patients are staying on therapy? And how does that compare to Zyprexa?

So first, I'll explain what our expectations were going into the launch. Zyprexa or generic olanzapine is used ubiquitously across schizophrenia and bipolar. It's got about 20 share in schizophrenia and 10% or 11%, 12% share in bipolar without promotion, without any attenuation weight, and that's simply because of the efficacy. It's typically used for a brief period of time now, often when people present in the acute phase, but on Zyprexa or olanzapine because it's so efficacious. So our expectation was that we would be able with EVOLVE if the weight effect that we saw in clinical trials was borne out in the real world and we expected our modeling expected that evolving would end up being like other branded well-tolerated antipsychotics. And that sounds like a good thing, but recognize that those only have average durations of therapy measured in a small number of months, 5 or 6 months. It's abysmal, and it relates more to the quality of care that these patients get generally and the number of switches that they do all the time. But we didn't expect because of its weighted tenuring effects, we would end up better than any other branded medication. If that turns out to be true, that would be brilliant. But that's not our modeling. The early data suggests that it's exactly like that. We've taken olanzapine from being an acute medicine to one that's being prescribed in the outpatient setting for maintenance and then will probably be around the same type of duration as other branded agents.

Got it. Understood. And maybe shifting to something that you've been very excited about. Can you talk about what you believe you can learn about the molecule in '23 if the drug favorable proceeds through Phase I testing? How much can you really eliminate liver safety tox in a smaller Phase I versus a larger study? And conceptually, if you run your Phase I similar to how Takeda did, how much can these measures derisk the efficacy profile of the molecule?

It's a really attractive area for drug development for a couple of reasons. One is that it's so challenging. So there's not going to be a lot of people who make it to the finish line, we don't think. But that doesn't sound attractive, but it actually is if you think you've got good molecular design. But the primary feature is the quality of the translation that you can get early in the clinical trial. To know whether you're on target and whether you have an effect on sleep architecture. So we think that you can front-load a lot of the derisking in this program in the first studies, the single ascending dose, the multiple ascending doses and essentially the proof of concept that you can determine through the markers [indiscernible] sleep measures. So the 3 concentric circles of the market opportunity of this drug at the core, it's what you call NT1, type 1 narcolepsy. This is a disease that's characterized by a lack of orexin. So orexin replacement in NT1 makes a ton of sense, and that's been validated clinically by use of the peptide IV to reestablish a more normal sleep pattern. The second shell behind that is NT2, which is type 2 narcolepsy, which may or may not have a more analog or more gradations of orexin deficiency. And then the third outer shell is what's called idiopathic hypersomnia, where peers retired all the time. And so the idea there is if you can reestablish sleep architecture that's more consistent, you'll get more wakefulness and better sleep. The core of the bull's-eye NT1, we can test pretty reliant we look at a signatory EEG changes and there's precedent biology and precedent clinical information that you can reference back to. Our expectation is that we will raise our dose in the single ascending dose study, move those doses as they clear into multiple exposure and begin to interrogate the EDG patterns early on in the program. So I expect in 2023, we'll have a really good sense of the profile of the drug. Now people are fixated on liver toxicity because of Takeda's previous experience, you should know that liver toxicity or drug-induced liver injury, dilly, that's a feature of all small molecule drug development. That's what we have focused on almost irrespective of the indication, the liver being a primary organ first for all these drugs. One of the great ways of addressing dilly is by having a highly potent drug. It's almost a conceivable to have drug-induced liver injury that is a direct toxicity in drugs that are administered below 20 milligrams. There's just not enough active metabolites by mass to do as much. So a primary feature of ours from the ACO has been potency in order to attenuate any off-target side effects. So our anticipated human dose based on the animal work that we've done is quite low. We'll, of course, have to confirm that in patients and in healthy volunteers. But if it meets the profile, then I think we're feeling really good about the off-target liver segments.

Right. Makes sense. I was going to go a little bit deeper into the liver tox liabilities as that continues to come up in investor conversations. But if we think about other AEs, so in conversations with sleep specialists, we often hear concerns about the impact on heart rate, blood pressure, possibly addiction. Do you think these are AEs that can be designed out of the molecule or simply a function of reregulating orexin?

