Alkermes plc (ALKS) Earnings Call Transcript & Summary

Great. Good morning, everyone. My name is Jess Fye. I'm a biotech analyst at JPMorgan, and we're continuing the conference today with Alkermes. As you guys probably know, we're not switching for Q&A this year. If you want to ask a question during the Q&A session, just raise your hand, someone will bring you a microphone or alternatively, you can submit them electronically and I'll read them off the iPad. So with that, let me turn it over to Alkermes CEO, Richard Pops, for the presentation.

Thank you, Jess. Good morning, everyone. So it's slightly different this year. The way we're approaching this presentation. The title of this year's presentation is a clear investment thesis. So what you're going to see, I hope, is how we've evolved the business to reveal what we see as a very straightforward path that creating value for shareholders. Our Neuroscience business represents a compelling opportunity with topline growth drivers and significant operating leverage. And our oncology programs are maturing and offer a really attractive investment opportunity on their own -- in their own right. And our goal this year is to make that abundantly clear throughout the course of the year. So I will make forward-looking statements in this presentation. And our actual results could differ materially from these due to various risks. Things rarely turn out in our business the way we expect them to. So for that reason pay close attention to the Slide 2 and also our SEC disclosures where we do our best to articulate the risks associated with the business. So with that said, I'm going to show you 2 slides to begin with. The first one is Alkermes Today and then where we're going. So today, Alkermes is a multifaceted business comprised of some distinctive elements. First, our commercial products. We have 3 proprietary commercial products developed by our scientists and marketed by our commercial team. VIVITROL, a long-acting injectable treatment for alcohol dependence and opioid dependence. ARISTADA another long-acting injectable medication in this case for schizophrenia. And our most recently launched product LYBALVI which is an oral antipsychotic indicated for both schizophrenia and bipolar-1 disorder. We bring these products to the market through a commercial capability that we've established over many years and refined it over many years to be able to operate in large, complicated markets, markets with barriers to entry that limit access to new medicines and require specialized interactions with governments and complex payment systems in order to ensure access for patients. Our proprietary product revenues are augmented by additional revenue streams, including royalty and manufacturing revenues from VUMERITY and other products and our share of worldwide revenues from J&J's long-acting INVEGA products. An update there, as you probably saw last week, we announced that an arbitration panel issued an interim award in the arbitration we initiated last spring. We're pleased with that development. We'll engage with J&J and the panel prior to the final issuance of the award, at which point, we'll have more clarity on the economics. Our proprietary commercial products and other products are enabled by our manufacturing capabilities for complex in sterile injectable and solid oral dosage forms. The engine of the product portfolio is our science. We have a productive R&D efforts in our core area of neuroscience as well as in oncology, where we've made important progress over the past few years. Progress across all of these domains is what drives the logic of simplifying and clarifying the investment thesis and the capital allocation process across them. So this is where we plan to go. With LYBALVI's early launch success, we have one of the most distinctive neuroscience businesses in biopharma. The planned separation of the oncology business has 2 objectives: to create a pure-play commercial neuroscience company with the potential for enhanced profitability over time and a stand-alone oncology company with a late-stage clinical asset and a protein engineering expertise. Alkermes becomes the company that you see here. Three proprietary CNS commercial products, a well-established commercial infrastructure we can leverage, complex manufacturing capabilities, neuroscience pipeline and R&D capabilities. As a stand-alone CNS-focused biopharmaceutical company, the opportunity for value creation becomes more clear and lends itself to classic valuation metrics that can be applied to this type of economic enterprise. As we work to separate the oncology business, the potential stand-alone oncology company has a candidate in late-stage clinical trials, an early-stage development pipeline of engineered cytokines. And we believe given the demand for and scarcity of oncology medicines, potential opportunities for significant value creation as those programs mature. We believe we can unlock a lot of value in 2023 by focusing on 3 key areas. The first is LYBALVI. Driving its ongoing launch is a top priority for the company. The strong traction of the LYBALVI launch in 2022 has demonstrated that it has significant potential in the oral antipsychotic market. We plan to build on that momentum in 2023. The second is to advance our Orexin program in narcolepsy and other sleep disorders. We're now in the clinic with ALKS 2680 and we expect to generate initial proof-of-concept data this year. There's a lot of excitement around this program given the strong biological rationale and the significant medical and economic opportunity. We believe that if we're successful here, this program has the potential to create considerable value in a short period of time. And third is to execute the separation of our oncology assets to clarify the investment thesis for both the neuroscience and the oncology components of our business. So commercial, R&D, business structures and efficiencies. These are the 3 domains where we are continuously focused. So let's take them in turn, starting with LYBALVI. LYBALVI is our oral treatment for adults with schizophrenia or bipolar-1 disorder. It's a once-daily oral atypical composed of olanzapine, a well-established antipsychotic agent. And samidorphan, which is a new chemical entity developed by our scientists. We launched LYBALVI just over a year ago with a broad and differentiated label for both schizophrenia and bipolar-1 disorder. And as you can see in the picture, the LYBALVI is available in commonly prescribed olanzapine strengths, each co-formulated with 10 milligrams of samidorphan in a single bilayer tablet. The LYBALVI launch is off to an excellent start with strong fundamentals supporting that growth. Over 7,000 prescribers have prescribed LYBALVI since its launch. This is a significant number. which, as