Alkermes Wins Over Investors With Plan To Become Trans-Atlantic “Big Biotech”

7/6/11Follow @xconomy

Richard Pops went on hiatus for a while as CEO of Alkermes, and when he returned in September 2009, he vowed to put the company back in “building mode.” It could have been dismissed as rah-rah rhetoric, but over the past couple of months, the investment community has started to rally behind Pops’ bold plan to build Alkermes into a much bigger, more stable company.

Waltham, MA-based Alkermes (NASDAQ: ALKS) has enjoyed a bull run ever since May 9, seeing its shares climb more than 30 percent after unveiling plans for a $960 million takeover of Ireland-based Elan Drug Technologies. There are moving parts to any acquisition, sometimes in the fine print, but investors have been warm to this deal from the start. By obtaining the 400-person unit of Elan, Alkermes is putting together a portfolio of 25 commercial products-five of which have potential to be cash cows well into the 2020s. The “new” Alkermes is supposed to be consistently profitable, have more than $450 million in annual revenue, and offer a diversified lineup of products that can help protect it from any potential hiccups (regulatory, commercial, manufacturing or other) that can damage a company that counts on just one or two drugs.

Ultimately, it’s about taking the company up a notch, into the league of Big Biotechs where investors care not just about scientific “blue-sky” possibilities, but also how much money you can make each year, and how durable all the legs really are on the company stool.

“At first blush, Wall Street’s reaction was ‘Aha, I get it, it’s financially transformative,” Pops said during a lunch meeting a couple weeks ago in downtown Boston. “You go from a money-losing biotech company to one that’s growing revenues, growing margins, growing cash flows for a long time.”

Richard Pops

The acquisition of Elan Drug Technologies, which will technically reincorporate Alkermes into a Dublin-based company, still has to pass a vote of shareholders, which is expected sometime before the end of September. But no real opposition has emerged, or even much bearish sentiment, so this looks like it’s basically a done deal. As Cory Kasimov, a biotech analyst with JP Morgan put it in a May 9 note to clients, “ALKS has been one of our favorite mid-cap biotechs, and at first glance, this development further entrenches our view.”

To understand what’s going on here, a little background on the “old” Alkermes is needed. The company is best known for its technology that helps make biotech drugs remain stable for longer periods of time in the bloodstream, enabling them to be given as less-frequent injections. The company in its current form gets more than 80 percent of its revenue today from one product—Johnson & Johnson’s long-lasting version of risperidone (Risperdal Consta) for treating schizophrenia and bipolar disorder.

Alkermes also has high hopes that its delivery technology will generate significant cash with a new treatment to help wean people off addiction to opioid-based painkillers (Vivitrol), and a long-awaited new treatment for diabetes—Amylin Pharmaceuticals and Eli Lilly’s exexatide once-weekly (Bydureon).

Before this deal was announced, Alkermes bears on Wall Street had plenty to chew on. Vivitrol has generated a lot of optimism among drug-treatment officials, but it hasn’t yet translated into big sales, and the product never really caught on as a treatment for alcohol dependence. The diabetes drug recently won approval from European regulators, but its market introduction in the U.S. has been delayed by FDA requests for more data from a heart study. And, most importantly, investors had been worried that another J&J schizophrenia drug, paliperidone palmitate (Invega Sustenna) would basically steal the market away from Riperdal Consta.

By acquiring Elan Drug Technologies, Alkermes tackled all three of these concerns in one fell swoop. The Elan unit collects a royalty stream from J&J’s sales of Invega Sustenna that’s almost identical to what Alkermes already gets from Risperdal Consta, so Alkermes can collect royalties on both schizophrenia meds. And the company also gets a piece of sales of the new multiple sclerosis drug, dalfampridine (Ampyra), from Acorda Therapeutics. By adding those revenue streams, Alkermes has strengthened its reliable base of revenue. And while stabilizing the base of revenue you can count on, Alkermes hasn’t had to go completely conservative. Alkermes still has the upside potential of drugs like Vivitrol and Bydureon, while also taking some of the pressure off those products to carry the whole load for the company.

One of the caveats here, though, is that Alkermes financed this deal partly through its stock, and also by taking on $450 million in debt from Morgan Stanley and HSBC. Debt has been known to trip up many biotech companies, usually when they count their chickens before they hatch. But in this case, Pops says it made sense, because Alkermes didn’t borrow as much as it could have, interest rates are low, and cash flow from the products should enable the company to pay back the entire loan over the next four to five years, he says. It’s possible that if Alkermes generates more cash through partnerships, it could pay down the debt even sooner, he says.

“Leveraging a [money-losing] biotech company is reckless, but leverage for a cash-flow positive and stable company is prudent balance sheet management,” Pops says.

There are tax implications to this deal, which I won’t dwell on at length. But suffice to say, Alkermes considered the value of being incorporated in a country where corporate income taxes are 12.5 percent, compared to a 38 percent combined federal and state tax rate.

Alkermes plans to maintain operations with 400 employees in Ireland, hold its board meetings there, and make all the big decisions there, Pops says. Being based in Ireland, and still listed on the NASDAQ, means that Alkermes will have a higher profile with investors on both sides of the Atlantic. And Pops doesn’t even have to play the bad guy role in managing this internally. The combined company will have about 1,200 employees. Because of the way the acquisition was structured, there’s no administrative overlap that needs to be cut, so there’s no plan to make any layoffs through the merger, he says.

There are still a number of adjustments going on, much of them behind the scenes, in a deal of this magnitude. There are different company cultures, country cultures, and time zones to consider. Overcoming some of those barriers, and keeping people happy on both sides of the Atlantic, will be key to whether the deal really stands the test of time.

“Thankfully, it’s pretty easy to get there from Boston,” Pops says. “You can get on the 6 pm Aer Lingus flight, and be there at midnight.” Even so, these trips will be frequent, and important, not just a once-in-a-while nice thing to do. The organization will be getting more complicated to run. “It will take some getting used to,” he says.

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