e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30, 2007
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number 1-14131
ALKERMES, INC.
(Exact name of registrant as
specified in its charter)
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PENNSYLVANIA
(State or other
jurisdiction of
incorporation or organization)
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23-2472830
(I.R.S. Employer
Identification No.)
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88 Sidney Street, Cambridge,
MA
(Address of principal
executive offices)
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02139-4234
(Zip
Code)
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Registrant’s telephone number including area code:
(617) 494-0171
(Former name, former address,
and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act.): Yes o No þ
The number of shares outstanding of each of the issuer’s
classes of common stock was:
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As of August 3,
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Class
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2007
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Common Stock, $.01 par value
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101,559,841
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Non-Voting Common Stock,
$.01 par value
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382,632
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ALKERMES,
INC. AND SUBSIDIARIES
INDEX
2
PART 1.
FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements:
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ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
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June 30,
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March 31,
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2007
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2007
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(In thousands, except share and per share amounts)
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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60,990
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$
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80,500
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Investments — short-term
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264,762
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271,082
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Receivables
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66,782
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56,049
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Inventory
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20,218
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18,190
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Prepaid expenses and other current
assets
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9,063
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7,054
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Total current assets
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421,815
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432,875
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PROPERTY, PLANT AND EQUIPMENT:
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Land
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301
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301
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Building and improvements
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31,708
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25,717
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Furniture, fixtures and equipment
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65,042
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64,203
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Equipment under capital lease
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464
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464
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Leasehold improvements
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32,375
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32,345
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Construction in progress
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45,180
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42,442
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175,070
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165,472
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Less: accumulated depreciation and
amortization
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(44,807
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)
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(41,877
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)
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Property, plant and
equipment — net
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130,263
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123,595
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RESTRICTED INVESTMENTS
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5,144
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5,144
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OTHER ASSETS
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7,036
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7,007
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TOTAL ASSETS
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$
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564,258
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$
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568,621
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LIABILITIES AND
SHAREHOLDERS’ EQUITY
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CURRENT LIABILITIES:
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Accounts payable and accrued
expenses
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$
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26,714
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$
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45,855
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Accrued interest
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2,975
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2,976
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Unearned milestone
revenue — current portion
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6,333
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11,450
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Deferred revenue —
current portion
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705
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200
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Long-term debt — current
portion
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1,288
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1,579
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Total current liabilities
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38,015
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62,060
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NON-RECOURSE RISPERDAL CONSTA
SECURED 7% NOTES
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157,694
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156,851
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LONG-TERM DEBT
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28
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47
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UNEARNED MILESTONE
REVENUE — LONG-TERM PORTION
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115,738
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117,300
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DEFERRED REVENUE —
LONG-TERM PORTION
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23,242
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22,153
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OTHER LONG-TERM LIABILITIES
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6,622
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6,749
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TOTAL LIABILITIES
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341,339
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365,160
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COMMITMENTS AND CONTINGENCIES
(Notes 8 and 9)
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SHAREHOLDERS’ EQUITY:
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Capital stock, par value, $0.01 per
share; authorized, 4,550,000 shares (includes
3,000,000 shares of preferred stock); issued, none
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—
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—
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Common stock, par value, $0.01 per
share; authorized, 160,000,000 shares; 102,168,103 and
101,550,673 shares issued, 101,344,426 and
100,726,996 shares outstanding at June 30, 2007 and
March 31, 2007, respectively
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1,022
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1,015
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Non-voting common stock, par value,
$0.01 per share; authorized, 450,000 shares; issued and
outstanding, 382,632 shares at June 30, 2007 and
March 31, 2007
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4
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4
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Treasury stock, at cost
(823,677 shares at June 30, 2007 and March 31,
2007)
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(12,492
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)
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(12,492
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)
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Additional paid-in capital
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848,955
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837,727
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Accumulated other comprehensive
income
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228
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753
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Accumulated deficit
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(614,798
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)
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(623,546
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)
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TOTAL SHAREHOLDERS’ EQUITY
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222,919
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203,461
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TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY
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$
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564,258
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$
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568,621
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
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Three Months Ended June 30,
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2007
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2006
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(In thousands, except per share amounts)
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REVENUES:
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Manufacturing revenues
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$
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31,517
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$
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22,193
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Royalty revenues
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6,982
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5,139
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Research and development revenue
under collaborative arrangements
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23,450
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14,464
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Net collaborative profit
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6,989
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9,742
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Total revenues
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68,938
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51,538
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EXPENSES:
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Cost of goods manufactured
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10,145
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9,338
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Research and development
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32,619
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25,863
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Selling, general and administrative
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15,400
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16,530
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Total expenses
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58,164
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51,731
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OPERATING INCOME (LOSS)
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10,774
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(193
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)
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OTHER INCOME (EXPENSE):
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Interest income
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4,402
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4,335
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Interest expense
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(4,073
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)
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(5,473
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)
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Other income (expense), net
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26
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787
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Total other income (expense)
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355
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(351
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)
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INCOME (LOSS) BEFORE INCOME TAXES
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11,129
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(544
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)
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INCOME TAXES
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2,382
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171
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|
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NET INCOME (LOSS)
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$
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8,747
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$
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(715
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)
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EARNINGS (LOSS) PER COMMON SHARE:
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BASIC
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$
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0.09
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$
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(0.01
|
)
|
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|
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|
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DILUTED
|
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$
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0.08
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$
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(0.01
|
)
|
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WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING:
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|
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|
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BASIC
|
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101,324
|
|
|
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93,784
|
|
|
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|
|
|
|
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DILUTED
|
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104,191
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|
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93,784
|
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|
|
|
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|
|
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|
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
ALKERMES,
INC. AND SUBSIDIARIES
(unaudited)
| |
|
|
|
|
|
|
|
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|
Three Months Ended
|
|
|
|
|
June 30,
|
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|
|
|
2007
|
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|
2006
|
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(In thousands)
|
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CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
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|
|
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Net income (loss)
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|
$
|
8,747
|
|
|
$
|
(715
|
)
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|
Adjustments to reconcile net income
(loss) to cash flows from operating activities:
|
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Share-based compensation
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5,747
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|
|
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8,347
|
|
|
Depreciation and amortization
|
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|
2,930
|
|
|
|
2,826
|
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Other non-cash charges
|
|
|
1,064
|
|
|
|
1,215
|
|
|
Change in fair value of warrants
|
|
|
(196
|
)
|
|
|
(846
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)
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Gain on sale of equipment
|
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|
—
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|
5
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|
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Changes in assets and liabilities:
|
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|
|
|
|
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|
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Receivables
|
|
|
(11,805
|
)
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|
|
(1,551
|
)
|
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Inventory, prepaid expenses and
other current assets
|
|
|
(7,197
|
)
|
|
|
(5,401
|
)
|
|
Accounts payable, accrued expenses
and accrued interest
|
|
|
(19,414
|
)
|
|
|
(7,529
|
)
|
|
Unearned milestone revenue
|
|
|
(6,679
|
)
|
|
|
81,103
|
|
|
Deferred revenue
|
|
|
2,666
|
|
|
|
(50
|
)
|
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Other long-term liabilities
|
|
|
(28
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from operating activities
|
|
|
(24,165
|
)
|
|
|
77,422
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
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Additions to property, plant and
equipment
|
|
|
(6,462
|
)
|
|
|
(6,160
|
)
|
|
Purchases of short and long-term
investments
|
|
|
(140,812
|
)
|
|
|
(63,374
|
)
|
|
Sales and maturities of short and
long-term investments
|
|
|
146,562
|
|
|
|
67,096
|
|
|
(Increase) decrease in other assets
|
|
|
(8
|
)
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
(720
|
)
|
|
|
(2,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
5,627
|
|
|
|
2,268
|
|
|
Excess tax benefit from stock
options
|
|
|
58
|
|
|
|
—
|
|
|
Payment of debt
|
|
|
(310
|
)
|
|
|
(294
|
)
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(2,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
5,375
|
|
|
|
(653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(19,510
|
)
|
|
|
74,345
|
|
|
CASH AND CASH
EQUIVALENTS — Beginning of period
|
|
|
80,500
|
|
|
|
33,578
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS — End of period
|
|
$
|
60,990
|
|
|
$
|
107,923
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
3,003
|
|
|
$
|
4,511
|
|
|
Cash paid for income taxes
|
|
$
|
380
|
|
|
$
|
—
|
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
Conversion of 2.5% convertible
subordinated notes into common stock
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
Purchased capital expenditures
included in accounts payable
|
|
$
|
3,136
|
|
|
$
|
—
|
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The accompanying condensed consolidated financial statements of
Alkermes, Inc. (the “Company” or “Alkermes”)
for the three months ended June 30, 2007 and 2006 are
unaudited and have been prepared on a basis substantially
consistent with the audited financial statements for the year
ended March 31, 2007. In the opinion of management, the
condensed consolidated financial statements include all
adjustments that are necessary to present fairly the results of
operations for the reported periods. The Company’s
condensed consolidated financial statements are prepared in
conformity with accounting principles generally accepted in the
United States of America (commonly referred to as
“GAAP”).
