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 of $13 currently reflects how much cash it has in the bank, the value of its stake in Johnson & Johnson’s risperidone (Risperdal Consta) for schizophrenia, and some anticipated future revenue for the longer-lasting diabetes drug, Pops says.

Here’s a preview of some of the other things Pops plans to talk about with investors today.

—Back in February, Alkermes unveiled it has developed a new chemical method for making drugs last longer in the bloodstream that’s supposed to be cheaper and easier than the technique being used for the once-weekly diabetes drug. This new method, called LinkeRx, is being applied to a longer-lasting version of Bristol-Myers Squibb’s aripiprazole, a $2 billion-a-year antipsychotic marketed as Abilify. But that’s not the only antipsychotic Alkermes thinks it can improve upon.

Today, Alkermes is announcing it is working on a once-monthly injectable version of one of the world’s biggest-selling psychiatric drugs, Eli Lilly’s olanzapine (Zyprexa). Alkermes’ philosophy with long-lasting antipsychotic drugs is that they avoid the peaks and valleys in the drug’s blood concentration that can lead to side effects on the high end, and insufficient treatment on the low end. Plus, a long-lasting injectable helps ensure mentally ill patients can stay on their meds, because they don’t need to remember to take them every day.

Lilly has developed its own FDA-approved longer-lasting version of olanzapine (Zyprexa Relprew) as well, although it creates hassles because patients need to be monitored for several hours after they get a dose, to make sure they aren’t among the 1 percent who suffer from a dangerous side effect called somnolence. Patients with that side effect become heavily sedated, which can be really bad if it happens while you’re driving home.

Alkermes believes that its longer-lasting version, ALKS 7921, has been engineered to avoid high concentrations that can lead to somnolence, Pops says. The drug candidate is being timed to enter the clinic in 2011.

If Pop’s optimism turns out to be justified in clinical trials, then Alkermes could have a serious rival to a drug that generated $4.9 billion in worldwide sales in 2009. “Zyprexa is a mainstay therapy in the psychiatric community,” Pops says.

—While Alkermes anticipates most of its cash flow via deals in which it improves upon drugs from other companies, it also aspires to develop its own oral pills.

One of those is ALKS 37, a drug being developed for the constipation that many people get in the hospital when they take opioid-based narcotic pain relievers, like morphine. Alkermes is now planning a study of 60 patients, in which it will randomly assign them to get a placebo or the new drug. That trial should produce preliminary results before the end of March 2011, Pops says.

There is competition in this space. San Carlos, CA-based Nektar Therapeutics (NASDAQ: NKTR) received a $125 million upfront payment from AstraZeneca last year for a drug to treat opioid-induced constipation. Tarrytown, NY-based Progenics Pharmaceuticals (NASDAQ: PGNX) has a product for this as well. Both are injectables, while the Alkermes drug is an oral pill.

“We think a drug in this class needs to be an oral,” Pops says.

—Lastly, Alkermes will roll out its clinical plan for ALKS 33. This product has been tested to help people kick alcoholism, like another Alkermes product that has never generated much in the way of sales, naltrexone (Vivitrol). Pops acknowledges that nobody cares much to hear about drugs to help treat alcoholism.

But ALKS 33 is really a “Trojan horse,” which Alkermes is studying in a broad range of reward disorders and impulse control problems, of which alcoholism is just one component. Alkermes has studied it in alcoholism first because it has experience in the field and relationships with physicians, but it is now ready to branch into studies for binge eating, and in a combination trial with buprenorphine for addiction and mood disorders.

Data from an ongoing mid-stage study of ALKS 33 for alcohol dependence should be ready by the end of 2010, while the binge-eating study should generate results by the end of June 2011, Pops says. (By the way, Pops will be a featured speaker at Xconomy’s XSITE 2010 conference at Babson College on June 17.)

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