[email protected][email protected]MORGAN STANLEY & CO. LLC David Risinger +1 212 761-6494 Onusa Chantanapongwanij, M.D. +1 212 761-5672 Alkermes Plc. ( ALKS.O, ALKS US ) Specialty Pharmaceuticals / United States of America Stock Rating Stock Rating Overweight Overweight Industry View Industry View In-Line In-Line Price target Price target $85.00 $85.00 Shr price, close (Aug 31, 2015) $59.56 Mkt cap, curr (mm) $8,867 52-Week Range $75.17-38.49 Fiscal Year Ending 12/14 12/15e 12/16e 12/17e ModelWare EPS ($) ModelWare EPS ($) 0.35 0.35 (0.56) (0.56) (0.39) (0.39) 0.01 0.01 Prior ModelWare EPS Prior ModelWare EPS ($) ($) - (0.42) (0.42) (0.25) (0.25) 0.44 0.44 P/E P/E 165.7 165.7 NM NM NM NM 5,248.6 5,248.6 Consensus EPS ($)§ Consensus EPS ($)§ 0.27 0.27 (0.40) (0.40) (0.24) (0.24) 0.53 0.53 Div yld (%) 0.0 0.0 0.0 0.0 Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework § = Consensus data is provided by Thomson Reuters Estimates e = Morgan Stanley Research estimates QUARTERLY MODELWARE EPS ($) 2015e 2015e 2016e 2016e Quarter 2014 Prior Current Prior Current Q1 0.11 - 0.06a - - Q2 0.11 - (0.09)a - - Q3 0.03 (0.22) (0.27) - - Q4 0.11 (0.18) (0.28) - 0.00 e = Morgan Stanley Research estimates, a = Actual Company reported data Industry View In-Line Stock Rating Overweight Price Target $85.00 Alkermes Alkermes September 1, 2015 The pipeline cometh; double upgrade from UW to OW We now see investment negatives as resolved or well-reflected in Alkermes shares, and we expect the market will turn its focus toward forthcoming Ph 3 readouts for a potential blockbuster for treatment-resistant depression. We raised our PT from $61 to $85. What's Changed? What's Changed? From: From: To: To: Alkermes Plc. Alkermes Plc. Price Target $61.00 $85.00 Rating Underweight Overweight What changed? We previously rated ALKS Underweight due to concerns about Aristada's (aripiprazole lauroxyl) commercial potential and the durability of Ampyra royalties (est $100M pretax income), since patents appeared to be at risk. We now believe that investor enthusiasm for Aristada has moderated, and the Ampyra IPR patent challenges were resolved in favor of the brand on August 25. We significantly raised our long-term financial projections (see Key Key model changes and explanations model changes and explanations section section), and we expect the street to turn its focus to potential positive 5461 (treatment resistant depression) clinical trial readouts over the next year. We view Alkermes as an under-appreciated leader in CNS drug development. Many investors think of Alkermes as a drug formulation company...and (we believe) under-appreciate its core competencies in developing new drugs for central nervous system disorders. In particular, Alkermes' expertise in the brain's reward centers (as evidenced by its successful development and commercialization of Vivitrol for addiction) is a key reason that we are optimistic about two late-stage pipeline products – 5461 for depression and 3831 for schizophrenia. We are bullish on 5461 readouts ahead. 5461's human abuse liability (HAL) trial results in 4Q:15 should show a limited risk of abuse potential for this combination opioid agonist/antagonist. Mgmt stated that due to "full blockade of the mu agonist effects of buprenorphine," it had seen very encouraging results in earlier human pupillometry (measurement of pupil diameter) tests. We also expect positive Ph 3 trial results. Our confidence is based on Phase 2 validation of both the mechanism and the innovative clinical trial design (sequential parallel comparison design). We raised base case odds of success from 80% to 100% and 2020E end-user sales from $680M to $900M. And if 5461 succeeds, we expect investor enthusiasm for 3831 to step higher, since both drugs incorporate novel agent samidorphan . Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this refer to the Disclosure Section, located at the end of this report. report. | September 1, 2015 Alkermes MORGAN STANLEY RESEARCH 1
P/EP/E 165.7165.7 NMNM NMNM 5,248.65,248.6Consensus EPS ($)§Consensus EPS ($)§ 0.270.27 (0.40)(0.40) (0.24)(0.24) 0.530.53Div yld (%) 0.0 0.0 0.0 0.0Unless otherwise noted, all m etrics are based on Morgan Stanley ModelWare fram ework§ = Consensus data is provided by Thom son Reuters Estim atese = Morgan Stanley Research estim ates
e = Morgan Stanley Research estim ates, a = Actual Com pany reported data
Industry ViewIn-Line
Stock RatingOverweight
Price Target$85.00
AlkermesAlkermesSeptember 1, 2015
The pipeline cometh; double upgradefrom UW to OW
We now see investment negatives as resolved or well-reflected inAlkermes shares, and we expect the market will turn its focus towardforthcoming Ph 3 readouts for a potential blockbuster fortreatment-resistant depression. We raised our PT from $61 to $85.