These financial statements should be read in conjunction with
the Company’s audited consolidated financial statements and
notes thereto which are contained in the Company’s Annual
Report on
Form 10-K
for the year ended March 31, 2007, filed with the
Securities and Exchange Commission (“SEC”).
The results of the Company’s operations for any interim
period are not necessarily indicative of the results of the
Company’s operations for any other interim period or for a
full fiscal year.
Principles of Consolidation — The condensed
consolidated financial statements include the accounts of
Alkermes, Inc. and its wholly-owned subsidiaries: Alkermes
Controlled Therapeutics, Inc.; Alkermes Europe, Ltd. and RC
Royalty Sub LLC (“Royalty Sub”). The assets of Royalty
Sub are not available to satisfy obligations of Alkermes and its
subsidiaries, other than the obligations of Royalty Sub
including Royalty Sub’s non-recourse RISPERDAL CONSTA
secured 7% notes (the “Non-Recourse
7% Notes”). Intercompany accounts and transactions
have been eliminated.
Use of Estimates — The preparation of the
Company’s condensed consolidated financial statements in
conformity with GAAP necessarily requires management to make
estimates and assumptions that affect the following:
(1) reported amounts of assets and liabilities;
(2) disclosure of contingent assets and liabilities at the
date of the condensed consolidated financial statements; and
(3) the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these
estimates.
Income
Taxes
Effective April 1, 2007, the Company adopted Financial
Accounting Standards Board (“FASB”) Interpretation
No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN No. 48”).
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial
statements in accordance with FASB Statement No. 109,
“Accounting for Income Taxes.”
FIN No. 48 also prescribes a recognition threshold
and measurement attribute for the financial statement
recognition and measurement of each tax position taken or
expected to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. See
Note 8, Income Taxes, to the condensed consolidated
financial statements for a discussion of the Company’s
accounting for uncertain tax positions.
New
Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurements”
(“SFAS No. 157”), which establishes a
framework for measuring fair value in GAAP and expands
disclosures about the use of fair value to measure assets and
liabilities in interim and annual reporting periods subsequent
to initial recognition. Prior to SFAS No. 157, which
emphasizes that fair value is a market-based measurement and not
an entity-specific measurement, there were different definitions
of fair value and limited guidance for applying those
definitions in GAAP. SFAS No. 157 is effective for the
6
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Company for the reporting period beginning April 1, 2008.
The Company is in the process of evaluating the impact of the
adoption of SFAS No. 157 on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115” (“SFAS No. 159”).
SFAS No. 159 permits entities to elect to measure
selected financial instruments and certain other items at fair
value. Unrealized gains and losses on items for which the fair
value option has been elected are recognized in earnings at each
reporting period. SFAS No. 159 is effective for the
Company for the reporting period beginning April 1, 2008.
The Company is in the process of evaluating the impact of the
adoption of SFAS No. 159 on its consolidated financial
statements.
In June 2007, the Emerging Issues Task Force (“EITF”)
of the FASB reached a consensus on Issue
07-03,
“Accounting for Nonrefundable Advance Payments for Goods
or Services to Be Used in Future Research and Development
Activities,”
(“EITF 07-03”),
which addresses the diversity which exists with respect to the
accounting for the non-refundable portion of a payment made by a
research and development entity for future research and
development activities. Under
EITF 07-03,
an entity would defer and capitalize non-refundable advance
payments made for research and development activities until the
related goods are delivered or the related services are
performed.
EITF 07-03
is effective for fiscal years beginning after December 15,
2007 and interim periods within those years. Accordingly, the
Company is in the process of evaluating the impact of
EITF 07-03,
however, the Company does not expect it to have a significant
impact on its consolidated financial statements.
|
|
|
2.
|
COMPREHENSIVE
INCOME (LOSS)
|
Comprehensive income (loss) for the three months ended
June 30, 2007 and 2006 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,747
|
|
|
$
|
(715
|
)
|
|
Unrealized (loss) gain on
available-for-sale investments
|
|
|
(525
|
)
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
8,222
|
|
|
$
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
EARNINGS
(LOSS) PER COMMON SHARE
|
Basic earnings (loss) per common share is calculated based upon
net income (loss) available to holders of common shares divided
by the weighted average number of shares outstanding. For the
calculation of diluted earnings per common share, the Company
uses the weighted average number of shares outstanding, as
adjusted for the effect of potential outstanding shares,
including stock options, stock awards, redeemable convertible
preferred stock and convertible debt. For periods during which
the Company reports a net loss from operations, basic and
diluted net loss per common share are equal since the impact of
potential common shares would have an anti-dilutive effect.
7
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Basic and diluted earnings (loss) per common share are
calculated as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,747
|
|
|
$
|
(715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding
|
|
|
101,324
|
|
|
|
93,784
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,553
|
|
|
|
—
|
|
|
Restricted stock awards
|
|
|
314
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common share equivalents
|
|
|
2,867
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculating diluted
earnings (loss) per common share
|
|
|
104,191
|
|
|
|
93,784
|
|
|
|
|
|
|
|
|
|
|
|
The following amounts are not included in the calculation of net
income (loss) per common share because their effects are
anti-dilutive:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
11,956
|
|
|
|
19,420
|
|
|
Restricted stock awards
|
|
|
—
|
|
|
|
127
|
|
|
2.5% convertible subordinated notes
|
|
|
—
|
|
|
|
7,438
|
|
|
3.75% convertible subordinated
notes
|
|
|
—
|
|
|
|
10
|
|
|
Redeemable convertible preferred
stock
|
|
|
—
|
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,956
|
|
|
|
27,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
SHARE-BASED
COMPENSATION
|
Share-based compensation expense for the three months ended
June 30, 2007 and 2006 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
|
|
June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Cost of goods manufactured
|
|
$
|
626
|
|
|
$
|
260
|
|
|
Research and development
|
|
|
1,851
|
|
|
|
2,836
|
|
|
Selling, general and administrative
|
|
|
3,270
|
|
|
|
5,251
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,747
|
|
|
$
|
8,347
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007 and 2006, $0.4 million and
$0.7 million, respectively, of share-based compensation
cost was capitalized and recorded under the caption
“Inventory” in the condensed consolidated balance
sheets.
