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Alkermes PLC (NASDAQ:ALKS)
Q3 2019 Earnings Call
Oct 23, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Alkermes Third Quarter 2019 Financial Results Conference Call. My name is Rob and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I'll now turn the call over to Sandra Coombs, Vice President of Investor Relations. Sandy, you may begin.

Sandra Coombs -- Vice President of Investor Relations

Thank you. Good morning. Welcome to the Alkermes Plc conference call to discuss our financial results and business update for the quarter ended September 30, 2019. With me today are Richard Pops, our CEO and Jim Frates, our CFO.

Before we begin, I encourage everyone to go to the Investors section of alkermes.com to find our press release and related financial tables, including a reconciliation of the GAAP to non-GAAP financial measures that we'll discuss today. We believe the non-GAAP financial results in conjunction with our GAAP results are useful in understanding the ongoing economics of our business.

Our discussions during this conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements. Please see Slide 2 of the accompanying presentation, our press release issued this morning, and our most recent annual and quarterly reports for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements.

We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. After our prepared remarks, we'll open the call for Q&A.

And now, I'll turn the call over to Richard.

Richard F. Pops -- Chairman and Chief Executive Officer

Thanks, Sandy. Good morning, everyone. So as you can see from today's restructuring announcement, we're looking ahead and taking actions to position Alkermes for sustainable, long-term growth. Over the past year, we've gained increased clarity regarding the profile of our business. Revenues from VIVITROL and ARISTADA are growing, and we expect that growth to continue. Add to that VUMERITY, which will add a new revenue stream from a strong partner in the MS Market. And next is ALKS 3831. We plan to submit the NDA for 3831 this quarter and prepare for its potential launch in schizophrenia and bipolar I disorder.

In the pipeline, ALKS 4230 is building momentum in its clinical development and we expect that momentum to continue as we move into 2020. So greater clarity into the economic contributors of the business enhances our ability to manage costs and focus on long-term growth. Our priorities are to maximize the value of our commercial products and our development candidates while streamlining our cost structure in order to position the Company for sustained profitability.

This morning we announced the implementation of a reorganization, designed to support these priorities. The scope of the reorganization follows a comprehensive review of our top line growth, cost structure and operations. We identified the key objectives for the business, evaluated our organizational capabilities to ensure that we could meet those objectives and set a goal of a $150 million in annual cost savings.

From an R&D perspective, we've now refined our focus to specific high potential programs within two core areas; high value opportunities in CNS, building on our long-standing presence there; and oncology, building on our scientific strength in -- excuse me in cytokine engineering and new research we have under way in our labs.

Concentration in these focus areas will complete the Company's transition that's been under way for several years, moving away from our legacy of drug delivery and precedented pharmacology to our new molecules and novel mechanisms of action.

In addition to the cost savings we'll capture through our more focused R&D strategy, we also assist our SG&A expenses. For our general and administrative organization, we've significantly streamlined those functions to improve efficiency. For our commercial organization, VIVITROL and ARISTADA are our current drivers of growth and we will continue to invest in them. We made certain refinements to the commercial organization and we're recalibrating our marketing investments to focus on the initiatives that are driving the most return on investment.

We believe that the investments we're making in our specialized commercial capabilities for ARISTADA and VIVITROL will be highly leverageable as we plan for ALKS 3831 and beyond. We also made certain refinements to our manufacturing organization, while preserving our ability to produce high quality products for patients and prepare for potential upcoming commercial launches.

Across the Company, the reorganization resulted in the elimination of approximately 160 existing positions. This reduction in our workforce coupled with our significant recalibration of our future hiring plans and a substantial decrease in external spending are expected to yield cost savings of $150 million. This actually rebaselines our expense profile and is expected to deliver total cost savings of several hundred million dollars over the next several years.

This improved financial efficiency will help us achieve three important objectives; the first is sustained non-GAAP profitability. The second is to increase our flexibility to pursue business development opportunities that complement our R&D and commercial capabilities. And the third is to preserve our ability to invest appropriately in the clinical development program for 4230 and the ALKS 3831 launch.

While the restructuring is necessary to enhance the strength of the organization for the long term, our priority is to treat all of our impacted employees with highest level of respect and care and to facilitate a smoother transition. We recognize that we would not be where we are today without the collective efforts of all the individuals that contribute to our mission.

So with that, I'll turn the call over to Jim to provide an overview of our Q3 performance and a closer review of the financial impact of this reorganization, including our updated financial guidance for the remainder of the year.

James M. Frates -- Senior Vice President and Chief Financial Officer

Thank you, Rich. With a $1 billion top line, driven by the growth of our proprietary products and the upcoming addition of potential new revenue streams, we're accelerating toward profitability and positioning the business for long-term growth. Today, I'll discuss our results for the third quarter 2019, the financial implications of our restructuring announced this morning, and updates to our 2019 financial expectations.

With two months remaining in the year, we're adjusting our financial expectations for 2019 to reflect the restructuring and improved overall financial performance. I'll detail these revisions more fully in a moment, but will start with an overview of our key financial and commercial highlights from the third quarter.

During the quarter, we generated $255 million in total revenues, reflecting solid year-over-year performance of our proprietary products, driven by unit growth. We recorded a GAAP net loss of $52.9 million and a non-GAAP net loss of $7 million. During the quarter, VIVITROL net sales increased 7% year-over-year to $85.2 million, in line with the expectation of approximately $85 million that we provided on our Q2 earnings call. These results were driven primarily by underlying unit growth of 11% that was partially offset by gross to net adjustments that increased to 48.7% in Q3 2019, compared to 46.6% in Q3 2018, reflecting an increased contribution from Medicaid units.