What changed? We previously rated ALKS Underweight due to concernsabout Aristada's (aripiprazole lauroxyl) commercial potential and the durabilityof Ampyra royalties (est $100M pretax income), since patents appeared to beat risk. We now believe that investor enthusiasm for Aristada has moderated,and the Ampyra IPR patent challenges were resolved in favor of the brand onAugust 25. We significantly raised our long-term financial projections (see KeyKeymodel changes and explanations model changes and explanations sectionsection), and we expect the street to turn itsfocus to potential positive 5461 (treatment resistant depression) clinical trialreadouts over the next year.
We view Alkermes as an under-appreciated leader in CNS drugdevelopment. Many investors think of Alkermes as a drug formulationcompany...and (we believe) under-appreciate its core competencies indeveloping new drugs for central nervous system disorders. In particular,Alkermes' expertise in the brain's reward centers (as evidenced by itssuccessful development and commercialization of Vivitrol for addiction) is akey reason that we are optimistic about two late-stage pipeline products –5461 for depression and 3831 for schizophrenia.
We are bullish on 5461 readouts ahead. 5461's human abuse liability (HAL)trial results in 4Q:15 should show a limited risk of abuse potential for thiscombination opioid agonist/antagonist. Mgmt stated that due to "full blockadeof the mu agonist effects of buprenorphine," it had seen very encouragingresults in earlier human pupillometry (measurement of pupil diameter) tests.We also expect positive Ph 3 trial results. Our confidence is based on Phase 2validation of both the mechanism and the innovative clinical trial design(sequential parallel comparison design). We raised base case odds of successfrom 80% to 100% and 2020E end-user sales from $680M to $900M. And if5461 succeeds, we expect investor enthusiasm for 3831 to step higher, sinceboth drugs incorporate novel agent samidorphan .
Morgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research. As a result,investors should be aware that the firm may have a conflictof interest that could affect the objectivity of MorganStanley Research. Investors should consider MorganStanley Research as only a single factor in making theirinvestment decision.For analyst certification and other important disclosures,For analyst certification and other important disclosures,refer to the Disclosure Section, located at the end of thisrefer to the Disclosure Section, located at the end of thisreport.report.
Price Target $85 16x base case 2016E revenue of $754M.
Bull $10520x '16E bull case rev of$784M
Aristada's launch surprises on the upside and externalstrategic action drives the stock higher. Aristada (aripiprazolelauroxil) launch exceeds our estimate of $85M by over ⅓ ($30M),and external strategic action boosts the stock higher.
Base $8516x '16E base case rev of$754M
5461 succeeds in Phase 3 trials, driving stock multipleexpansion. 5461 for treatment-resistant depression succeeds inat least two of its three Ph 3 trials with an acceptable safety profile.This also boosts enthusiasm for 3831, since it incorporates thesame novel drug (samidorphan) as 5461.
Bear $388x '16E bear case rev of$669M
FDA declines to approve Aristada in Sept '15, and 5461 failsin its human abuse liability study in 4Q:15 or Ph 3 trials in2016. Aristada approval is significantly delayed, yielding revs $85Mbelow forecast. ALKS 5461 disappoints in clinical trials, causinginvestors to pull the drug from models and discount 3831, since itincorporates the same novel drug (samidorphan) as 5461.
Investment ThesisInvestment Thesis
We rate ALKS stock Overweight relative to ouruniverse based upon our pipeline enthusiasm.
