How Alkermes Survived a Brush With Death

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this happened, or what kinds of steps J&J and Alkermes thought were necessary to satisfy the FDA’s concerns. The rest of the statement emphasized everything else in the Alkermes pipeline, attempting to show investors that all was not lost.

The message didn’t go over well. Alkermes stock lost almost 70 percent that day, July 1.

“Phones were ringing, people were asking ‘What happened?’” Pops said. “We had no indication. We had no prelude to this. Sometimes when an application is problematic, you have frequent interaction with the [FDA] and you have an idea what’s coming. In this kind of situation, when you’re telling the street you didn’t know, your credibility is blown. Not only that, but all our financial forecasts, based on assumptions of royalties from J&J—none of it was valid anymore.”

Lots of bad things were inevitable in this kind of situation. Shareholder lawsuits were bound to come, with lawyers asking Pops what he knew and when he knew it. There was a good possibility that some Big Pharma company might try to seize on his misfortune, and make a hostile takeover bid at a low-ball stock price. Employees had to be reassured there was a plan moving forward, lest they think about jumping ship to go work somewhere with better prospects.

Alkermes needed to act fast. It had $110 million of cash in the bank, but had burned $30 million of it in the most recent quarter. At that spending rate, Alkermes would run out of money in a year. The stock crash made it practically impossible to raise more equity financing, at least at anything resembling decent terms. Besides, the remaining shareholders would have screamed bloody murder about excessive dilution. Pops had tried to put together a diversified portfolio of products, so selling off assets on the cheap would undermine the long-term plan. Borrowing short-term money at favorable terms from a bank? Not gonna happen in a risky business like biotech.

“There were two things we had to do immediately: Reduce costs and raise money,” Pops said last week.

As he put it in his Sloan case study to business students:

Working in your favor is the simple fact that you have a very strong company—world class science, excellent partners, bright employees, exciting pipeline. The only sure way to destroy it all is to run out of money. You are going to have to cut programs, reduce the budget and lay off a significant number of good, hard-working employees.

 On Aug. 26, the company terminated 122 people, about 23 percent of its workforce.

While Alkermes sought to understand what went wrong with the J&J application (some data on drug toxicology in rats needed to be clarified), there were other pressing matters to handle. Alkermes had one other important partner at the time, Indianapolis-based Eli Lilly (NYSE: LLY). Lilly had a longstanding franchise in making insulin for diabetics. It had partnered with Alkermes to make an inhalable form. At the time, it looked like a convenient way to help diabetics manage their disease without the hassle of regular injections.

A team of about 40 people was working on the project at Alkermes. Pops and others on his management team flew to Indianapolis to meet with Lilly executives to get some assurance that they were still excited, and committed to the program. If nothing else, that would give Pops the confidence to shield the inhaled insulin group from layoffs, and give him something positive to talk about with investors while the Risperdal Consta issue was being sorted out with the FDA. He knew that if Lilly backed out of the inhaled insulin program while Consta was still in regulatory limbo, it could be the end of the company.

Assurances from Lilly didn’t come, at least not right away. Things actually got more dicey. Lilly initially told him there was no budget for the inhaled insulin program in 2003. At the time, Lilly was under financial pressure because of the loss of the patent on its blockbuster antidepressant fluoxetine (Prozac). (After making Alkermes sweat a while, Lilly followed through and financed the inhaled insulin work it had agreed to do.)

Adding to Pops’s headaches was a pending merger he had negotiated the year before. Alkermes had agreed in December 2001 to pay $100 million to merge with Corner Lakes, NJ-based Reliant Pharmaceuticals. “We were on our way to building a great company,” Pops recalls. Instead, on Aug. 14, Alkermes pulled the plug on its pending merger “due to general market conditions,” according to a footnote in its annual report that year. (GlaxoSmithKline eventually paid $1.65 billion to acquire Reliant, the maker of an omega-3 fatty acid drug marketed as Lovaza).

Just a little bit of good news came that same month. The longer-lasting J&J product was approved for sale in Germany and the United Kingdom. That gave investors some hope that the issue with the FDA might be solvable.

Still, Alkermes was burning a lot of cash and couldn’t count on big-time royalties it was expecting from U.S. sales. It refinanced some convertible debt, by pushing back the repayment date back from 2007 to 2009, while accepting a higher interest rate. As part of the deal, Alkermes brought in another $50 million in cash.

“We were able to fight another day,” Pops said.

For months, Alkermes management spent time figuring out what the gaps were in the application around toxicology studies in rats. The company sought to explain the situation clearly to investors. By April, J&J submitted a formal response to the FDA. Pops spoke with more confidence in a company statement: “This submission represents an important step towards our goal of bringing the first long-acting atypical antipsychotic drug to patients with schizophrenia in the U.S.”

Six months later, the FDA cleared the drug for sale. Alkermes stock was up, and it was back on its feet. As predicted, Risperdal Consta turned into a cash cow. In the end, Alkermes survived. The company has been around 26 years, making it one of the granddaddies of biotech.

Years later, when Pops tells the story to business students, he emphasizes how important it was to think fast about how deep to cut, and where to find money in his hour of need. The near death of two important pipeline programs reminds him of the importance of having a diversified pipeline. “Many biotechs are built by a scientist saying ‘Eureka, it works’ with a single asset,” Pops said. “You can do it that way, but it’s not a good bet.”

For years, Pops has said publicly that he wants to build Alkermes into the next “Big Biotech.” It’s not yet in the same league of the really big companies like Amgen, Biogen Idec, Gilead Sciences, and Celgene. But like any company with ambitious long-term goals, Alkermes has had to switch into short-term survival mode to keep its eye on the long-term prize. I look forward to fleshing out a few more of these stories at “Building Biotechs to Last” in SF on Dec. 9.

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2 responses to “How Alkermes Survived a Brush With Death”

  1. Daniel G. Eramian says:

    Pops built credibility as he built the company.

  2. Mogens Vang Rasmussen says:

    An exellent example of the shortsightedness in the venture capital and biotech “industry” today, which believe that they can build everything on one project and outsource everything to external partners without building core competences in house around a diverse product portfolio.