Alkermes Knocks on Door of Biotech Big Leagues, Aims to Make Drugs of its Own

Xconomy Boston — 

People in the life sciences business throw around the term “Big Biotech” as a way to distinguish the industry’s elites from the money-losing masses in the product-development stage. The “Big Biotechs” are the industry’s select few profitable companies with multi-billion dollar stock valuations, like Amgen, Genentech, Gilead Sciences, Celgene, and a duo from Cambridge, MA—Genzyme and Biogen Idec. Now another Cambridge neighbor, Alkermes, says it is pounding on the door of that club.

I gathered some of this insight into Alkermes’ thinking last month at an investor meeting in San Francisco, where I talked with chairman Richard Pops and chief financial officer Jim Frates. They were somewhat unnerved by the financial crisis, but said they took some comfort in being able to sell investors on that rarest of entities—a profitable biotech company with growth potential.

Alkermes (ALK-ur-meez) was founded in 1987, and like the usual biotech company, it lost money for its first 20 years. Alkermes’ calling card all those years was its expertise in making existing drugs more stable and longer-lasting in the bloodstream, allowing for less frequent dosing. It has sought help from partners along the way. That softened the R&D bills, lowered the company’s risk, and also limited its ability to reap the rewards from its work. But now that one of its partnered products with Johnson & Johnson, a long-acting version of the drug risperidone, marketed as Risperdal Consta for schizophrenia, has become a $1.3 billion-a-year hit, it has turned Alkermes into a consistently profitable company. That’s enabled the company to build all the capability it needs to develop drugs from start to finish, and market them on its own, just like the rest of the class in “Big Biotech.”

“Now we actually have an economic business,” Pops says. “As a biotech company, you spend the first decade or two as a science project. It’s not really a business. It’s funded by investors who are willing to take risk. Now we’re in a different place. The whole nature of the risk profile changes over time.”

The strategy, Pops says, was to build the company in a step-by-step manner. Alkermes never bet the company on a single drug, a strategy Pops calls “the classic biotech gamble.” Instead, Alkermes chose to hone its proprietary technology, he says. Despite a big setback last year when Eli Lilly pulled the plug on an inhaled insulin partnership, Alkermes steadily developed enough of a royalty stream off partners’ products to switch over into profitability from 2006 through 2008. It did this while building up enough in-house talent (610 employees as of last March) and proprietary resources (it has its own drug factory) to turn the company into an independent operation, rather than an R&D shop for big drugmakers. The company made an important strategic move in that direction in December by adding a 70-person sales and marketing staff, and acquiring 100 percent of the commercial rights from Frazer, PA-based Cephalon to naltrexone (Vivitrol) for alcohol dependence.

“We know how to develop drugs that get approved by FDA, we have a factory, we have proprietary technology, it’s patented, we have people who can do it. Why do it all for pharmaceutical companies anymore? Now we can do it ourselves,” Pops says.

Still, Alkermes’ business depends heavily on riding a wave of royalties from its big partner, Johnson & Johnson. The Alkermes technology was particularly useful for schizophrenia, as many schizophrenia patients struggle to take their pills every day, causing relapses. The Alkermes technology transformed a daily pill into an every-other-week injection. It also enables the medication to remain stable in the blood for a full two weeks, allowing patients to avoid the peaks and valleys of concentration in the bloodstream that can lead to spotty effectiveness, Pops says. (This week, the FDA delayed an application to expand the drug’s use to bipolar disorder.)

Since about 1.5 million people worldwide get diagnosed with schizophrenia each year, and patients depend on their medication, even in a downturn, this is not a bad pharmaceutical business to be in. Plus, Alkermes has built up a formidable cash reserve of $423 million as of the end of the year, that is growing as the company has become cash-flow positive.

From a stock perspective, Alkermes still isn’t thought of as anywhere near the top tier of biotech. Its market valuation was just a shade over $1 billion as of yesterday’s close. Partly because Alkermes isn’t in the lead storytelling role for Risperdal Consta—it collects a 10 percent royalty on worldwide sales—the company flies below a lot of investors’ radar screens. “We believe the company is well-positioned in this uncertain economic environment,” wrote JP Morgan analyst Cory Kasimov in a note to clients last week. “We feel the company is still surprisingly underappreciated by many investors.”

This year, Alkermes is counting on doing two big things to take its game to a higher level. The first is with exenatide LAR, which is vying to become the first FDA approved once-weekly injectable drug for diabetes. If this drug can make it through the FDA—still a sizable if—it will be marketed by Eli Lilly and Amylin Pharmaceuticals. In the background, without spending any of its money on the marketing rollout, will be Alkermes, collecting a 7 percent royalty on worldwide sales.

“Lilly and Amylin have to launch the product, and go into the money-losing launch phase, but we’re quite happy, because we’ll get our profits from the first dime,” Frates says.

The next piece of the strategy will be to boost sales of its alcohol-dependence drug—which aren’t much, at an estimated $5 million to $8 million in fiscal 2009, Alkermes says. The company is hoping this drug has something in common with Risperdal Consta, in which a long-lasting injectable drug might have an advantage in treating a population of patients who have a hard time taking their meds consistently, Pops says. Based on greater insights into the biology of addiction, Alkermes is going to try to expand the drug’s use more broadly over time to people who suffer from addictions to opiates, Pops says.

How this experience goes in clinical trials will go a long way toward establishing Alkermes’ identity in the biotech industry. It might even propel the company into the league of “Big Biotech.” Profitability is not a bad word to have on a PowerPoint slide when investors are feeling freaked out.

“We’re right on the threshold,” of being a “Big Biotech,” Pops says. “We’re no longer money-losing, equity-dependent biotech. The Street is waiting for us, now that we’re profitable, to see whether the explosive growth will come from our next product.”

By posting a comment, you agree to our terms and conditions.

Comments are closed.