We believe consensus under-appreciates Alkermes'core competencies in CNS disorders andprobability of pipeline success.
We expect ALKS stock to trade up going into Ph 3readouts for 5461 for treatment-resistantdepression in 1H:16. The drug showed compellingPh 2 data, and Ph 3 is designed well to succeed.
Validation of 5461 would drive greater optimismabout 3831 for schizophrenia (reporting Ph 3 in2016) since both drugs incorporate ALKS33 (brainreward center modulator).
Key Value DriversKey Value Drivers
Aristada FDA action (we and consensus expectapproval in Sept '15) and label details vs.competitor Abilify Maintena
5461 human abuse liability (HAL) trial results inlate '15 - will hopefully show limited or noeuphoria or abuse potential for this combination ofbuprenorphine + samidorphan (ALKS 33)
5461 Ph 3 trial completions in February, May, andJuly 2016 (subject to change)
Aristada launch trends in 2016
3831 Ph 3 results in 2017
Financial results relative to expectations
External strategic action
Risks to Achieving Price TargetRisks to Achieving Price Target
Pipeline candidates could fail
Pipeline news flow could drive greater stockup/downside than we anticipate
Alkermes' current products could exceed or missexpectations, driving earnings upside/downside
Alkermes may have to invest more to grow thebusiness than we model
Management could executecompelling/disappointing external deals
Risk RewardRisk Reward
Risk-Reward
Sou rce: Th omson Reu ters, Morgan Stan ley Research
Exhibit 1:Exhibit 1: MS projections vs. consensus; we forecast greater spending over the nextfew years, but we project higher revenue driving operating leverage and thus muchhigher EPS toward the end of the decade
Revenue ($M) 2015E 2016E 2017E 2018E 2019E 2020E
MS 626 754 982 1,379 1,913 2,470
Cons' 628 760 930 1,107 1,343 N/A
% diff. 0% -1% 6% 25% 43% NM
EPS 2015E 2016E 2017E 2018E 2019E 2020E
MS ($0.56) ($0.39) $0.01 $1.13 $3.36 $5.69
Cons' ($0.40) ($0.24) $0.53 $1.22 $1.90 N/A
% diff. -41% -61% -98% -7% 77% NM
Sou rce: Th omson Reu ters, Morgan Stan ley Research
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We revised our projections, and we now reflect Alkermes booking end-We revised our projections, and we now reflect Alkermes booking end-market 5461 and 3831 salesmarket 5461 and 3831 sales
Key model changes and explanationsKey model changes and explanations
Our revised model reflects lower EPS near-term due to slightly lower Aristada (schizophrenia) salesand greater investment spending, but much higher projections long-term. We are below consensus onAristada due to limited differentiation vs. Abilify Maintaina, but we view this as immaterial to the investmentthesis. We revised our long-term model to reflect Alkermes booking 5461 and 3831 pipeline product sales(rather than out-licensing and recording royalties), and we raised our long-term projections significantly. Seetable below for key estimate revisions.
We revised key pipeline product revenus. We lowered Aristada 2016 revenue by 25% to reflect aconservative assumption about adoption since it will take time to win provider formulary access and becauseAristada is only slightly different from Otsuka's Abilify Maintena. We tweaked the launch curves for 5461 and3831, but we project end-market 2020 revenues for both drugs approximately 20% higher than our priorprojections.
We lowered our '15–'18E EPS to adjust for higher spending on SG&A. We now assume ALKS will booktotal sales for ALKS 5461 and 3831 instead of royalties revenue. We previously modeled Alkermes outlicensingand booking royalties from the two products. We model no ex-US sales, although Alkermes could ultimatelypartner 5461 or 3831 for ex-US commercialization.
Culmination of changes: 2020 projections explained.We raised our 2020E sales from $1.6B to $2.5B,operating income from $237M to $763M, and non-GAAP EPS from $2.68 to $5.69. We now assume thatAlkermes will leverage its infrastructure and commercialize 5461 and 3831 itself. Compelling profiles shouldyield commercial success without partners, and incremental costs should be well worth the spending. Weforecast incremental SG&A spending of $450M to launch both drugs (we estimate total company SG&A risingfrom $385M in 2016 to $833M in 2020).