It's a really good question, and it's an important question. I think that's one where we feel like we have some competitive advantage based on our insights on here. It's interesting to think about orexin, its role in natural sleep wake cycle. It's one of the central prime movers in the wake cycle. So when that orexin system fires up, the whole autonomic nervous system fires up, you're ready to go and awake. So it stands to reason that there would be some correlation. We actually believe that there are features of the blood brain barrier penetration, the rate of penetration, Cmax in the target tissues, rate of change of Cmax, AUC, a lot of these more prosaic pharmacokinetic, pharmacodynamic parameters that will affect essentially the space between the dose response curve for alertness and dose response curve for blood pressure and heart rate effects.

And we think about the unmet need that you believe orexin console for is the goal to be the foundational therapy you talked about the different types of narcolepsy. And is this the foundational therapy for all narcoleptics broadly speaking? Are you looking to improve outcomes for the more severe end of the spectrum of patients, such as those who get sodium oxybate? Maybe just kind of help us define what you think this is going to bring to the market that isn't really being adequately served?

The reason why people have been so excited about orexin agonist in narcolepsy type 1 is that it's almost akin to a hormone replacement type therapy. The deficiency, the disease is caused by the loss of these orexin-producing neurons. So replacing the peptide is disease modified. And so other approaches have been more focused on changing the sleep architecture during sleep or using amphetamines or whatever. This is actually getting to the root of the problem itself. So there's great promise for this. So I think that any time you say that, you have to say, look, these are new molecules in the brain. We have to make sure there aren't any untoward effects as well. But in terms of CNS indications, this is one as credential as you get.

Great. So shifting now to profitability targets and kind of thinking about the broader separation and whatnot, how do you plan to go for '23? And what I mean for that by that is, will you guide stripping out IL-2 costs to reflect the outlook for the pure-play CNS company? Or are you going to be guiding on a blended company basis?

Yes, we'll probably do both. We want to give you guys the tools to be able to start to model the 2 independent entities. And so we're working through that with the board right now. We'll guide in February. Our hope is that we can really give a really clear picture of this commercial CNS growing company with profitability and the ability to continue to invest in R&D. And then the oncology company, which is more of a classic biotech waiting for pivotal data evaluated basically on the data that exists to date, the quality of the pipeline. So that will be a loss-making enterprise just a close with the...

Right. Okay. Great. And mindful there are a number of scenarios and targets, but it's safe to say the market best in this type of backdrop and environment versus the manufacturing bottom line growth, all views the product with the most upside potential and the most operating leverage dynamics. Said differently, don't seem less likely to surprise in a big way. So just trying to think about the drug position of that.

Yes, I think that's probably right. There's something quite magical, we, we even take slower-growing product, add them together with a fast-growing product, how quickly the top line becomes nonlinear, that's, that's, that's exactly -- again LYBALVI is we were waiting to see what LYBALVI was maturing into before we made the decision to split and if LYBALVI, we are not going to be a big product in our estimation. We probably wouldn't have split the company because we would say nemvaleukin could be our next big thing, but we really feel like we've got the engine. Of course, the X factor would be the Orexin because if you're going to put a terminal value on the business, it's based on pipeline or even if you put it in the DCF model then I think that Orexin will reveal itself in 2023 in a way that will help us all figure out whether it's worth something or not.

Right. So if we kind of think about VIVITROL, which we've made it 22 minutes without even touching on any virtual IP or LOEs. Assuming how sustainable do you see this outlook? I assume it's a fairly profitable business for Alkermes. When do you model LOEs? Are you modeling 2031 or 2030 or could exclusivity potentially extend beyond that? So second question embedded within the first.