Consistent with the pattern that we've seen in the last two years, VIVITROL units were flat from Q2 to Q3. The sequential decrease in net sales of approximately 3% was driven primarily by fluctuations in gross to net adjustments due to Medicaid utilization data from various states that favorably impacted Q2, 2019 net sales by approximately $3 million, as we highlighted last quarter.

VIVITROL net sales remain concentrated with our top five states representing 43% of volume in the third quarter. We've continued our efforts to diversify growth at the state level and more than 22 states have demonstrated greater than 25% year-over-year unit growth. As we approach the end of the year; today, we're narrowing our expectation of VIVITROL net sales for the full year to a range of $330 million to $340 million.

Turning to the ARISTADA product family; today, we are updating our expectation for 2019 ARISTADA net sales to a range of $185 million to $190 million from a previous range of $200 million to $210 million. In 2019, we introduced a number of initiatives to drive ARISTADA growth and while we're beginning to see those efforts gain traction and continue to believe they'll be productive over time, growth this year has been slower than we anticipated.

With that said, for the third quarter, net sales increased 48% year-over-year to $53.6 million, driven primarily by unit growth. Underlying total prescription data for ARISTADA demonstrated solid growth of 42% year-over-year in terms of months of therapy. Sequentially, ARISTADA net sales increased 11%, also driven by unit growth. Gross-to-net adjustments for ARISTADA were 48.2% for Q3, consistent with the second quarter and our expectation for full-year gross-to-net. Against the backdrop of a long-acting atypical market that has continued to grow at double-digit rates, ARISTADA's market share has also continued to increase.

ARISTADA's market share for new prescriptions in terms of months of therapy in the long-acting aripiprazole market was 31% in September 2019, compared to 28% in September 2018. In the overall market for long-acting atypical antipsychotics, ARISTADA's market share for new prescriptions, also in terms of months of therapy was 9% in September 2019, compared to 7% in September 2018.

Moving on to our manufacturing and royalty business, we saw revenues of $103.8 million in the third quarter compared to $116.4 million in the prior year, reflecting a $13 million decline in revenues from our AMPYRA/FAMPYRA franchise, following generic competition to AMPYRA entering the US market in 2018.

Revenues from RISPERDAL CONSTA, INVEGA SUSTENNA and INVEGA TRINZA remain fairly flat year-over-year at $77.2 million as increased end-market sales of INVEGA SUSTENNA and INVEGA TRINZA were offset by fewer manufacturing batches for RISPERDAL CONSTA during the quarter. Notably, overall growth in our INVEGA SUSTENNA and INVEGA TRINZA royalties continued despite the expiration of our SUSTENNA 1.5% patent royalty in the US in May of this year.

In the third quarter, we recognized R&D revenues of $12.7 million, primarily driven by the reimbursement of development expenses for VUMERITY related to our collaboration with Biogen. The FDA approval of VUMERITY will trigger a $150 million milestone payment that we expect to record as license revenue in our Q4 results. Alkermes will receive mid-teens royalty on net sales of VUMERITY and we look forward to working with Biogen as it prepares for commercial launch.

In terms of expenses, our total operating expenses for the third quarter were lower than expected, following implementation of various cost-saving initiatives. Our R&D expense for the third quarter was $107.7 million compared to $101.3 million for the prior year as we increased investment in the clinical development of ALKS 4230.

SG&A expenses for the third quarter were $148.7 million compared to $128.8 million for the prior year, reflecting investments in our commercial organization in support of both ARISTADA and VIVITROL.

Turning to our balance sheet, we ended the third quarter with approximately $609 million in cash and total investments, compared to approximately $594 million at the end of the second quarter. The Company's total debt outstanding was approximately $278 million at the end of the third quarter.

Let me shift now to a broader financial update for our expectations for 2019. Now that we're three quarters of the way through the year, we're able to narrow the ranges of our previously provided expectations. Our full financial expectations are outlined in the press release we issued earlier this morning. For the topline, we continue to expect total revenues to be in the range of $1.14 billion to $1.19 billion, as higher than expected INVEGA SUSTENNA royalties offset the decrease in our expectation for ARISTADA net sales in 2019.

For our operating expense line items, we initiated the review of our cost structure early in the third quarter and began to implement cost savings measures across the organization. Predominantly as a result of this, we decreased our operating expenses by approximately $30 million in 2019.

In terms of our guidance for 2019, this is primarily reflected in the decrease in our expectation for R&D expense to a range of $430 million to $450 million for 2019 from our previous expectation of $450 million to $480 million. We also narrowed our full year 2019 expectation for SG&A to a range of $590 million to $610 million and expect to record a restructuring charge of approximately $15 million in the fourth quarter that will impact our GAAP results.

As a result of the updated financial expectations that I've highlighted in the call today and that are outlined in the earnings press release issued this morning, our expectation for GAAP net loss for 2019 is unchanged, but we're increasing our expectation for non-GAAP net income to be in the range of $70 million to $90 million from our previous range of $40 million to $70 million.

Turning to the restructuring; as we evaluated our cost structure, we identified three key areas to improve financial efficiency; streamlining current headcount across a number of functional areas within the organization; reducing the number of open positions including reprojecting our hiring plans for the next several years and reducing our external spend.