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Exhibit 2:Exhibit 2: New model estimates (including our old/new end-market sales projections for 5461 and 3831)and our assumptions for Alkermes recorded revenue for both
ALKS 5461 Ph. 3 Forward-4 study for treatment of MDD (N=350, NCT02158533) primary completion Feb. '16
ALKS 5461 Ph. 1 safety and tolerability study in healthy subjects (N=120, NCT02479308) completion Mar. '16
ALKS 5461 Ph. 3 Forward-3 study for treatment of MDD (N=670, NCT02158546) primary completion May '16
ALKS 5461 Ph. 3 Forward-5 study for treatment of MDD (N=350, NCT02218008) primary completion Jul. '16
Sou rce: Clin ica lTria ls .G ov, Compan y Data , Morgan Stan ley Research
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Bull/bear views and MS estsBull/bear views and MS ests
ALKS 5461 opportunity; ALKS 5461 opportunity; odds of success in Ph 3 are high, in our viewodds of success in Ph 3 are high, in our view
Treatment-resistant depression is a large market opportunity
Nearly six million patients are diagnosed with depression in the U.S. Commonly-used drugs include SSRIs(selective serotonin reuptake inhibitors) and SNRIs (serotonin norepinephrine reuptake inhibitors). As examples,Lexapro, an SSRI, had U.S. sales > $2B before it went generic in early 2012, and Effexor, an SNRI, had almost $4B(>$2B U.S.) in global sales before it went generic in 2010.
Exhibit 4:Exhibit 4: ALKS pipeline Bull/Bear views and MS 2020E sales assumptions
Drug/Timing Bull view Bear view MS view and estimates
Providers will choose Aristada overMaintena because Aristada offersmore flexibility because it will beavailable in a range of doses
FDA approval is not guaranteedsince Alkermes only conductedone Ph 3 trial; Aristada will not beable to leverage the Abilifytrademark; FDA may onlyapprove the lowest dose ofAristada since the high doseefficacy did not separate much;Aristada only has acuteexacerbation data and nomaintenance data
We are relatively cautious onuptake of Aristada. We are unsure ifthe medical community will adopt itmuch when its differentiation isrelatively limited vs. entrenchedproduct Abilify Maintena. We modellaunch in 4Q:15 and 2020E end usersales of $354M. We think peaksales could approach $500M.
ALKS 5461;human abuseliability trialreporting late'15; three Ph 3trials reportingin 2016
The market is very large fortreatment resistant depression andPh 3 trials are highly likely tosucceed for this modified opiod.
ALKS 5461 will be competing withgeneric drugs for severedepression; adoption may beconstrained by DEA scheduling(likely Schedule 3) plusphysicians' concerns aboutprescribing an opiod. Sideeffects, including the potential fornausea, sleepiness, and fatiguehave yet to be fully elucidated;there also may be CV risk.
We have high confidence in Ph 3success. We model launch in 2017and 2020E end user sales of$900M. We think peak sales couldexceed $1B.
ALKS 3831; Ph 3could read outin 2017
Zyprexa was a $5B branded drug,and 3831’s weight attenuationshould make it a blockbuster
Payers may restrict 3831 topatients who gain significantweight on generic Zyprexa, whichwill constrain adoption. Ph 2 datasuggested greater risk ofsleepiness and fatigue for 3831than control.
We model launch in 2018 and2020E end user sales of $384M. Wethink peak sales could exceed$750M.
ALKS 8700; Ph 3should read outin 2018
The market potential is very large;MS biotech analyst MatthewHarrison projects global Tecfiderasales of $5.3B in 2020E.
ALKS evaluated 8700 in a single-dose study relative to Tecfidera,but larger, longer-duration datais required to assess its relativeefficacy and safety; Biogen isworking on new formulations;Xenoport is also a potentialcompetitor; Tecfidera' activeingredient DMF is only protectedby formulation patents so themarket may be genericizedsooner than expected.
It is too early to draw conclusionsabout the competitive profile of8700 relative to competitors'pipeline candidates. We lookforward to Ph 3 data in 2018.
ALKS 7119 Novel mechanism could offerbroad application in various mentalhealth disorders; initial indication isfor Alzheimer's agitation
No human data yet It is early and we look forward tomore data
Sou rce: Compan y data ; Morgan Stan ley Research estimates
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We raised odds of success from 80% to 100% and 2020E odds-adjusted sales from $680M to $900M.