8
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Inventory is stated at the lower of cost or market value. Cost
is determined using the
first-in,
first-out method. Inventory consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
8,448
|
|
|
$
|
7,238
|
|
|
Work in process
|
|
|
3,967
|
|
|
|
4,291
|
|
|
Finished goods
|
|
|
7,803
|
|
|
|
6,661
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,218
|
|
|
$
|
18,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
2007
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
accounts payable
|
|
$
|
10,987
|
|
|
$
|
12,097
|
|
|
Accrued expenses related to
collaborative arrangements
|
|
|
947
|
|
|
|
16,155
|
|
|
Accrued compensation
|
|
|
4,645
|
|
|
|
10,917
|
|
|
Accrued interest
|
|
|
2,975
|
|
|
|
2,975
|
|
|
Accrued other
|
|
|
7,160
|
|
|
|
3,711
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,714
|
|
|
$
|
45,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
RESTRUCTURING
OF OPERATIONS
|
In June 2004, the Company and its former collaborative partner
Genentech, Inc. announced the decision to discontinue
commercialization of NUTROPIN
DEPOT®
(the “2004 Restructuring”). In connection with the
2004 Restructuring, the Company recorded net restructuring
charges of $11.5 million in the year ended March 31,
2005. As of June 30, 2007, the Company had paid in cash,
written down, recovered and made restructuring charge
adjustments that aggregated approximately $10.5 million in
connection with the 2004 Restructuring.
The following table displays the restructuring activity during
the three months ended June 30, 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Balance
|
|
|
|
March 31,
|
|
|
|
June 30,
|
|
|
|
2007
|
|
Payments
|
|
2007
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Facility closure
|
|
$
|
1,079
|
|
|
$
|
(96
|
)
|
|
$
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,079
|
|
|
$
|
(96
|
)
|
|
$
|
983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company records a deferred tax asset or liability based on
the difference between the financial statement and tax bases of
assets and liabilities, as measured by enacted tax rates assumed
to be in effect when these differences reverse. As of
June 30, 2007, the Company determined that the deferred tax
assets may not be realized and a full valuation allowance has
been recorded.
9
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The provision for income taxes in the amount of approximately
$2.4 million for the three months ended June 30, 2007
relates to the U.S. alternative minimum tax
(“AMT”). The utilization of tax loss carryforwards is
limited in the calculation of AMT and as a result, a federal tax
charge was recorded in the three months ended June 30, 2007
and 2006. The current AMT liability is available as a credit
against future tax obligations upon the full utilization or
expiration of the Company’s net operating loss
carryforward. The provision for income taxes for the three
months ended June 30, 2007 and 2006 was prepared on a
discrete quarterly basis, as a yearly effective tax rate was not
considered a reliable estimate for the current quarter
provision. This provision reflects tax recognition of the entire
$110.0 million nonrefundable milestone payment the Company
received from Cephalon in the first quarter of fiscal 2007 under
its collaborative arrangement.
The Company adopted FIN No. 48 on April 1, 2007.
The implementation of FIN No. 48 did not have a
material impact on the Company’s condensed consolidated
financial statements or results of operations. At the adoption
date of April 1, 2007, and also at June 30, 2007, the
Company had no significant unrecognized tax benefits. The tax
years 1993 through 2006 remain open to examination by major
taxing jurisdictions to which the Company is subject, which are
primarily in the United States (“U.S.”). The Company
is currently in the process of conducting a study of its
research and development credit carryforwards. This study may
result in an adjustment to the Company’s research and
development credit carryforwards, however, until the study is
completed and any adjustment is known, no amounts are being
presented as an uncertain tax position under
FIN No. 48. A full valuation allowance has been
provided against the Company’s research and development
credits, and, if an adjustment is required, this adjustment
would be offset by an adjustment to the valuation allowance.
Thus, there would be no impact to the condensed consolidated
balance sheet or statement of operations if an adjustment were
required.
In addition, the Company recently concluded a study of its net
operating loss (“NOL”) carryforwards to determine
whether such amounts are limited under IRC Sec. 382. The Company
does not believe the limitations will significantly impact its
ability to offset income with available NOLs.
The Company has elected to include interest and penalties
related to uncertain tax positions as a component of its
provision for taxes. For the three months ended June 30,
2007, the Company did not recognize any accrued interest and
penalties in its condensed consolidated financial statements.
On October 10, 2006, a purported shareholder derivative
lawsuit, captioned “Thomas Bennett, III vs. Richard
Pops et al.” and docketed as CIV-06-3606, was filed
ostensibly on the Company’s behalf in Middlesex County
Superior Court, Massachusetts. The complaint in that lawsuit
alleged, among other things, that, in connection with certain
stock option grants made by the Company, certain of its
directors and officers committed violations of state law,
including breaches of fiduciary duty. The complaint named the
Company as a nominal defendant, but did not seek monetary relief
from the Company. The lawsuit sought recovery of damages
allegedly caused to the Company as well as certain other relief,
including an order requiring the Company to take action to
enhance its corporate governance and internal procedures. The
defendants moved to dismiss the lawsuit and, following oral
argument, the Massachusetts Superior Court issued a decision
dated July 10, 2007 granting the defendants’ motion to
dismiss the lawsuit in its entirety.
The Company has received four letters, allegedly sent on behalf
of owners of its securities, which claim, among other things,
that certain of the Company’s officers and directors
breached their fiduciary duties to the Company by, among other
allegations, allegedly violating the terms of its stock option
plans, allegedly violating generally accepted accounting
principles in the U.S. by failing to recognize compensation
expenses with respect to certain option grants during certain
years, and allegedly publishing materially inaccurate financial
statements relating to the Company. The letters demand, among
other things, that the Company’s board of directors take
action on its behalf to recover from the current and former
officers and directors identified in the letters the damages
allegedly sustained by the Company as a result of their alleged
conduct,
10
ALKERMES,
INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
among other amounts. The letters do not seek any monetary
recovery from the Company. The Company’s board of directors
appointed a special independent committee of the board of
directors to investigate, assess and evaluate the allegations
contained in these and any other demand letters relating to the
Company’s stock option granting practices and to report its
findings, conclusions and recommendations to the Company’s
board of directors. The special independent committee was
assisted by independent outside legal counsel. In November 2006,
based on the results of its investigation, the special
independent committee of the Company’s board of directors
concluded that the assertions contained in the demand letters
lacked merit, that nothing had come to its attention that would
cause it to believe that there are any instances where
management of the Company or the Compensation Committee of the
Company had retroactively selected a date for the grant of stock
options during the 1995 through 2006 period, and that it would
not be in the Company’s best interests or the best
interests of the Company’s shareholders to commence
litigation against its current or former officers or directors
as demanded in the letters. The findings and conclusions of the
special independent committee of the Company’s board of
directors have been presented to and adopted by the
Company’s board of directors.
From time to time, the Company may be subject to other legal
proceedings and claims in the ordinary course of business. The
Company is not aware of any such proceedings or claims that it
believes will have, individually or in the aggregate, a material
adverse effect on its business, financial condition or results
of operations.
The Company operates as one business segment, which is the
business of developing, manufacturing and commercializing
innovative medicines designed to yield better therapeutic
outcomes and improve the lives of patients with serious disease.
The Company’s chief decision maker, the Chief Executive
Officer, reviews the Company’s operating results on an
aggregate basis and manages the Company’s operations as a
single operating unit.
11
|
|
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Alkermes, Inc. (as used in this section, together with our
subsidiaries, “us”, “we” or “our”)
is a biotechnology company that develops innovative medicines
designed to yield better therapeutic outcomes and improve the
lives of patients with serious disease. We currently have two
commercial products:
RISPERDAL®
CONSTA®
[(risperidone) long-acting injection], the first and only
long-acting atypical antipsychotic medication approved for use
in schizophrenia, and marketed worldwide by Janssen-Cilag
(“Janssen”), a wholly owned division of
Johnson & Johnson; and
VIVITROL®
(naltrexone for extended-release injectable suspension), the
first and only once-monthly injectable medication approved for
the treatment of alcohol dependence and marketed in the United
States (“U.S.”) primarily by Cephalon, Inc.