We expect this restructuring to deliver savings of approximately $150 million with roughly one-third related to R&D and two-thirds driven by SG&A. We'll provide more detailed financial expectations for 2020 on our year-end earnings call in February. Over the next few years, we expect to capture total savings of several hundred million dollars, helping us to achieve sustained non-GAAP profitability on an ongoing basis.

A key objective for this restructuring was preserving our ability to invest appropriately in what we believe to be our most high value opportunities like the ALKS 4230 development program and the potential launch of ALKS 3831. We believe that we're well positioned to do this with incremental investment now on a cost structure that has been recalibrated at significantly lower levels.

We've also increased our flexibility to pursue business development opportunities that may have the potential to expand our development pipeline. We're actively managing the business and are well positioned to drive growth in our commercial portfolio, advance our development pipeline candidates in both CNS and immuno-oncology and achieve sustained non-GAAP profitability.

With that, I'll turn the call back to Richard.

Richard F. Pops -- Chairman and Chief Executive Officer

Thank you, Jim. So, you can see, we're changing the profile of Alkermes. We've proven our ability to develop, manufacture and market important medicines. Over the past year, we've gained significant clarity on the profile of the Company in the coming years. We're focused on continuing to build the Company while improving our financial performance.

The basic architecture of the Company continues to be characterized by three foundational pillars; a stream of royalty and manufacturing revenues, revenues from our proprietary marketed products, and an evolving pipeline of development candidates.

Our royalty and manufacturing revenues have allowed us to invest in our proprietary commercial products and our clinical development pipeline, and we continue to expect meaningful manufacturing and royalty revenues from our partnered long-acting injectables into the mid-2020s. Biogen's expected launch of VUMERITY will add to this portfolio of revenue streams. From the first sale, VUMERITY will be accretive and has the potential to be a powerful financial driver for Alkermes.

The Company's second foundational pillar continues to be our proprietary commercial portfolio VIVITROL and ARISTADA. Last year, we crossed $1 billion in annual revenues, primarily driven by the growth of these proprietary products. VIVITROL is an important element of our nation's response to the opioid crisis.

As a nation, we've made significant strides to address the vast scope and scale of the crisis, but there remain significant need to improve education and access to care and to provide patient-centered treatment. Our commitment to this challenging area is rooted in the potential to help patients struggling with opioid dependence and that is happening. This week, approximately 10,000 patients will receive a VIVITROL injection; 10,000 patients and the people that care for them will be impacted by this medicine. We're very proud of that and we'll keep going.

For ARISTADA, year-over-year volume growth is solid and we expect this product will continue to grow for years. With new data from the ALPINE study this summer and the expansion of our commercial field organization earlier this year, we've completed our major expected investments in the ARISTADA product family. We're beginning to see the impact of these investments, albeit not as quickly as we had anticipated.

The LAI market is growing and we believe ARISTADA has the features and supportive data of an important and differentiated product in this market. Consistent, long-term, commercial execution will be key to maximizing the potential of this product family.

The third pillar of our advancing pipeline is our advancing pipeline of development candidate. First is ALKS 3831, which we expect will be the next commercial launch in our proprietary commercial psychiatry portfolio. We're in the final stages of preparing the filing and plan to submit the 3831 NDA for both schizophrenia and bipolar I disorder this quarter.

3831 is a particularly interesting opportunity because it's an ideal complement to our current commercial capability that can leverage the infrastructure in place for ARISTADA. IF approved, LKS 3831 represents another opportunity for revenue growth as it builds into its potential over the coming years.

Turning to 4230 in immuno-oncology, harnessing the potential antitumor activity, the IL-2 pathway continues to be one of the most exciting opportunities in the development of new immuno-oncology candidate, up-regulating the immune system through selective expansion of CD8 positive and natural killer cells has the potential to be complementary with a variety of cancer treatment approaches, including other immunotherapies and treatment options like radiation, chemotherapy and targeted therapies.

The design and engineering of ALKS 4230 have yielded a differentiated potential new biologics. Data from the Phase 1 program are beginning to demonstrate its potential utility and we're preparing for the presentation of data from that program at the upcoming Society for Immunotherapy of Cancer, SITC, Annual Meeting at the beginning of November.

We're committed to positioning this organization for a promising future, and we've taken other important steps recently to prepare for that. In September, we appointed two new Directors to our Board; Dr. Richard Gaynor and Andy Wilson. We believe these two Directors are ideally suited to provide valuable insights and thoughtful leadership at this stage of our evolution. Their respective expertise in oncology and strategic value creation will be important assets as we focus on execution and prepare for our next phase of growth.

The reorganization announced today puts us on a new path and growth trajectory. While managing the business requires difficult decisions that impact our employees, I'm confident in the future of the organization and our ability to continue to make a meaningful difference in the lives of patients, families and communities that we serve.

So with that, I'll turn the call back to Sandy to run the Q&A.

Sandra Coombs -- Vice President of Investor Relations

Great, thank you. Rob, we'll now open the call for Q&A please.

Questions and Answers:

Operator

Thank you, Sandy. We'll now be conducting a question-and-answer session. [Operator Instructions] And our first question is from the line of Umer Raffat with Evercore. Please proceed with your question.

Umer Raffat -- Evercore ISI -- Analyst

Hi, good morning. Thank you so much for taking our questions. I had three today, if I may. First, we've been thinking about the proposed Teva settlement framework for SUBOXONE and what I'm trying to get at is, in theory, if a large generics player will supply all SUBOXONE for free, should that or should that not affect VIVITROL price points in the market? So just wanted to ask you that knowing that there has been a lot of generics in the market already. So, curious how you think about that, one.