We are confident that Phase 3 trials in treatment-resistant depression are likely to succeed. Note that 100%odds means that we are giving full credit in our base case, but it does not guarantee approval/launch. In a Phase2 study, ALKS 5461 showed a significant reduction in depressive symptoms vs. placebo. On the HamiltonDepression Rating Scale (HAM-D17), scores were reduced by 5.3 points for 5461 vs. 1.2 points for placebo(p=0.013) at the end of four weeks of treatment. On the Montgomery-Asberg Depression Rating Scale(MADRS), scores were reduced by 8.7 points for 5461 vs. 1.8 points for placebo (p=0.004). Nevertheless,approval is not guaranteed and our 100% odds reflect full credit for sales in our base case assumptions.
In a small Phase 3 trial (FORWARD-1), ALKS 5461 significantly reduced depressive symptoms from baseline in66 patients over eight weeks of treatment (p<0.001, no control arm). Moreover, the results for the first fourweeks were consistent with the results from Phase 2 and ALKS 5461 showed continuing improvement indepression scores from weeks 4–8.
Clinical trials to date have shown 5461 to be generally well tolerated. The most common adverse events havebeen were nausea, constipation, and dry mouth.
Clinical trials in depression are notorious for failing due to placebo responses. ALKS has not disclosed Phase 3design details (IR said for “for both competitive reasons and also to dissuade placebo effect among savvypatients”), but is utilizing “state-of-the-art methodologies to reduce the impact of clinically meaningful placeboresponse” in the three pivotal trials FORWARD-3 (NCT02158546NCT02158546), -4 (NCT02158533NCT02158533), and -5 (NCT02218008NCT02218008).We believe the FORWARD trials are likely using a design highly similar (if not identical) to the sequential parallelcomparison design (SPCD) that was used in the successful Phase 2. The SPCD enriches the study population byidentifying and excluding patients who respond to placebo.
Three pivotal trials should read out over the first nine months of 2016
During the 2Q:15 earnings call (July 30), management stated, “We expect the first study, FORWARD-4, to becompleted in early Q1 2016, with a potential for it to move into late Q4 2015. The next will be FORWARD-3,which we now anticipate will likely complete in Q1 2016, which is an improvement from our original Q2estimate. FORWARD-5 is the third. It's at an earlier point in its enrollment, so we will not change our Q3 2016estimate at this time.”
HAL (human abuse liability) data in late 2015 is important commercially
Alkermes is hoping to show little to no risk of abuse with 5461 in a 50-patient Phase 1 trial (linklink) completing inSeptember 2015. . Physicians are generally hesitant to use opioids (even for pain management) because ofconcerns about addiction, so it is critical that this study yields encouraging results.
During the 2Q:15 earnings call, management stated, “In addition to the core efficacy studies, we are running acomprehensive set of supporting studies to support US registration and wide utilization of this medicine. We'llstart to see data from these studies soon, including the human abuse liability study later this year, which willprovide the clinical community with important confirmation of ALKS 5461's non-addictive properties.”
Alkermes management is confident that the HAL study will demonstrate non-addictive properties of 5461 basedupon prior assessment, including human pupillometry (the measurement of pupil diameter).
ALKS 5461 combines an opioid agonist with an opioid antagonist to try to realize antidepressant efficacywithout the opioid high. ALKS 5461 is a combination of buprenorphine (a Schedule 3 partial μ-opioid receptoragonist) and samidorphan (an investigational μ-opioid receptor antagonist also know as ALKS-33).Buprenorphine stimulates dopamine production, yielding the reward effect (“high”) that may be counteracted bya μ antagonist, so ALKS 5461 should be far less addictive than typical opioids.
We assume DEA will classify 5461 as Schedule 3, but Schedule 3 restrictions are not overly onerousand there is a slim chance 5461 could get better scheduling (e.g., Schedule 4)
Buprenorphine, the active ingredient in 5461, is a DEA Schedule 3 partial μ-opioid receptor agonist.Buprenorphine stimulates dopamine production, yielding the reward effect, so combining buprenorphine with aμ-opioid receptor antagonist counteracts the high produced by buprenorphine. A brand drug named Suboxone,which contains buprenorphine plus naltrexone, a μ-opioid receptor antagonist, is also Schedule 3. Therefore, itseems probable that DEA will classify 5461 as Schedule 3 as well. Nonetheless, we do not view Schedule 3restrictions to be very onerous—the main restriction is that a typical Schedule 3 drug cannot be refilled morethan five times or more than six months after the original prescription.
