Alkermes Reveals Higher-Than-Expected Royalty on Diabetes Drug

Alkermes is usually cast on Wall Street as a supporting actor in the eagerly-anticipated debut of the once-weekly diabetes drug from Eli Lilly and Amylin Pharmaceuticals. But today, Waltham, MA-based Alkermes, stepped into the spotlight, announcing it stands to collect more cash from the drug than expected.

Alkermes (NASDAQ: ALKS) is reporting today it will capture an 8 percent royalty on sales of exenatide once-weekly (Bydureon) on the first 40 million units sold per year. Assuming Amylin and Lilly set a price for the new drug comparable to the old twice-daily injectable version of exenatide (Byetta), the royalty would apply to the first $2 billion in annual sales. That means Alkermes would rake in $160 million in royalty payments on that amount of sales, which could climb further if Lilly and Amylin set a higher per-unit price for the once-weekly drug.

This financial detail matters because it’s the first time Alkermes has publicly stated what its actual royalty rate is for exenatide once-weekly. Until today, it has told analysts they could pencil in a 7 percent royalty for the purpose of their financial models. Since none of the 10 analysts who follow the company forecast more than $2 billion in annual sales for exenatide once-weekly, this means they will need to re-do their forecasts to reflect the extra percentage point of royalties flowing to Alkermes. It might not sound like much, but at a $2 billion sales rate, that’s an extra $20 million a year in potential revenue.

Then again, if this drug enters true mega-blockbuster territory with multiple billions in annual sales, the deal is structured so Alkermes will get a smaller piece of the pie. Once the product exceeds 40 million units sold in a given year, Alkermes’ royalty rate shrinks to 5.5 percent on every unit sale above that threshold.

Richard Pops

Richard Pops

The news is coming out this morning partly because Alkermes is trying to generate buzz around its R&D meeting in New York, and get people to start thinking about the company as an emerging player in the “Big Biotech” class, as Alkermes CEO Richard Pops has said before. With a market valuation of about $1.3 billion, Alkermes isn’t there yet.

“We’ll be making profits from the first vial of sales,” Pops says. “If it’s a $5 billion product, we’ll make hundreds of millions per year. With no capital investment. It’s pure profit.”

This royalty deal was established back in 2005, Pops says. Alkermes was the only company capable of doing the chemistry needed to make exenatide stable and effective in the blood for a full week, allowing people to rid themselves of the need for constant blood sugar monitoring, and frequent injections. Instead of shouldering the risk for manufacturing on its own, Alkermes chose to transfer the manufacturing technology to its partners. That left Lilly and Amylin the responsibility to build the factory to mass produce the drug, and pay commercial expenses, while Alkermes took a royalty stream, Pops says. The factory, which Amylin announced it planned to build in West Chester, OH in December 2005 for $150 million, actually ended up costing about $500 million.

So while the new royalty is the thing that will send analysts back to their spreadsheets to re-calculate their price targets for Alkermes, Pops is planning to spend much of the investor summit talking about stuff in the company’s pipeline that analysts don’t place any value on whatsoever. Alkermes’ share price … Next Page »

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