Yes, so the second, I mean LYBALVI, I think notionally, has a 2022 or -- I'm sorry, 2032 or 2033 prior to patent term extension. So we expect that to go longer than that. VIVITROL is a really interesting product because I've said for years now where there are no patents around VIVITROL, you still have to be able to make VIVITROL and compete or distributed in a market that's outside of the traditional health care system. This is a specialty injectable product. It's a cold chain storage. It's an aseptically produced polymeric microsphere. It's distributed largely by specialty pharmacies, regional or national that this isn't something to get swapped out at the CBS counter. So I expect in the fullness of time, that there won't be many players here at all. Remember, now [indiscernible] has been off patent for many, many years. There's many drug delivery technologies. Anybody could have been making a long-acting naltrexone using a variety of technology, nobody has. Why? It's difficult to do. This is a highly soluble molecule. It's a reasonable dose. It's a pretty sophisticated technology to do it. And number 2, it's not a real pharmaceutical market. We're talking about criminal justice, we're talking about public health systems, governors, senators. There's a lot of stuff that goes into bringing the river the market that's different than just dealing with a hospital formulary or a retail pharmacy chain. So our belief is that the growth of VIVITROL recently, interestingly, has been driven by alcohol use. Notwithstanding the opioid crisis in the country, the growth in VIVITROL has been alcohol. That growth is driven by Alkermes, our people out in the community, driving utilization this way. We think that's a long-term trend that can continue. So even if someone were to enter the market, depending on how they behave, we can see this market continuing to grow or we wouldn't see a decay curve. We wouldn't expect a generic to come in in the classic generic structure, price for 180 days at 80% and then drop the price to nothing because it's just a market that doesn't work that way.

Right. And talking about that other potential entrants. So as you sit here today, Teva is approaching 30 months since its generic filing with no kind of approval. If we don't see a tentative approval announced, call it, this month, does this validate, I mean I would assume yes, but to validate your view around the complexity to make an equivalent generic? I know you touched on a couple of those points just before.

Look, I think the difficulty of making VIVITROL and or AB substitute products doesn't need valuation. It is what it is. Could ever someone else do it? Absolutely. I mean, just it's just engineering times money. Question, is it worth it? What's the economic model to do so. The classic generic situations are either really high-priced drugs with high cost of goods. So there's a hot space between the IA biosimilars or pretty high-priced drugs with super low cost to make them where you can make tablets for a few pennies, they could sell them for $10 VIVITROL is a little bit the worst of both worlds. It's a high cost of goods drug at a low price, the Medicaid monthly price from VIVITROL $600, and it's expensive to make this. This is not a classic oral solid dose manufacturing side. These are sterile aseptic manufacturing processes that are very, very bespoke. So there's not as much space in between there to play with price. Now can someone try to do that, absolutely. And I don't presuppose what others might do. But I think that's a very specialized setting.

Very clear on that. So maybe in the final minutes here, post the separation, you will be in an enviable position with a profitable CNS franchise. And within CNS, it's been a very fragmented space over time. Can you maybe talk about business development? You have ongoing internal R&D efforts, but just thinking about the cash flow generation of the business, how do you think about business development? Any areas of interest going forward, so on and so forth?

Yes, it's a really important topic because either Alkermes becomes a cog in a much bigger wheel or we build ourselves through building out the pipeline because no major biopharmaceutical company makes it on one product, you have to continue to build out the business. And so interestingly, I think, interestingly, one of the assets of the company that's underappreciated is this commercial capability. The commercial capability in order to bring medicines at the lower price point where largely the government is the payer through Medicare or Medicaid, where policy is important, where access through major payers who restrict access is the skill set that's quite important. It's a leverageable phenomenon. And so we've built it over years. We've built it VIVITROL, ARISTADA and now layering on Leal, you see the synergies, you see the business leverage that we have by launching Leave on top of that existing infrastructure, we think that's really attractive. So companies that might have a single product or approaching the marketplace, thinking about recapitulating that in this environment with cost of capital as high as it should be more economic to license that drug to a company like us who could do a great job with it and have a square wave launch. So the commercial capability is a really strong foundation for business development. Then of course, scientifically, where we find ourselves to have expertise where we can see value or others might not, particularly as the small cap space stays challenged from a capital raising point of view, we'll be out there all the time. But it's not our #1 priority right now. #1 prior now is driving LYBALVI. Allocation of capital will be toward LYBALVI, DTC, [indiscernible] right now. We'll see how Orexin matures in 2023, and then we'll get a sense of where we stand.

Excellent. Thank you very much, Richard. I think that takes us to the time. I appreciate you helping me kick off this inaugural conference. Best of luck and we will be in [indiscernible] '23, and thank you again.