Suboxone contains a 4:1 ratio of buprenorphine:naltrexone, but 5461 contains a 1:1 ratio ofbuprenorphine:samidorphan, which achieved “full blockade of the mu agonist effects of buprenorphine”(5/29/12 press release), so 5461 could be less addicting than even Suboxone. ALKS expects to have humanabuse liability (HAL) trial data in late '15.
ALKS 3831 should enter Phase 3 in late 2015 and report out in 2017ALKS 3831 should enter Phase 3 in late 2015 and report out in 2017
We assume 80% odds of success and 2020E odds-adjusted sales of $384M.
ALKS 3831 combines olanzapine (generic Zyprexa) with samidorphan (the same opioid antagonist in ALKS5461) to try to realize Zyprexa's anti-psychotic efficacy with less weight gain. We assume 3831 launch in 2018E,and 2020E unadjusted sales of $480M. Zyprexa sales peaked at $5B ($2.5B US/$2.5B ex-US) in 2010 beforegoing generic in 2011, so the market opportunity for ALKS 3831 appears large. However, there is risk thatpayers encourage doctors to use 3831 primarily in patients who fail generic Zyprexa due to weight gain. Andnote that some patients who fail generic Zyprexa could simply be switched to another generic schizophreniadrug rather than branded 3831.
Phase 2 portends Phase 3 success
ALKS will initiate Phase 3 for 3831 in 4Q:15. Phase 2 data (N=309; NCT01903837) showed similar anti-psychotic efficacy (change from baseline in PANSS total score) at week 12 but less weight gain. The three 3831arms—samidorphan 5 mg, 10 mg, and 20 mg—gained 4.8 pounds (2.8%), 3.5 pounds (2.1%), and 4.9 pounds(2.9%), respectively, vs. the placebo arm's average gain of 6.5 pounds (3.9%). The absolute weight gaindifferences between the 3831 and placebo arms were 1.7 pounds (5 mg), 3.0 pounds (10 mg), and 1.6 pounds(20 mg).
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Early weight gainers subgroup showed much less weight gain for 3831 vs. placebo
In the early weight gain population (n=195), at 12 weeks, the 3831 patients gained approximately four poundsvs. the placebo group gain of roughly nine pounds, a difference of five pounds.
Flattening of weight gain curves beyond 12 weeks highly encouraging
For patients who received 3831 throughout the entire 6-month period, mean percent change in body weightfrom week 12 to week 24 was 0.5%. For patients who received Zyprexa only in the first 3-months and weretransitioned to 3831 for the second 3-months, mean percent change in body weight from week 12 to week 24was 0.1%.
Exhibit 9:Exhibit 9: Change from baseline in PANSS totalscore through 12 weeks
Source: ICOSR 2015
Exhibit 10:Exhibit 10: Percent change from baseline in bodyweight through 12 weeks
Source: ICOSR 2015
Exhibit 11:Exhibit 11: Percent change from baseline in body weight in full study population vs. early weight gainsubgroup through 12 weeks
Sou rce: Compan y p resen tation
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Watch side effects in Phase 3: key side effects in Phase 2 included sleepiness and dizziness, and ratesof discontinuation due to adverse events were higher for 3831
Adverse events that occurred at a higher rate in the 3831 groups vs. placebo included somnolence (12% vs. 4%),sedation (5% vs. 4%, with 12% in the 3831 20-mg group), and dizziness (4% vs. 1%, with 9% in the 20-mggroup). Also, the rates of discontinuation related to adverse events were 60% higher for 3831 vs. Zyprexa (8%vs. 5%, respectively), even though weight gain/metabolic is believed to be the major reason for discontinuationof Zyprexa.
ALKS 3831 Phase 2 readout in schizophrenia and alcohol use also expected in 2017
The randomized, double-blinded trial (NCT02161718NCT02161718) is enrolling 450 patients with schizophrenia and alcoholuse disorder. The primary endpoint is time to first event of exacerbation. Top-line results are expected in mid-2017.
