Tackling Pain and Addiction

Alkermes  (NASDAQ: ALKS  ) is primarily known for its schizophrenia and multiple sclerosis drug treatments. Schizophrenia treatments Risperdal Consta and Invega Sustenna collectively delivered $56.2 million in royalty payments from $627 million in sales, while MS drugs Ampyra and Fampyra generated $19.9 million last quarter. Collectively, these drugs amount to 55% of quarterly revenue. Bristol-Myers Squibb  (NYSE: BMY  )  / Otsuka Pharmaceuticals' schizophrenia treatment, Abilify, is the No. 1 selling drug in America with quarterly sales of $1.6 billion . However, Alkermes' own schizophrenia treatments have managed to outpace Abilify's single-digit sales growth and flat unit growth, gaining market share as a result.  In addition, generic competition for the three most prescribed schizophrenia treatments will have a substantial impact on sales through to 2016; for example, Eli Lilly's (NYSE: LLY  ) Zyprexa went generic in 2011 and the sales rights sold on, while sales of AstraZeneca's (NYSE: AZN  ) Seroquel dropped 85% in Q2 of 2012.

But schizophrenia isn't Alkermes' only opportunity. 

Tackling addiction
The company's foray into addiction treatment may offer better compensation than its schizophrenia offerings in the long term. Alkermes' Vivitrol treats heroin addicts and alcoholics by blocking receptors in the brain, reducing the user's desire for heroin or alcohol. The drug mechanism is different to methadone, which competes for receptors in the brain. Vivitrol is currently in use by the justice system in 21 states, and in the most recent quarter it added $17.4 million in sales, accounting for a 40% jump from last year.

The company was "very conservative" on forecasts for the drug, in part because its success is anecdotal given the circumstances of its use. However, Vivitrol on track to generate $80 million in revenue for the year. Mention of a possible price increase was rebuffed with Alkermes stating "we think we've priced the drug correctly," although the possibility of a future price hike was not denied. The company did hike prices in 2011 when Vivitrol sales were slower than expected, although often the alternative is prison, which cost multiples more than the typical $15,000+ annual cost of Vivitrol treatment.

Drug alternatives are few. The pill form, Naltrexone, was developed 30 years ago, but required a daily regiment which was difficult to maintain. Research for an injectable form for the drug was conducted during the '90s, from which Vivitrol emerged. As an injectable, Vivitrol only required a single shot a month which made addiction management considerably more effective. However, approval for use of Vivitrol came relatively late in the game: It was only in 2006 that the FDA approved its treatment for alcoholics, and 2010 for opiate addiction.

Alkermes has secured a large share of this market. Alkermes closest rival is Forest Laboratories (NYSE: FRX  ) . It manufactures Campral, used for to reduce alcohol consumption. Campral enjoyed worldwide sales of $80 million in 2011, but with Vivitrol to compete against sales, of Campral dropped to $4.7 million for the most recent quarter.

Treating pain
More than 15,000 people in the U.S. are killed every year from overdosing on painkillers, half a million visits to emergency departments are the result of overdoses, and 12 million American teens and adults abuse painkillers. The total cost in health care from painkiller abuse is $72.5 billion.

Why are these figures so high?

Because the largest percentage of the $27 billion painkiller market (29%) is from sales in "strong opioid" drugs, of which top dog is Purdue Pharma's OxyContin, with annual sales of $2.5 billion.  Here is a huge market in crisis need of viable alternatives.

Alkermes' pain-reliever development drug is called Alks 7106. Alks 7106 is a small molecule MME, which is derived from Alkermes' opioid modulator platform. The drug is taken orally, and in studies with rats, it has been shown to be 30 times more potent than morphine. In addition, the inherent properties of the molecule limit the potential for abuse and overdose death, plus there was a ceiling effect on the dosage, which further restricts the possibility for abuse. A phase 1 study is not expected until 2014, but Alkermes has a product that could revolutionize pain management. 

The outlook
Alkermes hasn't the broad spectrum of products as an Eli Lilly, Bristol-Myers Squibb, or AstraZeneca. However, it trades at a relatively competitive price-per-sales against its larger peers: Alkermes P/S of 7.9 isn't far from the 4.3 of Bristol-Myers Squibb, although it's outgunned by the 2.5 of Eli Lilly or the 2.4 of AstraZeneca.  It has a positive cash flow of $144 million a year, with cash on hand of $228 million. 

For next quarter, sales of Risperdal Consta and Invega Sustenna should bring an additional $2.2 million if Alkermes was to match the average 3.6% quarterly growth enjoyed by Abilify; a further $1.6 million will come from Vivitrol if it delivered on 10% growth. Further losses in Tricor will probably offset any gain from royalties in Ampyra and Fampyra. Collectively, this gives a revenue projection of $142 million for Q2, which is $3 million shy of Wall Street estimates.

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