Secondly, on ARISTADA, Richard, I know there's obviously a lot of optimism on long-term prospects, but I also noticed that the guidance has been taken down twice this year on ARISTADA estimates. Where do you think has it been falling short and why should or shouldn't that be a dynamic going forward?

And then finally, is it realistic for us to expect at least a 25%, 30% switch perhaps even ahead of a District Court decision on the VUMERITY franchise? Thank you so much.

Richard F. Pops -- Chairman and Chief Executive Officer

Good morning, Umer. Thanks for the questions. I'll take them in series. I think that the settlement activity that you see in the opioid crisis is going to continue, obviously. There is going to be a lot of money that's going to be flowing into the opioid quote-unquote, fixing the opioid problem by virtue of both appropriations from State and Federal governments as well as settlement money.

I recognize that SUBOXONE or Buprenorphine is 95% of the market. You know most everybody gets on SUBOXONE. So, my view is that the first principle right now in the phenomenon that is the opioid crisis is that most patients don't get access to medication assisted treatment at all. So if the impetus is to put more people into treatment on medicines, be it SUBOXONE or Methadone or VIVITROL, that's a good thing, because as we put more and more people into treatment, more and more patients recognize the option of detoxification plus VIVITROL.

So I think that you know just fine point on it, to be aware what -- what we understand is that the free goods or the tablets, rather than films, you know the film is still something that's used widely in the community. Our price point is essentially unrelated to the SUBOXONE price point because patients who seek to go on VIVITROL are really pursuing a completely different therapeutic option. They require detoxification and the use of VIVITROL.

The pricing of VIVITROL in the government systems in particular is incredibly fair. It's in -- between $500 and $600 a month. So we think the price point is exactly right for broader use with more government programs supporting its use.

The second question on ARISTADA, you're right. I mean we've taken -- we've taken the guidance down ARISTADA, simply reflecting the realities in the marketplace as the year -- as the year progress. As Jim noted in his comments, so it's important to establish it is growing quite well. I mean it is growing -- it is growing 40% quarter-on-quarter and year-on-year, it's -- I mean, it's a lot of people would love to have a product growing at the rate of ARISTADA. We just were too optimistic at the beginning of the year, the impact of the expansion of our salesforce and the ALPINE data that we expected.

We do think that those are going to have an impact. It's just taking longer than we would have thought. So we'll guide next year probably in a more conservative way, just based on the growth trends that we see in hand, recognized in the LAIs market, look at a drug like INVEGA SUSTENNA, it's been growing for a decade. It just takes a long time and things change slowly, but they do change and we think that ARISTADA is incredibly well positioned in that market with very few serious competitive entrants.

And, on the third question about VUMERITY, I know we've had this conversation before. I think the big sea change for us in terms of our expectations for VUMERITY are driven by our interactions with Biogen. We're the commercial supplier of this drug. We have a sense of what their view of it is, particularly following the completion of the EVOLVE-MS-2 study this summer, which was the head-to-head study showing numerical superiority of VUMERITY over TECFIDERA in GI events.

So, I'll direct you to them. I think they were little bit busy yesterday, but I think that we're really excited about VUMERITY. And I think it's interesting for us, we're not protecting a $5 billion franchise. We're starting from zero on this. So the point I made in the call, from the first dollar of sales, Vumerity becomes accretive to us and its trajectory can be really exciting as you superimpose it on our P&L, as it's currently configured.

Umer Raffat -- Evercore ISI -- Analyst

Thank you very much.

Operator

Our next question comes from the line of Chris Shibutani with Cowen. Please proceed with your question.

Chris Shibutani -- Cowen & Co. -- Analyst

Great. Good morning. Thank you very much for the questions. I have two. I noticed that in your discussion of where the Company is taking priorities that oncology was mentioned, first and is more in the forefront. You also highlighted that the incremental additions to the Board were members who have some oncology experience.

Can you talk to what you feel are the underpinnings for this type of decision based upon either core competencies or the direction that you feel you can position yourself, given how competitive oncology is?

And the second question is more specific relating to the 3831 filing, you had indicated that you're also filing for the bipolar I indication and there were some incremental steps and discussions you needed to take with the FDA. Can you update us on what the progress is with regard to those and your confidence that you will have adequately met those in order to make that filing complete and give that a probability of approval at the same time as for the original indication? Thanks.

Richard F. Pops -- Chairman and Chief Executive Officer

Good morning, Chris. It's Rich, I'll take on both. The oncology focus is a perfect example of how scientific exploration takes you in directions and if your scientists are good and you give them the freedom to pursue there -- where the data are taking them, it leads you into new places. So, the entree into oncology was not a strategic quote-unquote decision to get into oncology, it was driven by the cytokine engineering work that we were doing that first yielded 4230.

And that work on protein engineering that led to this really elegant construct of the alpha chain fused to the IL-2 molecule, leading to a very selective IL-2 fusion protein is not idiosyncratic just to that that embodiment. We have some other work going on inside cytokine [Phonetic] engineering that we think is really potentially important in the immuno-oncology space.

So, a few years ago, as we started putting more and more energy into that, as you might imagine, as you start developing more models, more oncology presence, more oncology site, other things derive from there. And so we haven't been quite as clear on disclosing some of those things, but suffice to say that we have a lot of energy in the labs on areas that we think are proprietary that -- where other people aren't playing that we think we can have an impact in the organization itself.