(“Cephalon”). Our pipeline includes extended-release
injectable, pulmonary and oral products for the treatment of
prevalent, chronic diseases such as central nervous system
disorders, addiction and diabetes. Our headquarters are in
Cambridge, Massachusetts, and we operate research and
manufacturing facilities in Massachusetts and Ohio.
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with certain collaborative arrangements as we expand
the development of our proprietary product candidates, including
costs related to preclinical studies, clinical trials and
facilities expansion. Our costs, including research and
development costs for our product candidates and sales,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
Forward-Looking
Statements
Any statements herein or otherwise made in writing or orally by
us with regard to our expectations as to financial results and
other aspects of our business may constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including, but not limited to,
statements concerning future operating results, the achievement
of certain business and operating goals, manufacturing revenues,
royalty revenues, research and development revenues under
collaborative arrangements, net collaborative profits, research
and development spending, plans for clinical trials and
regulatory approvals, spending relating to selling and marketing
and clinical development activities, financial goals and
projections of capital expenditures, recognition of revenues,
and future financings. These statements relate to our future
plans, objectives, expectations and intentions and may be
identified by words like “believe,”
“expect,” “designed,” “may,”
“will,” “should,” “seek,” or
“anticipate,” and similar expressions.
Although we believe that our expectations are based on
reasonable assumptions within the bounds of our knowledge of our
business and operations, the forward-looking statements
contained in this document are neither promises nor guarantees;
and our business is subject to significant risk and
uncertainties and there can be no assurance that our actual
results will not differ materially from our expectations. These
forward-looking statements include, but are not limited to,
statements concerning: the achievement of certain business and
operating milestones and future operating results and
profitability; continued revenue growth from RISPERDAL CONSTA;
the successful continuation of development activities for our
programs, including ALKS 29; and the successful manufacture of
our products and product candidates, including RISPERDAL CONSTA,
at a commercial scale. Factors which could cause actual results
to differ materially from our expectations set forth in our
forward-looking statements include, among others:
(i) manufacturing and royalty revenues for RISPERDAL CONSTA
may not continue to grow, particularly because we rely on our
partner, Janssen, to forecast and market this product;
(ii) we may be unable to manufacture RISPERDAL CONSTA in
sufficient quantities and with sufficient yields to meet
Janssen’s requirements or to add additional production
capacity for RISPERDAL CONSTA, or unexpected events could
interrupt manufacturing operations at our RISPERDAL CONSTA
facility, which is the sole source of supply for that product;
(iii) we may be unable to
scale-up and
manufacture our product candidates, including ALKS 29,
commercially or economically; (iv) our product candidates,
if approved for marketing, may not be launched successfully in
one or all indications for which marketing is approved and, if
launched, may not produce significant revenues;
(v) clinical trials may take more time or consume more
resources than initially envisioned; (vi) results of
earlier clinical trials may not
12
necessarily be predictive of the safety and efficacy results in
larger clinical trials; (vii) our product candidates could
be ineffective or unsafe during preclinical studies and clinical
trials, and we and our collaborators may not be permitted by
regulatory authorities to undertake new or additional clinical
trials for product candidates incorporating our technologies, or
clinical trials could be delayed or terminated;
(viii) after the completion of clinical trials for our
product candidates and the submission for marketing approval,
the Food and Drug Administration (“FDA”) or other
health authorities could refuse to accept such filings or could
request additional preclinical or clinical studies be conducted,
each of which could result in significant delays or the failure
of such product to receive marketing approval; (ix) even if
our product candidates appear promising at an early stage of
development, product candidates could fail to receive necessary
regulatory approvals, be difficult to manufacture on a large
scale, be uneconomical, fail to achieve market acceptance, be
precluded from commercialization by proprietary rights of third
parties or experience substantial competition in the
marketplace; (x) technological change in the biotechnology
or pharmaceutical industries could render our products
and/or
product candidates obsolete or non-competitive;
(xi) difficulties or set-backs in obtaining and enforcing
our patents and difficulties with the patent rights of others
could occur; (xii) we may continue to incur losses in the
future; and (xiii) we may need to raise substantial
additional funding to continue research and development programs
and clinical trials and other operations and could incur
difficulties or setbacks in raising such funds.
The forward-looking statements made in this document are made
only as of the date hereof and we do not intend to update any of
these factors or to publicly announce the results of any
revisions to any of our forward-looking statements other than as
required under the federal securities laws.
Product
Developments
Our
Strategy
We leverage our unique formulation expertise and drug
development technologies to develop, both with partners and on
our own, innovative and competitively advantaged drug products
that enhance patient outcomes in major therapeutic areas. We
enter into select collaborations with pharmaceutical and
biotechnology companies to develop significant new product
candidates, based on existing drugs and incorporating our
technologies. In addition, we develop our own proprietary
therapeutics by applying our innovative formulation expertise
and drug development capabilities to create new pharmaceutical
products. Each of these approaches is discussed in more detail
below.
RISPERDAL
CONSTA
Using our proprietary
Medisorb®
technology, we developed RISPERDAL CONSTA, a long-acting
formulation of Janssen’s antipsychotic drug
RISPERDAL®
for the treatment of schizophrenia. Schizophrenia is a brain
disorder characterized by disorganized thinking, delusions and
hallucinations. Studies have demonstrated that as many as
75 percent of patients with schizophrenia have difficulty
taking their oral medication on a regular basis, which can lead
to worsening of symptoms. Clinical data has shown that treatment
with RISPERDAL CONSTA may lead to improvements in symptoms,
sustained remission, and decreases in hospitalization. RISPERDAL
CONSTA is administered via intramuscular injection every two
weeks, alleviating the need for daily dosing. Janssen markets
RISPERDAL CONSTA worldwide. We are the exclusive manufacturer of
RISPERDAL CONSTA for Janssen, and we earn both manufacturing
fees and royalties from Janssen.
RISPERDAL CONSTA was approved by regulatory authorities in the
United Kingdom and Germany in August 2002 and was approved by
the FDA in October 2003. RISPERDAL CONSTA is approved in
approximately 83 countries and marketed in approximately 61
countries, and Janssen continues to launch the product around
the world.
VIVITROL
We developed VIVITROL, an extended-release Medisorb formulation
of naltrexone, for the treatment of alcohol dependence in
patients who are able to abstain from drinking in an outpatient
setting and are not
13
actively drinking prior to treatment initiation. Alcohol
dependence is a serious and chronic brain disease characterized
by cravings for alcohol, loss of control over drinking,
withdrawal symptoms and an increased tolerance for alcohol.
Adherence to medication is particularly challenging with this
patient population. In clinical trials, when used in combination
with psychosocial support, VIVITROL was shown to reduce the
number of drinking days and heavy drinking days and to prolong
abstinence in patients who abstained from alcohol the week prior
to starting treatment. Each injection of VIVITROL provides
medication for one month and alleviates the need for patients to
make daily medication dosing decisions. Cephalon, Inc. is
primarily responsible for marketing VIVITROL in the U.S. We are
the exclusive manufacturer of VIVITROL.
VIVITROL was approved by the FDA in April 2006 and launched in
June 2006. In March 2007, we submitted a Marketing Authorization
Application (“MAA”) for VIVITROL to regulatory
authorities in the United Kingdom and Germany. The MAA for
VIVITROL was submitted under a decentralized procedure, in which
the United Kingdom will act as the Reference Member State and
Germany will act as the Concerned Member State for the
application. If successful, a filing under the decentralized
procedure would result in a simultaneous approval of VIVITROL as
a treatment for alcohol dependence in these two countries. The
MAA submission reflects the Company’s targeted approach to
commercialize VIVITROL in Europe on a country by country basis.