we model it going forward, provides the foundation for broader use in the initiation of a broader awareness campaign. The indication split is as we expected at this point in the launch. And we love its indicative of olanzapine's efficacy in both schizophrenia and in bipolar-1 with about half and half. About 45% of the prescriptions since launch have been for patients switching from olanzapine with approximately 55% coming from a wide variety of other branded and generic medications. This diverse source of business demonstrates that physicians are utilizing LYBALVI for a broad range of patients. The olanzapine switches are particularly important in the launch phase as they give physicians a chance to observe the differences between treatment with olanzapine and LYBALVI in their own patients. One of the important attributes of LYBALVI is its label with both schizophrenia and bipolar-1 disorder indications at launch. These are major established therapeutic markets characterized by large numbers of patients and a significant amount of churn with many treatment changes occurring every month. There are estimated 2.6 million schizophrenia patients in the U.S. and potentially up to twice as many people with bipolar-1 disorder. And you can get a sense of the frequency of medication changes by the monthly treatments, which is shown here, 20,000 to 30,000. And despite the broad availability of generic medications, a significant number switches to branded medications occur every month. Government payers heavily dominating the treatment landscapes for both schizophrenia and bipolar-2. So there are specialized capabilities needed to bring new medicines to patients. Bipolar-1 disorder is an important element of LYBALVI's long-term growth profile. LYBALVI's bipolar-1 disorder mirrors that of olanzapine, which has a 12% market share in this indication. LYBALVI is indicated for the treatment of bipolar-1 disorder as monotherapy and as an adjunct to lithium or valproate for the treatment -- for the acute treatment of manic episodes or mixed episodes, which are defined by symptoms of both mania and depression. LYBALVI is also indicated for maintenance of monotherapy treatment. On the right is survey data from treatment providers, indicating the vast majority of their bipolar-1 patients, 84% in this data set, experienced both manic-and mixed episodes. The breadth of this indication and the strength of the first year launch and the prescriber and access base that we're building, is going to serve as the foundation to launch a direct-to-consumer advertising campaign this year, focused primarily in this bipolar-1 indication. DTC has been shown to be a highly effective tool to build awareness and drive prescription growth in many therapeutic categories, but particularly in psychiatry. Starting an effective campaign earlier in a product's life cycle provides an opportunity to capture a greater potential amount of the impact over the life of the product. The LYBALVI campaign will be comprised of traditional broadcast advertising as well as targeted digital elements. Major brands in this category have a continuous DTC presence. So as we enter the second year of the launch, we're excited to advance this campaign. 2022 was a very strong first year for LYBALVI. We have clear focus in 2023 in 3 areas: driving breadth, securing access and building awareness. And these focus areas are owned by their respective teams within our commercial organization. Our field force drives prescriber breadth, our market access team works with payers. And our marketing organization develops and deploys the DTC program and other related materials, all working in concert with our regulatory, legal and compliance teams. So in 2023, we'll continue to execute our commercial strategy. We're excited about the opportunity for LYBALVI represents as a new treatment option for patients, but also for its potential to drive growth within Alkermes. The second focus area for 2023 is advancing our Orexin 2 receptor agonist program. This is an important area of CNS drug development, given the strong biological relevance of the orexin pathway to narcolepsy. Unlike many neurological disorders, in narcolepsy, there's a strong linkage between the target and the disease. Orexin is a neuropeptide intimately associated with the sleep wake cycle. In narcolepsy and other sleep disorders, it's well established that low Orexin levels play a central role. Narcolepsy affects about 200,000 people in the U.S. and about 3 million people around the world. 70% of the people with narcolepsy have what's called narcolepsy Type 1, which is distinguished by cataplexy, a sudden muscle weakness, triggered by strong emotions and low or no orexin in their brains. There is strong genetic and pharmacologic evidence that suggests that orexin-2 receptor agonists may be useful for mechanistic therapy in this well-understood biological system. So designing one is a compelling and somewhat unusual opportunity in neurology, but it is not easy to do. A viable drug candidate targeting orexin dysfunction needs to satisfy a number of critical design objectives. And it has to capture the performance of the endogenous natural neuropeptide in affecting wakefulness and cataplexy. It has to have brain penetration properties. It has to be potent to mitigate the risk of undesired side effects. It has to have a pharmacokinetic profile that promotes wakefulness during the day and sleep at night. We've leveraged our molecular design capabilities to design small molecule orexin agonist with these target features embodied in a convenient, once-daily oral medication. Here's an example of the type of data supporting the program. In well-established preclinical models, pharmacologic effects of test compounds can be evaluated for their effects on the 2 defining features of narcolepsy type-1, wakefulness and cataplexy. And you can see in one of our compounds here, demonstrating dose-dependent increases in wakefulness in the left panel and decreases in cataplexy on the right. Now here's a graphic display of what happens in the brain of a rodent when giving increasing doses of orexin 2 receptor agonist and recording their EEGs. This is a picture that will have relevance to what we hope to see using EEG in the clinic. So I'll spend a second on this. Each of these panels represents -- depicts brain wave frequency on the Y-axis with lower frequency, delta, theta and the alpha waves up to the higher frequency gamma waves. Color denotes power, moving from lower power blue to higher power red-orange, the x-axis is time. Moving from left to right, the panel show vehicle, followed by 3 increasing doses of a selective orexin 2 receptor agonist. Focus on the color in the gamma band. Gamma wave forms are associated with wakefulness and higher brain activity. Note how the