A number of the people in our R&D organization have background in oncology. Craig Hopkinson, who is our Chief Medical Officer, has run multiple oncology development programs, as have other folks in our regulatory and clinical Group. So it's not -- it wasn't a reach for us operationally.

With that said, 4230 continues to get the traction that we hope it does. We do see collaborating with 4230. It's sufficiently multivalent, sufficiently promiscuous in terms of the potential combinations with IO agents and other agents that it really argues for a more broad-based collaboration allowing you to go after multiple tumor types, multiple combinations, and multiple lines of therapy.

The 3831; there is actually no news there. We had met with FDA over a year ago and proposed a PK bridging strategy for inclusion of the bipolar I indication on first approval. It stands to reason because Olanzapine is used widely there and we knew that with an approval only in schizophrenia, clinicians would want to use it in bipolar, and it'd be better to have labeling in that indication than not.

FDA agreed and suggested some clin-pharm studies that we did, particularly looking at co-administration with valproate and lithium, just to look at the drug-drug interaction potential. Those were done over a year ago. And so, in the pre-NDA meeting in the May-June time-frame, we confirmed that we would be submitting for both bipolar I and schizophrenia in the first application.

Chris Shibutani -- Cowen & Co. -- Analyst

Thank you.

Operator

Our next question is from the line of Cory Kasimov with JPMorgan. Please proceed with your question.

Neena Marie Bitritto-Garg -- JPMorgan -- Analyst

Hi, this is Neena on for Cory, thanks for taking the question. So, just one question on the restructuring. So, do you feel you have the best kind of structure and sales strategy in place on the SG&A side in order to maximize the commercial assets? And then the second question is just around SITC. What exactly should we expect to see there? I mean what formulations and what arms are you going to be presenting data from? Thanks.

Richard F. Pops -- Chairman and Chief Executive Officer

Jim, why don't you take those?

James M. Frates -- Senior Vice President and Chief Financial Officer

Yeah. So, good morning Nina. Thank you. On the restructuring side with SG&A, yes, I mean we have looked very carefully now with the trajectory that we're looking at for ARISTADA, and importantly, planning for the launch of 3831. And as that planning advance with 3831, we were better able, I think, to streamline and logically put together an organization that can support both products in the Schizophrenia area. And so we haven't -- we made slight adjustments to the outward facing sales organization, but a lot of adjustments to streamlining the back office work on the SG&A side. And as I mentioned, roughly one-third of the savings are going to be next year in R&D and two-thirds in the SG&A side. But we do think we're positioned appropriately for both ARISTADA and 3821.

Richard F. Pops -- Chairman and Chief Executive Officer

And I'll take the question on SITC. Recall that there are two major elements of the 4230 program right now. One is called ARTISTRY-1, which is the intravenous program that has multiple facets to it, a dose escalation phase, an expansion phase and a combination with pembro phase. And then what's called ARTISTRY-2, which is the subcu dosing regimen where we're testing 4230, administered both once weekly and once every three weeks.

So we'll be presenting data on the program at SITC on ARTISTRY-1 and a trial in progress poster on ARTISTRY-2. And I think the expectation, the first efficacy data is coming from the element of the development program that involves patients who have been enrolled primarily in pembro unapproved tumor types. But we'll give an update across the whole monotherapy dose escalation phase as well.

Neena Marie Bitritto-Garg -- JPMorgan -- Analyst

Great, thank you.

Operator

Our next question comes from the line of Jason Gerberry with Bank of America. Please proceed with your questions.

Jason Gerberry -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my questions. Just a couple from me. Just on the cost restructuring, so relative to 2019 where I think the implied cost spend for OpEx is about $1.1 billion [Phonetic]. Should we, for forecasting purposes, assume that on a net basis that that up-spend or OpEx spend is going to be down directionally or proportionate with the amount of the restructuring plan?

And then, a follow-up on the Teva proposed donation of addiction treatments; Rich, just can the Medicaid channel specifically dictate that patients have to move to a buprenorphine tablet-based therapy, if they're getting supplied this via donation? Just sort of curious how to think about the potential risks around the Medicaid channel? Thanks.

Richard F. Pops -- Chairman and Chief Executive Officer

Jim, why don't you go ahead on the restructuring and I'll talk about bout the...

James M. Frates -- Senior Vice President and Chief Financial Officer

Yeah. Thanks, Jason, for clarifying that. And -- so it's very important that the $150 million that we mentioned is based off our 2020 plans, which align roughly with the 2020 sell side consensus that we saw in early October -- late September, early October. So, yes, our spending will be down compared to 2019. But the $150 million you should adjust off your 2020 numbers. It's certainly not because we also adjusted our 2019 numbers for the beginning of this restructuring with the $30 million that I mentioned as we improved guidance.

So if you base it off 2020, I think you should be in line with our expectations. And as I mentioned, we'll give more specific guidance when we guide with our full budget in February.

Richard F. Pops -- Chairman and Chief Executive Officer

And Jason, I don't know exactly how the program will work. It's actually quite difficult to give free goods to the government, particularly since the implementation of these treatment programs is generally at a state or a county level. But I think the basic structure is what I said before, most -- the dominant form of treatment right now in the community is SUBOXONE, Buprenorphine and/or Methadone and most patients don't get access to MAT at all.