AIR
Insulin
We are collaborating with Eli Lilly and Company
(“Lilly”) to develop inhaled formulations of insulin
and other potential products for the treatment of diabetes based
on our
AIR®
pulmonary technology. Diabetes is a disease in which the body
does not produce or properly use insulin. Diabetes can result in
serious health complications, including cardiovascular, kidney
and nerve disease. Our inhaled insulin formulation, AIR Insulin,
is currently in phase 3 clinical development.
Exenatide
LAR
We are collaborating with Amylin Pharmaceuticals, Inc.
(“Amylin”) on the development of a long-acting release
(“LAR”) injectable formulation of Amylin’s
exenatide (“exenatide”) for the treatment of type 2
diabetes. Exenatide injection (trade name
BYETTA®)
was approved by the FDA in April 2005 as adjunctive therapy to
improve blood sugar control in patients with type 2 diabetes who
have not achieved adequate control on metformin
and/or
sulfonylurea, two commonly used oral diabetes medications. In
December 2006, the FDA approved BYETTA as an add-on therapy for
people with type 2 diabetes unable to achieve adequate glucose
control on thiazolidinedione, a class of diabetes medications.
BYETTA is a twice-daily injection. Exenatide LAR is being
developed as a once-weekly formulation to provide a more
patient-friendly treatment option. Amylin entered into a
collaboration agreement with Lilly for the development and
commercialization of exenatide, including exenatide LAR.
ALKS
29
In July 2007, we announced positive preliminary results from a
clinical trial of ALKS 29 in alcohol dependent patients. Based
on these results, we plan to move forward with a development
program for oral product candidates to treat alcohol dependence.
The clinical trial for ALKS 29, a phase 1/2 multi-center,
randomized, double-blind, placebo-controlled, eight-week study,
was designed to assess the efficacy and safety of ALKS 29 in
approximately 150 alcohol dependent patients. In the study, ALKS
29 was generally well tolerated and led to both a statistically
significant increase in the percent of days abstinent and a
decrease in drinking compared to placebo when combined with
psychosocial therapy. The study endpoints included the percent
of days abstinent, percent of heavy drinking days, and number of
drinks per day. Heavy drinking was defined as five or more
drinks per day for men and four or more drinks per day for women.
14
ALKS
27
Using our AIR pulmonary technology, we are developing ALKS 27,
an inhaled formulation of trospium chloride, with Indevus
Pharmaceuticals, Inc. (“Indevus”), for the treatment
of chronic obstructive pulmonary disease (“COPD”).
COPD is a serious, chronic disease characterized by a gradual
loss of lung function. Trospium chloride is a muscarinic
receptor antagonist that relaxes smooth muscle tissue and has
the potential to improve airflow in patients with COPD. Trospium
chloride is the active ingredient in
SANCTURA®,
Indevus’ currently marketed product for overactive bladder.
AIR
parathyroid hormone
We are developing inhaled formulations of parathyroid hormone
(“PTH”) with Lilly for the treatment of osteoporosis,
a progressive disease in which the bones become weak and are
more likely to break. The development program utilizes our AIR
pulmonary technology in combination with Lilly’s
recombinant PTH,
FORTEO®
(teriparatide (rDNA origin) injection). FORTEO was approved by
the FDA in 2002 to treat osteoporosis in postmenopausal women
who are at high risk for bone fracture and to increase bone mass
in men with primary or hypogonadal osteoporosis who are at high
risk for fracture.
Critical
Accounting Policies
A summary of significant accounting policies and a description
of accounting policies that are considered critical may be found
in Part II, Item 7 of our Annual Report on
Form 10-K
for the year ended March 31, 2007 in the “Critical
Accounting Policies” section. Other than as described
below, our critical accounting policies and estimates are as set
forth in the
Form 10-K.
Provision for Income Taxes — We record a
deferred tax asset or liability based on the difference between
the financial statement and tax bases of assets and liabilities,
as measured by enacted tax rates assumed to be in effect when
these differences reverse. As of June 30, 2007, we
determined that the deferred tax assets may not be realized and
a full valuation allowance has been recorded.
We adopted FIN No. 48 on April 1, 2007. The
implementation of FIN 48 did not have a material impact on
our condensed consolidated financial statements or results of
operations. At the adoption date of April 1, 2007, and also
at June 30, 2007, we had no significant unrecognized tax
benefits. The tax years 1993 through 2006 remain open to
examination by major taxing jurisdictions to which we are
subject, which are primarily in the U.S. We are currently
in the process of conducting a study of our research and
development credit carryforwards. This study may result in an
adjustment to our research and development credit carryforwards,
however, until the study is completed and any adjustment is
known, no amounts are being presented as an uncertain tax
position under FIN No. 48. A full valuation allowance
has been provided against our research and development credits,
and, if an adjustment is required, this adjustment would be
offset by an adjustment to the valuation allowance. Thus, there
would be no impact to the condensed consolidated balance sheet
or statement of operations if an adjustment were required.
In addition, we recently concluded a study of our net operating
loss (“NOL”) carryforwards to determine whether such
amounts are limited under IRC Sec. 382. We do not believe the
limitations will significantly impact our ability to offset
income with available NOLs.
We have elected to include interest and penalties related to
uncertain tax positions as a component of our provision for
taxes. For the three months ended June 30, 2007, we did not
recognize any accrued interest and penalties in our condensed
consolidated financial statements.
Results
of Operations
Net income for the three months ended June 30, 2007 was
$8.7 million, or $0.09 per common share — basic
and $0.08 per common share — diluted, as compared to a
net loss of $0.7 million, or a net loss of $0.01 per common
share — basic and diluted, for the three months ended
June 30, 2006.
15
Total manufacturing revenues were $31.5 million and
$22.2 million for the three months ended June 30, 2007
and 2006, respectively.
RISPERDAL CONSTA manufacturing revenues were $30.2 million
and $19.1 million for the three months ended June 30,
2007 and 2006, respectively. The increase in RISPERDAL CONSTA
revenues for the three months ended June 30, 2007, as
compared to the three months ended June 30, 2006, was due
to increased shipments of RISPERDAL CONSTA to Janssen to satisfy
demand.
Under our manufacturing and supply agreement with Janssen, we
earn manufacturing revenues when product is shipped to Janssen,
based on a percentage of Janssen’s estimated unit net sales
price. This percentage is determined based on Janssen’s
forecasted unit demand for the calendar year and varies based on
the volume of units shipped, with a minimum manufacturing
percentage of 7.5%. Revenues include a monthly adjustment from
Janssen’s estimated unit net sales price to Janssen’s
actual unit net sales price for product shipped. For the three
months ended June 30, 2007 and 2006, our RISPERDAL CONSTA
manufacturing revenues were based on an average of 7.5% of
Janssen’s unit net sales price of RISPERDAL CONSTA. We
anticipate that we will earn manufacturing revenues at 7.5% of
Janssen’s unit net sales price of RISPERDAL CONSTA for
product shipped to Janssen in the fiscal year ending
March 31, 2008 and beyond.
