Alkermes PLC

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Alkermes is a global biopharmaceutical company committed to developing innovative medicines in areas of neuroscience and oncology, with a focus on developing, manufacturing, and commercializing products utilizing their proprietary technologies.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Alkermes operates in the biopharmaceutical sector, a complex and rapidly evolving landscape where success hinges on a multitude of factors, including clinical trial outcomes, regulatory approvals, and the ability to establish and maintain a competitive edge.

Business Overview

  • Revenue Distribution: Alkermes’ revenue streams are mainly categorized into three areas:
    • Proprietary Products: Sales from medicines that Alkermes owns the rights to. These include products like LYBALVI, VIVITROL, and ARISTADA.
    • Royalty Revenues: Earnings from products that utilize their proprietary technologies, such as VUMERITY.
    • Manufacturing and Royalty Revenues: Income generated from the manufacturing of products, or from other collaborations and royalties.
  • Industry Trends: The pharmaceutical industry faces high research costs, long development cycles, and stringent regulatory standards. There is also fierce competition from both branded and generic products. Emerging trends include greater focus on precision medicine, biologics, and new modalities. Regulatory pathways and approvals can significantly affect profitability of this sector.
  • Margins: For the latest quarter ending September 30th 2023, Alkermes reported a gross profit margin of 67.8%. However, this margin may be affected by various factors such as product mix, pricing and also currency effects.
  • Competitive Landscape: Alkermes competes with large pharmaceutical companies and also emerging biotech firms. Some of the competitors in the different sectors include companies like Janssen (for schizophrenia), Alkami (for bipolar), and Acadia (for parkinson’s).
    • What Makes Alkermes Different: Alkermes’ primary advantage lies in its proprietary technologies, used across all products. This makes these products differentiated from their competitors and offer an additional layer of protection and allows for better profitability. Their core focus is on neuroscience and oncology. Their marketed products are long-acting injections. In addition, their manufacturing infrastructure enables them to produce complex medications at scale. They are also leveraging technology to accelerate the research and development process through platform-enabled discovery.

Financial Analysis

  • Revenue Trends: Total revenues for the latest quarter ended September 30, 2023 came in at $285.1 million. The company showed growth in its product revenues over the last year. Specifically, the products that are marketed directly showed strong growth, with sales of LYBALVI increasing 53% year-over-year.
  • Profitability: The company is not profitable. They have a net loss of $62.5 million during the last quarter, the loss is because of large expenses, mostly R&D. The company’s operating loss for the last quarter was around $41.4 million. Also, free cash flow remained negative in the quarter, driven by investments in working capital, R&D, and manufacturing infrastructure.
  • Cash Position: The company’s cash and investments were $642.9 million on September 30, 2023, which gives them enough cash to operate at their current expense level.
  • Balance Sheet Health: The balance sheet appears healthy with a debt-to-equity ratio close to 28% in December 2022. They have enough cash to cover total liabilities. The debt they have is mostly term loans due in the long-term, giving the company financial flexibility, so debt is not a big concern for now. Because of this the company gets a healthy balance sheet rating. However, we see a reduction in equity as a result of previous buybacks and losses. The company also has some off balance sheet liabilities arising from operating leases.
  • Guidance: Management gave the 2023 revenue guidance at a range of 1.45 to 1.53 billion, with gross margins between 67-70%. They also raised their full-year revenue guidance for 2023 from approximately 1.06-1.13 billion to 1.45-1.53 billion. In 2024, the company is focused on execution and streamlining operation so they can be profitable.
  • Controversies: Alkermes has faced multiple lawsuits related to its products. The latest was a litigation agreement with Alkermes for its BYNIL technology in which the company’s commercial and manufacturing rights are confirmed. In general, the company is seeing an increase in R&D expenses over the last year, along with increased legal and regulatory costs due to litigations which might also affect its moat if it loses some lawsuits. Management thinks that, all its litigations will eventually be settled in its favor.

Moat Analysis

A moat, in the investment context, refers to a company’s sustainable competitive advantages that protect its profitability from competitors over an extended time.

Based on the framework, Alkermes has a narrow moat (2/5). The justification is as follows:

  • Intangible Assets:
    • Patents: The company possesses several patents relating to its products. These can help in sustaining higher margins. However, patents are subject to challenges and have a defined expiration date, which brings down the mote strength.
    • Regulatory Approvals: The pharmaceutical industry has very strong regulatory approvals. That means new competitors need a lot of time and money to enter this industry, acting as a barrier to entry for the companies.
  • Switching Costs:
    • The switching costs for pharmaceuticals are not that high from the point of view of the payer and the patient. The main determinant is the effectiveness of the medicine and doctors are often willing to try newer products. This brings down the moat strength.
  • Network Economics:
  • Network economics are not applicable in the industry that Alkermes operates in.
  • Cost Advantages:
    • The company does not have any clear cost advantage over its peers and is not a low-cost producer.

Risks to the Moat and Business Resilience

  • Product-Specific Risks: Clinical trial failures or unforeseen side-effects could impair the company’s products. The company has some serious competition in all its major areas.
  • Regulatory Risks: Any adverse regulatory ruling may harm revenue potential and profitability.
  • Legal Risks: Lawsuits and patent challenges can also impact the economic moat of the company. The company may also face legal action from consumers.
  • Technological Disruptions: The emergence of new and better technologies may erode the advantages of Alkermes.
  • Capital Structure: Although the company has ample cash today. It may take long before the company is profitable. This means more dilutive actions may take place which will decrease the equity per share, negatively impacting the valuation.
  • Pricing Pressures: Governments and insurance providers may impose pricing caps on prescription drugs which will hinder revenues and profitability.
  • Competition: Intense competition from generic and alternative products will also affect sales.
  • Market Volatility: Financial markets are subject to significant volatility, and investors might choose other options during turmoil that may be more stable, like government bonds.

Despite the threats, Alkermes has been showing good growth in sales in its core products, demonstrating the underlying demand for the product and hence its moat.

Understandability

The business is moderately complex (3/5), and here are reasons why:

  • On the one hand, it is a biopharmaceutical company which uses chemistry, biology, and other scientific disciplines to develop innovative drugs. And their revenue streams are not very easy to understand as they consist of proprietary products, royalties and development income and collaboration revenue. It is also quite difficult to know what are the future revenues and earnings from these.
  • On the other hand, it is not the most complex business like some technology companies and their business models are easy to grasp.

Balance Sheet Health

Alkermes shows good balance sheet health (4/5).

Here is why:

  • The company has enough cash to fund its operations, with over $600 million on the balance sheet.
  • It has an acceptable level of debt in relation to its assets.
  • The company is focused on profitable revenue growth and profitability, which means that it will be profitable in the future.
  • The company has no immediate pressure on its finances.

Conclusion

Alkermes is a biopharmaceutical company focused on the area of neurological disorders and oncology, with unique proprietary technologies that enhance their product offerings. Its moat is narrow and subject to future competition, especially if it loses its patent protection, is unable to improve its delivery mechanism, faces setbacks in clinical trials, or fails to acquire additional sources of revenue. The management has been making an effort to improve financial performance by emphasizing increasing revenue and cost reduction. Its management seems sound and financially transparent.