You've heard us say before, there is something like 14,000 treatment centers in America, less than half of which use medicines. And only 4% use all FDA approved medicines. So there's a huge amount of white space there to start channeling people from incarceration, from just cycling through failing counseling type programs into medication assisted treatment programs. Increasingly, MAT programs across the country are learning how to use VIVITROL as well.

And once revisions of the most recent opioid bill is passed in the Congress, this idea of piloting comprehensive opioid recovery centers, CORCs, that provide by -- in order for that, for that [Indecipherable] to be granted, they have to provide all the FDA approved medicines as well as the other determinants of health, including counseling and job placement, housing all those other things.

So it's a long answer to a simple question, but I think that just simply providing free buprenorphine is a small element of an overall treatment system that is in need of revision that's starting to happen, and I think more people in treatment means more people at the top of the funnel for the potential use of VIVITROL.

Jason Gerberry -- Bank of America Merrill Lynch -- Analyst

Right, if I can just squeeze a follow up and just on ARISTADA the prescription trends would suggest that volumes grow around 40%-ish in 2019, yet the midpoint of net sales growth is 27%. So what is -- can you just walk us through that disconnect of scripts growth and net sales growth and what those items are? I know that the first quarter, you had the inventory fluctuation, so if you can give us a little bit of a bridge there, that'd be helpful.

James M. Frates -- Senior Vice President and Chief Financial Officer

Yes, Jason, I think that's exactly it. If you look at the first quarter and the fourth quarter of last year and may be smooth that growth over time. You get to a number that's more in that 40% range, which we're seeing in the underlying script trends and I think that's what Rich emphasized earlier. ARISTADA is growing very nicely. We were incorrect in our guidance at the beginning of the year as we thought our new programs maybe would drive additional growth on to that. We're focused on making sure that the education around ALPINE and our additional hospital sales force does generate longer-term growth, which we think it will.

And that's one of the reasons why though we also adjusted our cost base here in Q3. But I think if you -- if you look a little bit broader than this year into Q4 of last year and smooth that out over the quarters, you'll see that the underlying unit growth is real and we should continue to see that pull through in the market. And we're just becoming more conservative in our guidance here, finishing up the year.

Jason Gerberry -- Bank of America Merrill Lynch -- Analyst

Okay, thank you.

James M. Frates -- Senior Vice President and Chief Financial Officer

You're welcome.

Operator

Our next question comes from the line of Paul Matteis with Stifel. Please proceed with your questions.

Alex Schwartz -- Stifel Nicolaus -- Analyst

Hi, this is Alex on for Paul, just a couple of questions from us here. The first of which is, do you have any visibility on contracting dynamics in the LAI market, sort of in the next few years, where do you expect gross to net to grow -- to go over time? And the second question is, could you walk us through a little bit more the sort of recent tentative approval for VUMERITY? Where you see the path to approval and the eventual commercialization going? Thanks.

James M. Frates -- Senior Vice President and Chief Financial Officer

Yeah, Alex. Good morning. On the gross-to-net side, I think we're into the contracting dynamics, now you know three, four years into the market and I think we've expected gross-to-net should hold pretty steady in the 50% range, which is what we're modeling long term. Barring any major changes that we don't foresee at this point.

Richard F. Pops -- Chairman and Chief Executive Officer

And on the VUMERITY, as you know we received tentative approval, which is a formal designation. We've completed the review that the drug is approvable. We're waiting just on the resolution on that outstanding exclusivity issue and we and Biogen and working with FDA right now to get an expeditious resolution of that. We're planning for approval this quarter.

Alex Schwartz -- Stifel Nicolaus -- Analyst

Great, thanks.

Operator

Our next question comes from the line of Biren Amin with Jefferies. Please proceed with your question.

Biren Amin -- Jefferies & Co., Inc. -- Analyst

Yeah, hi guys thanks for taking my questions. A follow-up on 4230, with the data coming up at SITC. Would ARTISTRY-1 data inform on the next phase of studies or would you have to wait for the ARTISTRY-2 data before moving the program forward? And Richard, I think you mentioned that investing in early oncology research in terms of investing in cytokines. When can we expect to learn more about these efforts in terms of new compounds and IND filings?

Richard F. Pops -- Chairman and Chief Executive Officer

Good morning, Biren. ARTISTRY-1 is the daily IV times five regimen, which is not an optimal regimen. But it's the IL-2 regimen. And that's why we chose it to give some type of apples-to-apples comparison in terms of the cellular expansion that we're seeing with the regimen compared to high-dose IL-2 and it's that regimen that allowed us to achieve what we call the recommended Phase II dose in June, which we felt at 6 micrograms per kg IV daily times five is equivalent to high dose IL-2 without the corresponding expansion om regulatory T-cells.

So that is that which is, if you will, a benchmark, a baseline for what the pharmacodynamic capacity is of the molecule. By the way, we don't think that's the limit. We're continuing the dose escalation monotherapy Phase just to see what the MTD is. But that then gives us a comparator because clearly a subcu form is a more commercially attractive presentation for 4230. And based on the primate data and preclinical work, we didn't see any reason why we wouldn't be able to shift to a subcu dose.

So to answer your question, I think that if we continue to see progress in ARTISTRY-2, we will ultimately shift over to most of our efficacy studies being run in the subcu format. With that said, if we were moving very fast and we're not there yet, if we did see in the expansion cohort in melanoma and renal cell patients who have failed pembro and are on their last treatment options, if we were seeing striking responses in that IV cohort in ARTISTRY-1 we would certainly sit down with FDA.

