Alkermes (ALKS +6.09%) has grown to be a $6.7 billion biotech by giving drugs a second chance -- taking established drugs and improving them with new formulations to make them more useful. After a surprising rejection two weeks ago of a New Drug Application (NDA) by the FDA and a 26% plunge in the stock price, and an equally surprising reversal of that decision today, investors are wondering whether Alkermes itself deserves another chance, or if it's just time to throw in the towel.
The drug in question is ALKS-5461, a once-daily oral medication for Major Depressive Disorder (MDD) that Alkermes claims is the first new approach to depression medication since Prozac was approved nearly 30 years ago and was expected to be the company's first blockbuster drug. On March 2, the company reported that it had received a Refusal to File (RTF) letter from the FDA, saying it was unable to review the data in the submittal package "based on insufficient evidence of overall effectiveness for the proposed indication, and that additional well-controlled clinical trials are needed prior to the resubmission of the NDA."
Is ALKS-5461 dead?
Alkermes officials expressed shock and anger in the conference call with analysts. It wasn't that the FDA had looked over the data and concluded that it didn't support approval of the drug. Instead, the agency dismissed the application out of hand, refusing to review the data at all.
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Making the rejection particularly puzzling was the fact that the company had met with the FDA twice to discuss the submission and had prepared an extensive briefing document in preparation for the pre-NDA meeting. If there had been concerns about the suitability of the filing, there was plenty of opportunity for the FDA to make them known before this.
Today, in yet another stunning turn of events, Alkermes announced in a terse press release that the FDA had reversed its decision of two weeks ago and will review the application after all, with a target action date of January 31, 2019. The share price is recovering, but still remains far below what it was before the RTF, reflecting ongoing investor concerns for approval.
Is ALKS-5461 dead or not? Well, the company doesn't think so, and the FDA is apparently going to give it a chance, but I think prudent investors should assume it is. The refusal to file certainly did seem unjust, but even though the FDA has relented on that decision, it is only agreeing to review the data. Passing that review is the big hurdle, and the agency has already tipped its hand on how it feels about the adequacy of the clinical data for ALKS-5461. If Alkermes needs to conduct another trial, the delay could be a couple of years, with no certainty of success even then.
We've seen this movie
Long-time Alkermes investors should be getting deja vu about now. This setback for ALKS-5461 is essentially a repeat of what happened in January 2016, when the company reported that the drug missed primary endpoints in two separate phase 3 trials. There was one more pivotal trial running that would eventually be a success, but at the time, there was no reason to assume ALKS-5461 was going to be anything but a bust.
On one hand, the apparent failure of a potential blockbuster for a second time is discouraging, but on the other hand, it gives investors a reference point. We can look at the valuation of Alkermes' stock the last time analysts took ALKS-5461 out of their spreadsheets and compare it to today's valuation and outlook for the company's business, assuming zero contribution from the drug.
The day Alkermes announced the two trial failures, the stock lost 44% of its value to close at $33.69. The stock bounced around the $33 level for a few weeks and gradually recovered to the $40s during the year, thanks to nice sales growth from its portfolio. On the day the positive results from the third pivotal trial were announced, the stock jumped from $43.51 to $55.62.
Last week, in the wake of disappointment over the FDA decision, the stock sat at about $43, almost exactly the price it was just before ALKS-5461 came back into the picture. If we consider that range of $33 to $43 in 2016 as representative of the market's valuation of the company excluding the depression drug, we can compare it to today's valuation, also considering the progress the company has made since then.
In early 2016, when the stock was selling for around $33, trailing-12-month revenue was $628 million, or $4.18 per share. Now, two years later, the company has increased trailing revenue 44% to $903 million, or $5.64 per share after a modest increase in the share count.
Alkermes stock was selling last week for 7.6 times sales, compared with 7.9 times in early 2016 and 8.9 times sales on October 20, 2016, the day before the successful trial of ALKS-5461 was announced. Using valuations from 2016 as our guide, we could reasonably expect Alkermes to be valued from about $45 to $50, assuming no contribution from ALKS-5461.
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Alkermes has made progress since 2016
A strong argument could be made that Alkermes actually deserves a higher valuation now than it had two years ago. Sales of the company's flagship drug, naltrexone, or Vivitrol, for opioid and alcohol addition addiction, have finally taken off after having been on the market since 2006. The company had to invest in a unique sales force to sell the drug to treatment centers and law enforcement organizations rather than to medical professionals. Vivitrol sales are up 86% from 2015 to 2017, and they grew 22% in the most recent quarter. The drug, which is turning out to be an important tool in the battle against the opioid abuse epidemic, is even mentioned specifically in President Trump's opioid initiative. Altogether, net sales of Alkermes' proprietary drugs grew 42% in 2017 and are expected to grow 28% in 2018.
The company has also advanced other candidates in its pipeline. In November, Alkermes and Biogen announced a partnership to commercialize ALKS-8700, now called BIIB098, for multiple sclerosis. That candidate could be on par with Biogen's Tecfidera, which had $4.2 billion in sales last year. Biogen's commitment is an important vote of confidence from the leader in M.S. drugs, and it should pay off well in both milestone payments and royalties, with an expected NDA filing this year.
The company is also getting close to completing clinical studies of ALKS-3831, a derivative of an existing schizophrenia drug that could diminish the side effects of weight gain and metabolic problems. Phase 3 results are expected this year with an NDA filing in 2019.
Give up on the depression drug, but don't give up on Alkermes
The apparent second failure of ALKS-5461 took us back to where we were in early 2016, but with two important differences: The stock is cheaper relative to sales, and the company's business is further developed, both in terms of its portfolio and its pipeline.
For sure, there is plenty of risk in the stock, as there always has been. The company is still not profitable, although the company may want to hold back on launch expenses for ALKS-5461 in 2018, and if it does, profitability is actually a possibility this year. Even if the potential blockbuster is a total loss, the stock still holds potential for investors willing to take the risk.