Add'l pipeline candidates not (yet) in our modelAdd'l pipeline candidates not (yet) in our model
We believe Alkermes' earlier-stage pipeline is likely to deliver more success stories. Alkermes' strategyin drug discovery and development is to leverage and build upon proven pharmacology using its strongfoundations in chemisty and biology. ALKS 8700 can potentially be a better (less side effects) Tecfidera (BIIB'soral multple sclerosis drug). ALKS 7119 could be a compelling add-on treatment for agitation in Alzheimer's.And immuno-oncology agent RDB 1419 is a novel cancer treatment.
ALKS 8700 (multiple sclerosis) begins Phase 3 in 4Q:15; we estimate readout in 2018
ALKS 8700 is a prodrug that is metabolized in vivo to monomethyl fumarate (MMF), the same active metaboliteas BIIB’s Tecfidera (dimethyl fumarate). A Phase 1, single-dose study showed that ALKS 8700 and Tecfideraexhibited similar levels of exposure to MMF, but 8700 showed lower Cmax and variability.
Potential advantages of ALKS 8700 include lower rates of GI side effects (e.g., nausea, vomiting, and diarrhea)
Exhibit 12:Exhibit 12: Percentage change from baseline in body weight - 3-month ALKS 3831 after 3-month Zyprexa vs6-month ALKS 3831
and flushing. Alkermes has filed for a composition of matter patent that would provide protection until 2034; italso filed for a method of use claim for MS. Other companies including Xenoport and Biogen are working onsimilar drugs.
RDB 1419 (immuno-oncology) should begin Phase 1 in fall 2015
RDB 1419 is a cancer immunotherapy based upon Proleukin (IL-2), which is approved for advanced melanomaand RCC (kidney cancer) but has significant side effects. RDB 1419 offers an improved dosing regimen andtolerability vs. Proleukin. RDB 1419 uses ALKS’ proprietary Picasso technology (makes fusion proteins) to yieldan IL-2-derived molecule that binds to the body’s immune cells better and other cells less. Alkermes has filed fora composition of matter patent that would provide protection until 2033. They also filed patent(s) to protect thePicasso technology.
ALKS 7119 (agitation in Alzheimer's) should enter the clinic in early 2016
ALKS 7119 is a novel small molecule that combines NMDA receptor antagonism with serotonin reuptakeinhibition. NMDA receptor antagonists—e.g., ketamine—are primarily used as anesthetics; serotonin reuptakeinhibitors—e.g., Celexa—are primarily used as antidepressants. ALKS is targeting 7119 for the treatment ofagitation in Alzheimer's disease and other psychiatric indications (e.g., treatment-resistant depression).
Exhibit 13:Exhibit 13: MMF concentrations after dosing of8700 vs. Tecfidera
Source: CMSC 2015
Exhibit 14:Exhibit 14: GI and flushing side effects for 8700vs. Tecfidera
Source: CMSC 2015
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ValuationValuation
$85 PT based upon multiple expansion. ALKS is currently trading at a ~12x EV/revenues, using consensus'2016E revenues, which is at a 6% discount to the peer median multiple. Our PT assumes a 33% multipleexpansion from 12x to 16x, which we believe is justified because of our expectation for positive pipeline newsflow. At our $85 price target, ALKS shares would be trading at a 26% premium to the peer median due tostronger pipeline prospects vs. peers. Although our '16E EPS of ($0.39) is below the street's ($0.24) due tohigher spending estimates, we believe this is immaterial to the stock.
Upside risks to our PT. Financial results above expectations. Pipeline developments above our expectationsincluding aripiprazole launch and ALKS 5461 Phase 3 data being better than expected. Management executesvalue-creating deals.
Exhibit 15:Exhibit 15: Valuation comparables
All th e compan ies listed are covered by Matth ew Harrison excep t ALKS an d INCY (n o t covered ).
Sou rce: Th omson Reu ters, Morgan Stan ley Research
Exhibit 16:Exhibit 16: Consensus NTM EV/Revenue for ALKS vs. US Biotech/Specialty Median
Sou rce: Th omson Reu ters, Morgan Stan ley Research
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Downside risks to our PT. Financial results below expectations. Pipeline developments disappoint including asignificant delay to aripiprazole lauroxil approval and ALKS 5461 Phase 3 disappointing in 2016. See more inRisk rewardRisk reward section .