VIVITROL manufacturing revenues were $1.3 million and
$3.1 million for the three months ended June 30, 2007
and 2006, respectively. Under our agreements with Cephalon, we
bill Cephalon at cost for finished commercial product shipped to
them and for idle capacity charges incurred in the period. The
decrease in VIVITROL manufacturing revenues for the three months
ended June 30, 2007, as compared to the three months ended
June 30, 2006, was due to reduced shipments of VIVITROL to
Cephalon. We began shipping VIVITROL to Cephalon for the first
time during the quarter ended June 30, 2006, and during
that quarter we shipped sufficient quantities to build inventory
in anticipation of the commercial launch of the product. We are
currently managing our manufacturing volumes of VIVITROL to
avoid excess inventory and did not ship any product to Cephalon
during the quarter ended June 30, 2007. VIVITROL
manufacturing revenues for the three months ended June 30,
2007 consisted entirely of idle capacity costs, which consisted
of current period manufacturing costs related to underutilized
VIVITROL manufacturing capacity. There were no billings to
Cephalon for VIVITROL idle capacity costs in the three months
ended June 30, 2006. VIVITROL manufacturing revenues for
the three months ended June 30, 2007 and 2006 included
$0.1 million and $0.3 million, respectively, of
milestone revenue related to manufacturing profit on VIVITROL,
which draws down from unearned milestone revenue.
Royalty revenues were $7.0 million and $5.1 million
for the three months ended June 30, 2007 and 2006,
respectively, all of which were related to sales of RISPERDAL
CONSTA. The increase in royalty revenues for the three months
ended June 30, 2007, as compared to the three months ended
June 30, 2006, was due to an increase in global sales of
RISPERDAL CONSTA by Janssen. Under our license agreements with
Janssen, we record royalty revenues equal to 2.5% of
Janssen’s net sales of RISPERDAL CONSTA in the period that
the product is sold by Janssen.
Research and development revenue under collaborative
arrangements (“R&D revenue”) was
$23.4 million and $14.5 million for the three months
ended June 30, 2007 and 2006, respectively. The increase in
R&D revenue for the three months ended June 30, 2007,
as compared to the three months ended June 30, 2006, was
primarily due to increases in revenues related to work performed
on the
AIR®
Insulin, AIR PTH and exenatide LAR programs. A component of the
AIR PTH program revenue in the three months ended June 30,
2007 included recognition of a milestone payment we received
from Lilly upon first dosing in the Phase I clinical trial. We
are recognizing revenue under the proportional performance
method for this single unit arrangement, and based on the level
of effort incurred to date and the payments we expect to receive
under this arrangement, we were able to recognize all of this
milestone payment when achieved. In addition, R&D revenue
for the three months ended June 30, 2007 included revenue
of $1.2 million for FTE-related costs we incurred that were
reimbursed by Cephalon for the construction of the additional
VIVITROL manufacturing lines at our Ohio manufacturing facility.
Net collaborative profit was $7.0 million and
$9.7 million for the three months ended June 30, 2007
and 2006, respectively. For the three months ended June 30,
2007 and 2006, we recognized $5.3 million and
16
$27.4 million of milestone revenue — cost
recovery, respectively, to offset net losses on VIVITROL that
were funded by us. We were responsible to fund the first
$124.6 million of cumulative net losses incurred on
VIVITROL (the “cumulative loss cap”). We reached this
cumulative loss cap in April 2007, at which time Cephalon became
responsible to fund all net losses incurred on VIVITROL through
December 31, 2007. In addition, during the three months
ended June 30, 2007 and 2006, we recognized
$1.3 million and $1.2 million, respectively, of
milestone revenue related to the license provided to Cephalon to
commercialize VIVITROL. During the three months ended
June 30, 2007 and 2006, we made payments of
$5.2 million and $18.9 million, respectively, to
Cephalon to reimburse their net losses on VIVITROL, and during
the three months ended June 30, 2007 we received payments
of $5.6 million from Cephalon to reimburse us for our
expenses on VIVITROL, incurred after the cumulative loss cap was
reached. In the aggregate, net collaborative profit of
$7.0 million and $9.7 million for the three months
ended June 30, 2007 and 2006, respectively, consisted of
$6.6 million and $28.6 million of milestone revenue,
respectively, offset by net payments from/(to) Cephalon of
$0.4 million and ($18.9) million, respectively.
Net collaborative profit for the three months ended June 30 was
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Milestone revenue — cost
recovery(1)
|
|
$
|
5,256
|
|
|
$
|
27,424
|
|
|
Milestone revenue —
license
|
|
|
1,309
|
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Total milestone
revenue — cost recovery and license
|
|
|
6,565
|
|
|
|
28,615
|
|
|
Payments to Cephalon to reimburse
their net losses up to the cumulative loss cap
|
|
|
(5,223
|
)
|
|
|
(18,873
|
)
|
|
Payments from Cephalon to
reimburse our expenses incurred after the cumulative loss cap
was reached
|
|
|
5,647
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net collaborative profit
|
|
$
|
6,989
|
|
|
$
|
9,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months ended June 30, 2007, consists of the
portion of Cephalon’s net losses and Alkermes’
expenses incurred on VIVITROL that were funded by us up to the
cumulative loss cap. For the three months ended June 30,
2006, consists of $18.9 million of Cephalon’s net
losses incurred on VIVITROL that were funded by us,
$8.3 million of our expenses incurred on VIVITROL on behalf
of the collaboration and $0.2 million of our expenses
incurred on VIVITROL outside the collaboration, for which we
were solely responsible. |
We were responsible for the first $124.6 million of
cumulative net losses incurred on VIVITROL (the “cumulative
net loss cap”). The cumulative net loss cap was reached in
April 2007, at which time Cephalon became responsible to fund
all net losses incurred on VIVITROL through December 31,
2007. If VIVITROL is profitable before December 31, 2007,
net profits will be shared between us and Cephalon. After
December 31, 2007, all net profits or losses earned on
VIVITROL will be shared between us and Cephalon. The net profits
earned or losses incurred on VIVITROL after December 31,
2007 will be dependent upon end-market sales, which are
difficult to predict at this time, and on the level of
expenditures by both us and Cephalon in developing,
manufacturing and commercializing VIVITROL, all of which is
subject to change.
Through June 30, 2007, the cumulative net losses on
VIVITROL were $144.1 million, of which $56.9 million
was incurred by us on behalf of the collaboration and
$87.2 million was incurred by Cephalon on behalf of the
collaboration.
Cost of goods manufactured was $10.1 million and
$9.3 million for the three months ended June 30, 2007
and 2006, respectively. Cost of goods manufactured for RISPERDAL
CONSTA was $9.0 million and $6.5 million for the three
months ended June 30, 2007 and 2006, respectively. The
increase in cost of goods manufactured for RISPERDAL CONSTA for
the three months ended June 30, 2007, as compared to the
three months ended June 30, 2006, was due to increased
shipments of RISPERDAL CONSTA to Janssen to satisfy demand. Cost
of goods manufactured for VIVITROL was $1.1 million and
$2.8 million for the three months ended June 30, 2007
and 2006, respectively. The decrease in cost of goods
manufactured for VIVITROL for the three months ended
June 30, 2007, as compared to the three months ended
June 30, 2006, was due to
17
reduced shipments of VIVITROL to Cephalon. We began shipping
VIVITROL to Cephalon for the first time during the quarter ended
June 30, 2006, and during this quarter we shipped
sufficient quantities to build inventory in anticipation of the
commercial launch of the product. We are currently managing our
manufacturing volumes of VIVITROL to avoid excess inventory and
did not ship any product to Cephalon during the quarter ended
June 30, 2007. Cost of goods manufactured for VIVITROL for
the three months ended June 30, 2007 consisted entirely of
idle capacity costs, which consisted of current period
manufacturing costs related to underutilized VIVITROL
manufacturing capacity. There were no idle capacity costs
charged to VIVITROL cost of goods manufactured in the three
months ended June 30, 2006.
Research and development expenses were $32.6 million and
$25.9 million for the three months ended June 30, 2007
and 2006, respectively. The increase in research and development
expenses for the three months ended June 30, 2007, as
compared to the three months ended June 30, 2006, was
primarily due to increased personnel-related costs and materials
consumed during work we performed, notably on the AIR Insulin,
AIR PTH and exenatide LAR programs.