Biren Amin -- Jefferies & Co., Inc. -- Analyst

So, is that something that we can expect in terms of pembro -- 4230 responses in pembro failures at SITC, should we expect some of that data there?

Richard F. Pops -- Chairman and Chief Executive Officer

That expansion cohort in renal cell and melanoma opened recently, so you won't see any data probably from patients. What you will see is data from the pembro combos in pembro unapproved tumor types.

Biren Amin -- Jefferies & Co., Inc. -- Analyst

Got it, thank you.

Richard F. Pops -- Chairman and Chief Executive Officer

And the second -- the second question was about the new things and I think you'll see in 2020, I think you'll see us introduced some of the new elements of the pipeline.

Operator

Thank you. Our next question is coming from the line of Brandon Folkes with Cantor Fitzgerald. Please proceed with your questions.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Hi, thanks for taking my questions. Maybe just a follow-up on ARISTADA, you talked about potentially being too optimistic in your assumptions when you gave guidance this year. And granted the difference in the products with ARISTADA and 3831, but are there any broader market learnings or read-throughs to this 3831 launch that maybe -- may change your assumptions there?

Richard F. Pops -- Chairman and Chief Executive Officer

We'll Brandon, it's Richard. They're different and they're similar. They're different in the sense that an injectable is always going to be different than an oral in that category, because so many physicians -- if you look at the number of prescriptions written or number of prescribers writing orals compared to the number of prescribers writing injectables, it's probably a 10x difference in the two. So the concentration of the business for the LAIs is in a much smaller group of physicians. They tend to be slow to change and data doesn't actually drive a whole lot of change, it just -- it takes a lot of time to change behaviors.

And that's why we felt like we had to keep adding straws to the camel's back through not just a range of doses, a range of durations, but then INITIO and then two months and then ALPINE. We just keep building the evidence base for the use of ARISTADA.

But I do think it's a fair warning for 3831 because things in psychiatry and schizophrenia, particularly when you have government payers, these are not square wave launches. People do not rush and warehouse patients to put them on new medicines. You fight your way through generics, and so I think the launch is gradual, irrespective of the dosage form itself.

So when we guide for the 3831 launch, I think we'll guide recognizing that often there are new drug blocks for the first six months. There is often impediments to using new drugs, but the countervailing force, of course, is that there are literally millions of patients and a lot of inadequate treatment out there. So I think we'll guide conservatively and we'll hope to build on the infrastructure that we've built.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Great, thanks. And maybe one follow-up if I may. So, granted you have the savings program and restructuring. How should we think about capital allocation going forward in terms of priorities? Is it M&A, is it R&D investments in these new oncology compounds you talked about, share buybacks. And how should we think about that allocation between the CNS and oncology business? Thank you.

Richard F. Pops -- Chairman and Chief Executive Officer

Yes, I think it's hard to say at this moment what the ratio will be. What we've really done is focus down and we had a fairly broad approach to a lot of different things over the last few years. As you saw, our R&D expenditures grow and we're really focusing down now where we're seeing the most -- where we're seeing the most value. So, I would think -- of the things you said, we're very interested in licensing M&A particularly to expand the development portfolio.

We're very interested in licensing M&A to leverage the commercial infrastructure that we're building. And we have internal R&D that's beginning to bear fruit that we'll continue to fund. So in the restructuring, we wanted to be pretty severe in terms of getting rid of cost that we don't need by preserving our ability to spend aggressively into the things where we see that we're creating the most value.

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Great, thank you very much.

Richard F. Pops -- Chairman and Chief Executive Officer

You're welcome.

Operator

Our next question comes from the line of Marc Goodman with SVB Leerink. Please proceed with your questions.

Marc Goodman -- SVB Leerink -- Analyst

Good morning. Couple of questions. First of all, on 4230, you had told us before you're going to spend in the order of $75 million this year. I was just curious if that's still the number and should we be expecting that number to be $100-million-plus as we move into next year?

Second of all, you're taking $50 million out of the R&D line. Are those any programs that have been cut, any programs that you are planning on doing or is this just all back office spending and if it is, just give us an idea of what exactly is going away? Still little confused on that.

And then third, in the SG&A side, we had previously assumed that you would be adding quite a few sales reps for the launch of 3831. Given your comments now, I'm not sure if you're adding any. I'm a little confused over how you're thinking about that? If this is just going to be a reallocation of reps from ARISTADA over or will there be increasing reps? And if so, can you give us a sense of how you're thinking about it now? Thanks.

James M. Frates -- Senior Vice President and Chief Financial Officer

Sure, Mark. Good morning. Thank you. Appreciate the questions. I'll try and take them each in turn and if I miss one, remind me of the specifics, please. On 4230, you're right, we are -- we talked about spending that increase of roughly $75 million and I think plus or minus in 2019. That's the order of magnitude, I think you should expect us to continue to spend in 4230. That program can grow actually quite rapidly, you know depending on how many once these early stage studies are complete, depending on the next stages that Biren and Rich were talking about earlier, those can be expanded. We're planning to be able to do that.

We're also looking obviously at partnerships, both on the R&D side and the commercial side ultimately for 4230. But, yes, that's one of the things we wanted to preserve was that investment both this year and into next year. The adjustment in guidance that we made for this year, I think is related to a few things. One, the head count separations that we're making this year. Obviously a lot of that will play more into next year rather than this year and it's offset by a restructuring charge this year. A lot of it has to do with the ultimate expansion in terms of the number of expansion heads that we were anticipating into -- through '19 and into '20 and we're changing our plans there as we focus our R&D.