orexin agonist drove increasing gamma activity in a dose-dependent fashion. We plan to use similar techniques to evaluate trends in target engagement early in the clinical program. Our first candidate, 2680 is now in the clinic. And here's how the plan looks to get to clinical proof of concept this year. The Phase 1 single ascending dose study started in November of last year, and we're now well into doses that we consider to be biologically relevant. We've cleared sufficient dose levels now to trigger the initiation of 2 additional tracks, a Phase 1 multiple ascending dose study, evaluating doses as they clear the single ascending dose study. And a Phase 1b proof-of-concept study, which will evaluate traditional clinical efficacy endpoints in all 3 patient types that we're interested in, narcolepsy Type 1, narcolepsy Type 2 and idiopathic hypersomnia as well as sleep-deprived healthy volunteers. We expect to initiate these 2 additional tracks this quarter. Taken together, these studies are designed to generate preliminary proof-of-concept data by year-end. In this Phase 1 SAD, MAD studies in healthy volunteers, we'll learn pharmacokinetic and pharmacodynamic information as well as initial safety and tolerability information. We will also look for trends in EEG even in the healthy volunteers at single doses to get some sense of target engagement. The Phase 1b study is designed to provide early clinical proof-of-concept in patients and provide dose range estimation for Phase 2. In this study, we will use the gold standard EEG-based maintenance of wakefulness test as our primary measure as well as continue to augment our safety and tolerability data. So we're well on our way with ALKS 2680 and what will certainly be an important year for it. The third priority for the year is to complete the separation of the oncology business. We believe this separation will unlock value and position both the oncology business and the remaining neuroscience business for growth and success as we simplify the investment thesis and capital allocation decision -- that decision-making process for both companies. So as a potential stand-alone enterprise, our oncology business has some very attractive features. It would be a pure-play development stage oncology company anchored by the medical and economic potential of Nemvaleukin alpha or IL-2 variant. The IL-2 pathway offers a significant potential in oncology. And Nemvaleukin is now the most advanced IL-2 variant in development. It's distinguished by data generated in the clinic showing anti-tumor activity as single agent monotherapy and in combination with checkpoint inhibitors. Importantly, Nemvaleukin has demonstrated antitumor activity not only in tumor types where checkpoint inhibitors are approved but also in tumor types where they are not. Nemvaleukin as a cytokine engineered by Alkermes scientists. The new oncology company would have a pipeline of other engineered cytokines as well including an engineered tumors targeted IL-12 and an engineered IL-18, which are both attractive oncology targets. So a late-stage asset with the potential to be a first-in-class medicine, a pipeline, an experienced team and clear to the developmental milestones should to provide a compelling potential opportunity for oncology-focused investors. The reason to believe in Nemvaleukin lies in the extent of the data generated in the clinic. ARTISTRY-1, our study evaluating daily IV x5 Nemvaleukin has demonstrated deepening and durable responses across a broad range of tumor types, including high unmet need patient populations, while attenuating the hallmark toxicities of IL-2. The figure on the right summarizes the ARTISTRY-1 response data as of August 2022. And I won't go into the specifics here, obviously, but the picture itself tells a story, a range of tumor types, monotherapy and combination responses. It takes years in the clinic to develop this rich data set and it's gratifying to see it come together in this way. This is what the program looks like today. ARTISTRY-6 and ARTISTRY-7 are the registration-enabling studies as monotherapy in mucosal melanoma and in combination with pembrolizumab in platinum-resistant ovarian cancer, respectively. Both studies are using Nemvaleukin administered intravenously daily for 5 days in a 21-day cycle. This is the regimen that has generated the extensive data that I showed you on the previous slide. There are ongoing blinded studies and will continue enrolling both this year. I'll note that for ARITISTRY-6 following reaching a targeted enrollment number last year, the independent data monitoring and safety committee recently met and determined the study should continue as planned based on assessment of benefit and risk. ARTISTRY-2 and ARTISTRY-3 on the bottom are studies looking at alternative dosing regimens. ARTISTRY-2 is testing subcutaneous dosing once a week, ARTISTRY-3 is testing alternative less frequent IV dosing. These regimens include once every 3 weeks and twice every 3 weeks. We're making good progress in both, and we'll expect more updates this year. Spending in the oncology business makes sense, and we're working to make that happen this year. Now focus on Alkermes, which would emerge from the separation as a rare entity. Post separation, Alkermes would be a pure-play commercial stage neuroscience company. We believe the investment thesis and the value proposition will be quite clear. Three proprietary products with a new launch underway, establish and leverageable commercial capabilities in complex markets, the orexin program in the clinic and a proven R&D manufacturing and development capability. From a financial perspective, a significant topline driven by the growth of our proprietary products, LYBALVI changes the profile of the company, adding a product with major market potential on its own, while leveraging established commercial capabilities that we established for VIVITROL and ARISTADA. By separating the oncology business, we remove our most significant R&D expenditure, giving us the capacity to fund DTC for LYBALVI and additional neuroscience R&D and provide an opportunity to drive enhanced profitability for the business. You can see how the business has evolved over the past several years. Topline growth through an increasingly diversified group of products. And looking ahead, we will provide more of the financial details, including the full year 2022 results and 2023 expectations at our February year-end earnings call. So I'll finish with a summary of our focus areas in 2023 that we started with, drive the launch of LYBALVI, advance the orexin program and separate the oncology business. If we execute on these objectives, we see the potential to create significant value in 2023. So I'll stop there, and thank you very much, and we can go to the question session.