A significant portion of our research and development expenses
(including laboratory supplies, travel, dues and subscriptions,
recruiting costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not
tracked by project as they benefit multiple projects or our
technologies in general. Expenses incurred to purchase specific
services from third parties to support our collaborative
research and development activities are tracked by project and
are reimbursed to us by our partners. We generally bill our
partners under collaborative arrangements using a single
full-time equivalent or hourly rate. This rate has been
established by us taking into consideration our annual budget of
employee compensation, employee benefits and the billable
non-project-specific costs mentioned above and is generally
increased annually based on increases in the consumer price
index. Each collaborative partner is billed using a full-time
equivalent or hourly rate for the hours worked by our employees
on a particular project, plus any direct external research
costs, if any. We account for our research and development
expenses on a departmental and functional basis in accordance
with our budget and management practices.
Selling, general and administrative expenses were
$15.4 million and $16.5 million for the three months
ended June 30, 2007 and 2006, respectively. The decrease in
selling, general and administrative expenses for the three
months ended June 30, 2007, as compared to the three months
ended June 30, 2006, was primarily due to decreased
share-based compensation expense.
Interest income was $4.4 million and $4.3 million for
the three months ended June 30, 2007 and 2006,
respectively. The average cash and investment balances held and
interest rates earned during the three months ended
June 30, 2007 and 2006 were comparable and resulted in
similar interest income in the quarters.
Interest expense was $4.1 million and $5.5 million for
the three months ended June 30, 2007 and 2006,
respectively. The decrease for the three months ended
June 30, 2007, as compared to the three months ended
June 30, 2006, was primarily due to the conversion of our
2.5% convertible subordinated notes due 2023 (the
“2.5% Subordinated Notes”) in June 2006. Interest
expense for the three months ended June 30, 2006 included a
one-time interest charge of $0.6 million for a payment we
made in June 2006 in connection with the conversion of our
2.5% Subordinated Notes to satisfy the three-year interest
make-whole provision in the note indenture. We incur
approximately $4.0 million of interest expense each quarter
on the Non-Recourse Risperdal Consta secured 7% Notes (the
“Non-Recourse 7% Notes”) through the period until
principal repayment begins on April 1, 2009.
Other income (expense), net was income of $0.03 million and
$0.8 million for the three months ended June 30, 2007
and 2006, respectively. Other income (expense), net consists
primarily of income or expense recognized on the changes in the
fair value of warrants of public companies held by us in
connection with collaboration and licensing arrangements, which
are recorded under the caption “Other assets” in the
consolidated balance sheets, and the accretion of discounts
related to restructuring and asset retirement obligations. The
recorded value of warrants we hold can fluctuate significantly
based on fluctuations in the market value of the underlying
securities of the issuer of the warrants.
18
Income taxes were $2.4 million and $0.2 million for
the three months ended June 30, 2007 and 2006,
respectively. The provision for income taxes for the three
months ended June 30, 2007 and 2006 was prepared on a
discrete quarterly basis and therefore related to the
U.S. alternative minimum tax (“AMT”). Utilization
of tax loss carryforwards is limited in the calculation of AMT.
As a result, a federal tax charge was recorded in the three
months ended June 30, 2007 and 2006. The current AMT
liability is available as a credit against future tax
obligations upon the full utilization or expiration of our net
operating loss carryforward. The provision for income taxes for
the three months ended June 30, 2007 included tax
recognition of the $110 million nonrefundable milestone
payment received from Cephalon in the first quarter of fiscal
2007.
We do not believe that inflation and changing prices have had a
material impact on our results of operations.
Financial
Condition
Cash and cash equivalents and short-term investments were
$325.8 million and $351.6 million as of June 30,
2007 and March 31, 2007, respectively. Short-term
investments were $264.8 million and $271.1 million as
of June 30, 2007 and March 31, 2007, respectively.
During the three months ended June 30, 2007, combined cash
and cash equivalents and short-term investments decreased by
$25.8 million primarily due to normal changes in working
capital and to the acquisition of fixed assets, partially offset
by proceeds from the issuance of common stock.
We invest in cash equivalents, U.S. government obligations,
high-grade corporate notes and commercial paper. Our investment
objectives are, first, to assure liquidity and conservation of
capital and, second, to obtain investment income. We held
approximately $5.1 million of U.S. government
obligations classified as restricted long-term investments as of
June 30, 2007 and March 31, 2007, which are pledged as
collateral under certain letters of credit and lease agreements.
All of our investments in debt securities are classified as
available-for-sale and are recorded at fair value. Fair value is
determined based on quoted market prices.
Receivables were $66.8 million and $56.0 million as of
June 30, 2007 and March 31, 2007, respectively. The
increase of $10.8 million during the three months ended
June 30, 2007 was primarily due to: increased development
revenues related to the AIR programs and to the timing of
payments received from our partner Lilly with respect to these
programs; amounts due from Lilly for the reimbursement of costs
we incurred related to the construction of the second
manufacturing line at our commercial-scale production facility
for inhaled medications; amounts due from Cephalon related to
VIVITROL manufacturing costs and reimbursement for costs we
incurred on the construction of the two VIVITROL manufacturing
lines; and increases in amounts due from Janssen for RISPERDAL
CONSTA product deliveries related to the timing of invoices and
subsequent payments.
Inventory was $20.2 million and $18.2 million as of
June 30, 2007 and March 31, 2007, respectively. This
consisted of RISPERDAL CONSTA inventory of $12.6 million
and $11.2 million as of June 30, 2007 and
March 31, 2007, respectively, and VIVITROL inventory of
$7.6 million and $7.0 million as of June 30, 2007
and March 31, 2007, respectively. The increase in RISPERDAL
CONSTA inventory during the three months ended June 30,
2007 was primarily due to increases in raw materials and to
increases in finished goods inventory due to the timing of
shipments to Janssen. As of June 30, 2007 and
March 31, 2007, inventory included $0.4 million and
$0.6 million of share-based compensation costs,
respectively.
Accounts payable and accrued expenses were $26.7 million
and $45.9 million as of June 30, 2007 and
March 31, 2007, respectively. The decrease during the three
months ended June 30, 2007 was primarily due to decreases
in amounts due to Cephalon under our agreements and to decreases
in compensation accruals due to the timing of payroll and bonus
payments.
Unearned milestone revenue — current and long-term
portions, combined, were $122.1 million and
$128.8 million as of June 30, 2007 and March 31,
2007, respectively. The decrease during the three months ended
June 30, 2007 was due to the recognition of
$6.6 million and $0.1 million of milestone revenue
under the captions “Net collaborative profit” and
“Manufacturing revenues”, respectively, in the
condensed consolidated statement of operations during the
quarter.
19
Deferred revenue — current and long-term portions,
combined, were $23.9 million and $22.4 million as of
June 30, 2007 and March 31, 2007, respectively. In the
three months ended June 30, 2007, we recorded approximately
$1.5 million of deferred revenue related to funding from
Cephalon of the cost of the two VIVITROL manufacturing lines
currently under construction. Because we continue to operate and
maintain this equipment and intend to do so for the foreseeable
future, the continued payments made by Cephalon for our two
VIVITROL manufacturing lines currently under construction are
being treated as additional consideration and recorded as
deferred revenue.
Liquidity
and Capital Resources
We have funded our operations primarily through public offerings
and private placements of debt and equity securities, bank
loans, term loans, equipment financing arrangements and payments
received under research and development agreements and other
agreements with collaborators. We expect to incur significant
additional research and development and other costs in
connection with collaborative arrangements and as we expand the
development of our proprietary product candidates, including
costs related to preclinical studies, clinical trials and the
expansion of our facilities. Our costs, including research and
development costs for our product candidates and sales,
marketing and promotion expenses for any future products to be
marketed by us or our collaborators, if any, may exceed revenues
in the future, which may result in losses from operations.