And we're also reallocating people. Now that means different skillsets and different -- different hiring pattern and unfortunately the separation with some employees as we wind down some of the larger Phase III programs like VUMERITY. 3831 Phase IIIs are winding down as we shift from that Phase III development capability more into investment in the R&D earlier stage pipeline capability that we have.

So a lot of those costs are shifting and we are tightening our focus on some of the newer programs and away from those late stage Phase IIIs and also the drug delivery and precedented biology work that Rich was talking about earlier. So, that change is happening with focus.

And then on the SG&A side, we are making adjustments now in the back office, in our structure there. We will plan to add and expand our sales force in 3831. We see that more happening in 2021 and beyond, but the savings in the back office and the focused work in SG&A will help us with next year spend and then also that revised structure going forward will save us from additional spend in the years to come as well.

But we do expect to add sales force, but I think the majority of those costs will be in 2021 when you look at us filing the NDA for 3831 here in the fourth quarter and then also having the 90 day review period of time, If you'll remember, for Samidorphan and the DEA that's also going to be tacked on before we can launch. So hopefully those specifics will answer your questions.

Sandra Coombs -- Vice President of Investor Relations

Okay. Rob, we have time for one more question, please.

Operator

Yes, thank you. The next question is coming from the line of Akash Tewari with Wolfe Research.

Akash Tewari -- Wolfe Research -- Analyst

Hey, thanks for taking my questions. So on the last call, you had mentioned that long-term margins for ARISTADA and VIVITROL would approach about 20% to 30%. In light of today's restructuring program, where would those margins kind of look now? Can we -- could we think maybe 40% to 50% and where have your internal expectations on topline revenues for both of those programs change? It sounds like ARISTADA has come down a bit. It's kind of unclear on VIVITROL.

And on the slides, you had mentioned that your cost restructuring could lead to several hundred million dollars in savings in the long term, so it sounds like the $150 million is for 2020 and it's more -- it's not a net cut more than just spending that you wouldn't do otherwise. When could we expect to see those several hundred million dollars in cost savings? Thanks.

James M. Frates -- Senior Vice President and Chief Financial Officer

Sure. Akash, so I'll maybe start with the last question and move forward. So we outlined earlier, right, we're looking at our 2020 spend plan. When we're talking about our $150 million of savings, we're looking at our original 2020 spend plan, which as I mentioned earlier, aligns roughly with 2020 sell side consensus from earlier in the year and that's where the $150 million of savings are identified. But as you can imagine, you know the trajectory of spend with both external spend and a lower number of head count and fewer additions to our infrastructure, those savings are going to yield over time, if you're looking at a five-year revenue model plus a five-year expense model.

And so that $150 million while not necessarily repeated every year because we're going to have additional spend as we grow the business from this adjusted baseline but we're adjusting the baseline of our costs and our cost growth to make sure that we can commit to long-term profitability. And importantly I think expanding profitability as we look at adding to the topline with the likes of VUMERITY and 3831 and additional growth on ARISTADA and VIVITROL.

Turning to our long-range expectations for ARISTADA and VIVITROL, I mean, I think obviously as we -- as we look at were at 2019 and where we exit 2019, we'll make adjustments there, but I think our overall expectations for both products, we remain optimistic. We'll guide in 2022 to a logical extension of our existing growth rates. But long-term, I don't think we've lost our potential view that both of these products can be very, very important ones.

Certainly with VIVITROL, as Rich mentioned, earlier right now around average market penetration of 5% across the country and in certain states, over 10%. We think as the treatment paradigm changes, there is long-term growth opportunities for VIVITROL that can be -- that can change the trajectory of that product really at any time depending on state by state changes.

And then with ARISTADA, I don't think we fully understood and realize the value of the product with our ALPINE data and our focus on hospital starts and we're going to continue to work on changing that growth trajectory as we move forward.

So -- and then the last one was overall profit margins. I mean I think, overall for the business, yes, our margins are increasing, especially I think with the addition of new revenues from VUMERITY and 3831 and -- but more specific adjustments now in the long-term model. I think we'll leave to another day as we see what those growth trajectories actually are into 2020.

Akash Tewari -- Wolfe Research -- Analyst

Got it, thanks.

James M. Frates -- Senior Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. We've reached the end of our allotted time for questions today. And I will now turn the call over to Sandy Coombs for closing remarks.

Sandra Coombs -- Vice President of Investor Relations

Great. Thanks everyone for joining us on the call today. Please don't hesitate to reach out to us at the Company, if you have any additional questions. Thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Sandra Coombs -- Vice President of Investor Relations

Richard F. Pops -- Chairman and Chief Executive Officer

James M. Frates -- Senior Vice President and Chief Financial Officer

Umer Raffat -- Evercore ISI -- Analyst

Chris Shibutani -- Cowen & Co. -- Analyst

Neena Marie Bitritto-Garg -- JPMorgan -- Analyst

Jason Gerberry -- Bank of America Merrill Lynch -- Analyst

Alex Schwartz -- Stifel Nicolaus -- Analyst

Biren Amin -- Jefferies & Co., Inc. -- Analyst

Brandon Folkes -- Cantor Fitzgerald -- Analyst

Marc Goodman -- SVB Leerink -- Analyst

Akash Tewari -- Wolfe Research -- Analyst

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