Great. Thanks for that presentation. As a reminder, if you want to ask a question, just raise your hand, someone will bring you a mic or you can send them electronically and I'll read them off the iPad. So we have one here. Can you talk about -- how to think about R&D spend after the oncology spin?

So right now, is this amplifier can you hear me? So right now, our largest external R&D spend is on Nemvaleukin. So when we spin out the oncology business, that frees up a significant amount of capital for a couple of things. First, priority will be allocating a segment of that the DTC campaign for LYBALVI. That drives higher revenues in the out-year models. We will reserve a certain amount for ongoing R&D in the CNS side of the business and the most proximate or identifiable R&D spend in the business post spin will be our obligations under the pediatric program for LYBALVI, which has commercial potential as well as orexin. But we'll have capacity to advance things that are happening in our labs right now as well.

So maybe while we're on this topic, I know you touched on some presentation a little bit, but can you just elaborate, why spin oncology now. And there's data on the horizon, maybe not too far away. How did you determine that 2023 is the right time?

It was really driven by feedback from shareholders as well as the maturation of both sides of the business. It obviously makes sense to create pure-play investment vehicles for high-value potential products. But last year, at this time, for example, we were just launching LYBALVI. We had established that we thought it could be the drive -- growth driver of a stand-alone CNS company. We're quite confident that that's the case today. Similarly, on the oncology side, getting Nemvaleukin into the registration-enabling studies and seeing its profile mature over the course of the year was important. So while the readouts for Nemvaleukin are closed, they're not that close. We need to enroll all during 2023 and then let the data into '24 and then let the data not only generate response data, but look at durability day-to-day, which is also the hallmark of IL-2 treatment when it's successful. In the meantime, we saw that the valuation of the company is somewhat suppressed by the complexity associated with people saying, well, you've got a major oncology spin which is masking the inherent profitability of a growing CNS business. So let's just make it clear, simplified. Our shareholders are benefit from both because by spinning it, shareholders end up with shares in both of those entities, and they can allocate their capital then -- in the way that they best see fit.

Got it. I think you mentioned at one point that IRA legislation is representing one of the factors in the decision. How did it factor in specifically?