We believe that our current cash and cash equivalents and
short-term investments, combined with our unused equipment lease
line, anticipated interest income and anticipated revenues will
generate sufficient cash flows to meet our anticipated liquidity
and capital requirements through at least June 30, 2008.
We may continue to pursue opportunities to obtain additional
financing in the future. Such financing may be sought through
various sources, including debt and equity offerings, corporate
collaborations, bank borrowings, arrangements relating to assets
or other financing methods or structures. The source, timing and
availability of any financings will depend on market conditions,
interest rates and other factors. Our future capital
requirements will also depend on many factors, including
continued scientific progress in our research and development
programs (including our proprietary product candidates), the
magnitude of these programs, progress with preclinical testing
and clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in filing, prosecuting
and enforcing patent claims, competing technological and market
developments, the establishment of additional collaborative
arrangements, the cost of manufacturing facilities and of
commercialization activities and arrangements and the cost of
product in-licensing and any possible acquisitions and, for any
future proprietary products, the sales, marketing and promotion
expenses associated with marketing such products.
We may need to raise substantial additional funds for
longer-term product development, including development of our
proprietary product candidates, regulatory approvals and
manufacturing and sales and marketing activities that we might
undertake in the future. There can be no assurance that
additional funds will be available on favorable terms, if at
all. If adequate funds are not available, we may be required to
curtail significantly one or more of our research and
development programs
and/or
obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of
our technologies, product candidates or future products.
Our capital expenditures have been financed to date primarily
with proceeds from bank loans and the sales of debt and equity
securities. Under the provisions of our existing loans, General
Electric Capital Corporation (“GE”) and
Johnson & Johnson Finance Corporation have security
interests in certain of our capital assets.
Capital expenditures are expected in the range from
$15.0 million to $20.0 million for the year ending
March 31, 2008, net of reimbursements from our
collaborative partners. Our manufacturing facility in Chelsea,
Massachusetts is undergoing a significant expansion. Under our
commercial manufacturing agreement with Lilly for AIR Insulin,
Lilly funds the construction of a second manufacturing line at
this facility and funds all operating costs of the portion of
the facility used to manufacture AIR Insulin products.
20
Contractual
Obligations
The contractual cash obligations disclosed in our Annual Report
on
Form 10-K
for the year ended March 31, 2007 have not changed
materially since the date of that report.
Off-Balance
Sheet Arrangements
As of June 30, 2007, we do not have any significant
relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
As such, we are not exposed to any financing, liquidity, market
or credit risk that could arise if we had engaged in such
relationships.
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Item 3.
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Quantitative
and Qualitative Disclosures about Market Risk
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We hold financial instruments in our investment portfolio that
are sensitive to market risks. Our investment portfolio,
excluding our investment in Reliant Pharmaceuticals, Inc. and
warrants we receive in connection with our collaborations and
licensing activities, are used to preserve capital until it is
required to fund operations. Although our investments, excluding
our investment in Reliant Pharmaceuticals, Inc. and warrants we
receive in connection with our collaborations and licensing
activities, are subject to credit risk, our investment policies
specify credit quality standards for our investments and limit
the amount of credit exposure from any single issue, issuer or
type of investment.
Our short-term and restricted long-term investments consist of
U.S. government obligations, high-grade corporate notes and
commercial paper. These debt securities are: (i) classified
as available-for-sale; (ii) are recorded at fair value; and
(iii) are subject to credit and interest rate risk, and
could decline in value if interest rates increase. These debt
securities are sensitive to changes in interest rates, and
interest rate changes would result in a change in the fair value
of these financial instruments due to the difference between the
market interest rate and the rate at the date of purchase of the
financial instruments. A 10% increase or decrease in market
interest rates would not have a material impact on the condensed
consolidated financial statements.
We also hold certain marketable equity securities, including
warrants to purchase the securities of publicly traded companies
we collaborate with, that are classified as available-for-sale
and recorded at fair value under the caption “Other
assets” in the condensed consolidated balance sheets. These
marketable equity securities are sensitive to changes in the
market price of the underlying securities. Market price changes
would result in a change in the fair value of these securities
due to differences between their market price and purchase
price. A 10% increase or decrease in market price our marketable
equity securities would not have a material impact on the
condensed consolidated financial statements.
As of June 30, 2007, the fair value of our Non-Recourse
7% Notes approximated the carrying value. The interest rate
on these notes, and our capital lease obligations, are fixed and
therefore not subject to interest rate risk.
As of June 30, 2007, we have a term loan in the amount of
$1.2 million that bears a floating interest rate equal to
the one-month London Interbank Offered Rate (“LIBOR”)
plus 5.45 basis points.
Foreign
Currency Exchange Rate Risk
The royalty revenues we receive on RISPERDAL CONSTA are a
percentage of the net sales made by our collaborative partner,
Janssen. Some of these sales are made in foreign countries and
are denominated in foreign currencies. The royalty payment on
these foreign sales is calculated initially in the foreign
currency in which the sale is made and is then converted into
U.S. dollars to determine the amount that Janssen pays us
for royalty revenues. Fluctuations in the exchange ratio of the
U.S. dollar and these foreign currencies will have the
effect of increasing or decreasing our royalty revenues even if
there is a constant amount of sales in foreign currencies. For
example, if the U.S. dollar strengthens against a foreign
currency, then our royalty revenues will decrease given a
constant amount of sales in such foreign currency.
21
The impact on our royalty revenues from foreign currency
exchange rate risk is based on a number of factors, including
the exchange rate (and the change in the exchange rate from the
prior period) between a foreign currency and the
U.S. dollar, and the amount of RISPERDAL CONSTA sales by
Janssen that are denominated in foreign currencies. We do not
currently hedge our foreign currency exchange rate risk.
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Item 4.
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Controls
and Procedures
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(a)
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Evaluation
of Disclosure Controls and Procedures
|
We have carried out an evaluation, under the supervision and the
participation of our management, including our principal
executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act) as of June 30, 2007. Based upon
that evaluation, our principal executive officer and principal
financial officer concluded that, as of June 30, 2007, our
disclosure controls and procedures are effective in providing
reasonable assurance that (a) the information required to
be disclosed by us in the reports that we file or submit under
the Securities Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms, and (b) such information is accumulated
and communicated to our management, including our principal
executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls
and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and our management necessarily was required
to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
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(b)
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Change
in Internal Control over Financial Reporting
|
During the period covered by this report, there have been no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
22
PART II.
OTHER INFORMATION
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Item 1.
|
Legal
Proceedings
|
Note 9. Legal Matters in the Notes to Condensed
Consolidated Financial Statements in Part I of this report
on
Form 10-Q
is incorporated into this item by reference. Please see the
Legal Proceedings section of our Annual Report on
Form 10-K
for more information on litigation to which we are a party.
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Item 2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
There was no stock repurchase activity during the three months
ended June 30, 2007 pursuant to publicly announced
repurchase programs. We acquired, by means of net share
settlements, 22,791 shares of Company common stock during
the three months ended June 30, 2007, at an average price
of $15.22 per share, related to the vesting of employee stock
awards to satisfy withholding tax obligations.
(a) List of Exhibits:
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Exhibit
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No.
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31
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.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
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31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
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32
|
.1
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
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23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ALKERMES, INC.
(Registrant)
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By:
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/s/ David
A. Broecker
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David A. Broecker
President and Chief Executive Officer
(Principal Executive Officer)
James M. Frates
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Date: August 9, 2007
24
EXHIBIT INDEX
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Exhibit
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No.
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|
|
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31
|
.1
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
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31
|
.2
|
|
Rule 13a-14(a)/15d-14(a)
Certification (furnished herewith).
|
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32
|
.1
|
|
Certification pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith).
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25