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Exhibit 17:Exhibit 17: Income Statement, Margins & Valuation
N et change in cash 32 57 (23) (142) (41) 1 90 651
Other M etrics 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
LEVERAGE:
N et Debt 2 (273) (147) 28 166 163 (162) (819)
Debt / EBITDA 2.6x 32.7x N M N M N M 10.6x 0.0x 0.0x
N et Debt / EBITDA 0.0x N M N M N M N M 6.0x N M N M
PROFITABILITY:
ROE 17.2% 4.4% -6.6% -5.3% 0.2% 21.0% 52.8% 60.2%
RN OA 2.1% -5.2% -14.9% -16.8% -14.4% -4.3% 19.5% 44.7%
LIQUIDITY:
Current Ratio 5.7 6.7 5.5 4.1 3.1 3.3 4.0 10.1
Quick Ratio 5.2 6.3 5.2 3.8 2.8 3.0 3.6 9.7
OPERATION AL EFFICIEN CY:
Days Receivable 78 84 85 73 69 63 59 61
Days Payable 159 220 332 332 261 228 215 203
Days Inventory 92 101 122 107 86 76 76 76
Sou rce: Morgan Stan ley Research , Compan y Data
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LLC makes a market in the securities of Alkermes Plc., Allergan Plc, Depomed Inc, Endo Health Solutions Inc, Horizon PharmaPLC, Mallinckrodt Plc, Mylan Inc., Phibro Animal Health Corp, Teva Pharmaceutical Industries Ltd., Valeant Pharmaceuticals International, Zoetis Inc..The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based uponvarious factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment bankingrevenues.Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making,providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to andbuys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. 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An investor's decisionto buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.Global Stock Ratings Distribution(as of August 31, 2015)For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside ourratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover.Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (seedefinitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspondEqual-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
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COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC)STOCK RATING CATEGORY COUNT % OF TOTAL COUNT % OF TOTAL
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley receivedinvestment banking compensation in the last 12 months.Analyst Stock RatingsOverweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on arisk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverageuniverse, on a risk-adjusted basis, over the next 12-18 months.Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst'sindustry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, ona risk-adjusted basis, over the next 12-18 months.Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.Analyst Industry ViewsAttractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevantbroad market benchmark, as indicated below.In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broadmarket benchmark, as indicated below.Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broadmarket benchmark, as indicated below.Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe -MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index or MSCI sub-regional index or MSCI AC Asia Pacific ex Japan Index.Stock Price, Price Target and Rating History (See Rating Definitions)
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Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley SmithBarney LLC or Morgan Stanley or any of their affiliates, are available on the Morgan Stanley Wealth Management disclosure website atwww.morganstanley.com/online/researchdisclosures. For Morgan Stanley specific disclosures, you may refer towww.morganstanley.com/researchdisclosures.Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval isconducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.Other Important DisclosuresMorgan Stanley & Co. 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INDUSTRY COVERAGE: Specialty Pharmaceuticals
COMPANY (TICKER) RATING (AS OF) PRICE* (08/31/2015)
David RisingerAlkermes Plc. (ALKS.O) O (09/01/2015) $59.56Allergan Plc (AGN.N) O (11/21/2014) $303.74Depomed Inc (DEPO.O) ++ $26.93Endo Health Solutions Inc (ENDP.O) O (03/05/2015) $77.00Horizon Pharma PLC (HZNP.O) ++ $29.22Mallinckrodt Plc (MNK.N) E (02/12/2014) $86.24Mylan Inc. (MYL.O) ++ $49.59Perrigo Co. (PRGO.N) ++ $182.97Phibro Animal Health Corp (PAHC.O) U (04/21/2015) $35.30Teva Pharmaceutical Industries Ltd. (TEVA.N) O (07/29/2015) $64.41Valeant Pharmaceuticals International (VRX.N) O (01/06/2015) $230.60Zoetis Inc. (ZTS.N) E (11/12/2014) $44.87
Stock Ratings are subject to change. Please see latest research for each company.* Historical prices are not split adjusted.
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