I don't think it drove the decision, but it underlying the decision, the logic of because IRA, as you know, has created a differential value of opportunity for biologics versus small molecules. And I think particularly in oncology, to the extent that you can interrogate a biological target with a biologic rather than a small molecule. That's what everybody is already doing. So the asset -- the capital allocation on the R&D side has already shifted toward a preference for biologics. So here, we have a late-stage biologic with a biologic engineering capability and a stand-alone entity, I think it's quite attractive if Nemvaleukin continues to evolve the way we hope it does.

And then maybe just to round out the oncology questions. Is there any scenario in which the separation doesn't happen? And what would the circumstances be if it weren't kind of play out that way.

So what we announced a few weeks ago or a couple of months now was the intention to separate the assets. So to do so, you essentially have to create a separate entity within Alkermes -- separate financials. We also need to seek tax rulings to make sure that any spend that happened would be a tax free. So there's things that need to happen between now and the time you actually complete a spin. And so we're actually open to all kinds of -- or any type of business arrangement that would drive value for shareholders in that period of time. So for example, if someone came to us in that period and say, we want to collaborate we -- that isn't limited at all. Someone say we want to come and acquire all these assets, we would think about that as well. The only thing we can control 100% ourselves is executing the spin. But we've got quite a few months between now and that time. So we'll continue to evaluate our options along the way.

Great. Maybe switching to your orexin program. It's an exciting space and a number of companies are kind of going after that target. How do you get comfortable with the safety profile of your molecule? And what do you think are the areas that are going to emerge that are going to differentiate your product.

Well, establishing the safety of orexin receptor 2 agonist small molecules, just like what we do for any other program. And so the nomination package for a small molecule drug in one of these indications is extensive. So you leverage all of the animal toxicology work you can do as well as all the tools that are available to you in silico. I think it's a mistake to think just because one company had a liver finding that, that applies generally to the class, that's a consistent area of risk when you're developing new small molecule drugs. Hepatic clearance and hepatic toxicity is something we pay attention to all the time. One of the ways to gain a little bit of confidence in the design objective in this and any other program is potency. Highly potent compounds are much less likely to cause drug-induced liver injury. So potency is a really important feature for us in this program for that reason, but also given the potential dosing differences between narcolepsy type 1 and narcolepsy type 2, which is expected to be on the order of 10x. So if you had a drug that was potent at 2 milligrams in narcolepsy type 1, you might need to dose up to 20 milligrams in narcolepsy type 2, just to pick random numbers. But contrast that if your drug were effective at 20 milligrams in type you'd have to go to 200 milligrams. So there's just a -- there's a lot of virtue to potency. So our compounds in the assay systems that we have available to us are more -- as potent or more potent than the natural peptide. So -- but I think the admonishment is always appropriate for anytime you're taking a new small molecule or any type of drug into the clinic, you have to look at the data and you can be surprised. SO the fact that we've moved already so far through the single ascending dose is really encouraging and necessary but obviously insufficient condition, but we're really pleased with. In the animals, it's amazing. We've dosed up to 500 times the effect of dose with no measurable side effects and no accumulation of the drug over time with repeated dosing. So it satisfies all of the preclinical criteria that we would have established in order to nominate the candidate.

Okay. And I want to make sure I understand what type of proof-of-concept data we could get this year. Is it in narcolepsy patients and sleep-deprived healthy volunteers? And should we expect those to come at similar times? Or will those come into sequence?

So there's a couple of different elements of the translational medicine piece for this year. The first that I'll describe is a little bit more experimental. That is looking even at single doses and multiple doses in healthy volunteers, seeing whether you can see EEG signature changes in that intact non-narcoleptic brain. So that will be underway, and we're hopeful that we'll be able to see, it's nothing that will drive statistics or anything. I'll just tell you that you're hitting that receptor system in a way that's measurable in the brain. The second in the Phase 1b is a much more rigorous way of looking at the efficacy of the drug early on, and that's using what's considered to be the gold standard test, which is an EEG monitored maintenance of wakefulness test. And so this is the approval endpoint. And with a drug like this, like an orexin 2 receptor agonist, it shouldn't be something that you need statistics to see whether it's working. When you give it to a small number of patients, you should see the characteristic response in terms of their maintenance of wakefulness consistent with EEG patterns that you would then extrapolate should result in a much more resumption of a normal sleep wake cycle. So the goal of this program, in contrast to many CNS type programs in psychiatry is that in the early studies, Phase 1, Phase 1b and Phase 2, you should essentially establish everything you know about including the dosimetry. So when you go to Phase 3 you have a high degree of reliability on the final output.

And how should we think about the path to market after you see that data later this year, assuming it's positive.