Alkermes Plc (NASDAQ:ALKS) is already marketing drugs for central nervous system disorders and generated nearly $250 million in revenue last quarter. Its plans to launch a new drug treating depression, however, suffered a big setback this month, when the FDA's advisory committee recommended against its approval. The FDA doesn't have to follow the advice of its advisors, but it usually does, and that casts significant doubt on the future of ALKS-5461. Can Alkermes recover from this disappointment?

In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones and contributor Todd Campbell discuss the advisory committee's decision and what's next for Alkermes.

A full transcript follows the video.

This video was recorded on Nov. 7, 2018.

Shannon Jones: Let's dig into Alkermes. For our listeners, on Nov. 1, Alkermes, ticker ALKS, had the opportunity to make its case for its depression drug ALKS 5461 -- we'll just call it 5461 -- in front of an FDA advisory panel of experts. 5461 has been studied, is still being studied, in treatment-resistant major depressive disorder. But this drug in and of itself has had quite the roller-coaster history. Looking at earlier this year, in April, at one point, you had the FDA issuing a refuse-to-file letter. In the grand scheme of things, a complete response letter is terrible. When the FDA refuses to even look at your drug, because they say it's not complete enough, that is red flag of red flags. But, two weeks later, all of a sudden, the FDA did an about face. Alkermes came out and said that they were able to "clarify" some things with the FDA.

Todd, what is all the fuss with this drug, 5461?

Todd Campbell: It makes you wonder whether they really clarified things, or if they basically just strong-armed them and said, "We're filing it anyway!" And the FDA said, "Hey, do it at your own risk." I urge everybody to go out and check out the background that that was put together by the FDA for the members of the Advisory Committee.

As a refresher, what ends up happening with many of these drugs that go through the FDA process of approval is that the company will make a presentation in front of a panel of experts in that field and try to convince that panel of experts that their drug is both efficacious, it works, and that it's safe, it doesn't harm anybody relative to the efficacy that it delivers. That's what we're talking about.

The FDA Advisory Committee panel meeting met to weigh in on 5461. And they voted overwhelmingly against its approval. The vote was 21-2 overall against approving it; 20-3 said that Alkermes did not provide substantial evidence of the drug's effectiveness. That's crazy. They only convinced three people that the drug was approvable for efficacy. And on safety, it squeaked by with safety barely -- 13 votes in favor on safety versus 10. And if you read the background that was put together by the FDA for these committee members, you certainly feel a slant against this drug by the FDA. You'd assume that probably factored into the committee members' decision.

Jones: There were so many interesting things. I would encourage any healthcare investor, if you are investing in the biotech space, I would say this is just as important as reviewing SEC filings -- reviewing the Advisory Committee briefing documents, to your point, Todd, is crucial. Oftentimes, a company may issue a press release, or they'll say, "We had very successful talks with the FDA and we're both on the same page." Really, I think what this panel demonstrated and highlighted is that that's not always the case.

Looking at this drug, it was novel. Not just the drug itself, but even from a study design perspective. Todd, what can you tell us about the drug itself? This is not your typical antidepressant.

Campbell: Alkermes, I think, was thinking that because there's such a big need for new therapies that can address depression, they could push this over the finish line. There are about 15 million people in America who suffer from major depression. About 3 million new cases of major depression are diagnosed per year. Unfortunately, 60%-70% of people with depression fail to respond to the existing antidepressant therapies that are on the market, and less than 30% achieve remission in depression on the first line of therapy that they try. So what ends up happening is that they go through multiple lines of trying and failing on different antidepressants, hoping to find the right one that will work for them.

Part of that is because we don't fully understand the cause of depression. We can make some assumptions about biology. We know that the environment can factor into causing it as well. Most of the antidepressants, what they try to do manipulate the amount of chemicals that are in your brain, things like serotonin, to try and improve mood. This was going to be an entirely novel approach, an entirely new approach.

What they were doing at Alkermes was combining together an opiate and a second compound that was designed to prevent you from becoming addicted to the opiate. You had buprenorphine, which is the opiate part of 5461, and samidorphan, which was the new entity that was trying to counteract the risks associated with taking buprenorphine. The idea here was, "We know that opiates can improve mood. Is there a way that we can make them less addictive?"

We look at the trial design, the way that Alkermes set up the trials to try and win approval... [laughs] again, reading this background, wow. They actually said in the background at one point, the FDA wrote that there was a "lack of alignment between the applicant and the FDA on this new drug application." A lack of alignment. It's really weird when you're being told by the FDA, "Hey, these are the things that you should probably do if you want to come in front of us and win approval," and you're basically ignoring them and saying, "No. We're going to do these things. We're just going to hope that you give us approval."

Jones: Yeah. That's what's been the big head-scratcher here. You sometimes expect to see this with really small, very early-stage biotechs. You don't expect to see it with a company like Alkermes. They're about a $6 billion market cap company, with approved products already on the market. That was a bit of a head-scratcher.

Going back to that trial design, it's something called sequential parallel comparison design, or SPCD. The reason that Alkermes was attempting to use this novel study design that the FDA didn't think had much merit was trying to get after one of the major problems that they see with depression trials, and that's the placebo effect. You see this consistently with drug companies that attempt to go after this depression indication. Oftentimes, when a patient is exposed to placebo, they have improvements. It makes it much harder to see the actual effect of the drug in the trial. Alkermes was attempting to mitigate this with this study design. Uh... basically, they failed. [laughs] I'm trying to think of a nice way to say it. They failed! [laughs]

Campbell: Downright failed! I mean, you think about the people who will enroll in a trial, it's going to be the ones who are most motivated to want to see an improvement. I think that's probably why you see the placebo effect typically being high in these trials. Historically, that's been a big problem for drug developers. Failure rates in depression and related disorders are much higher than they are in other disorders where maybe you can connect the dots little bit more easily to treatment versus outcome. This two-stage trial design approach, basically what they did is they randomized for the drug and for placebo, then they took the non-responders, and that's from that stage one that were in the placebo group, and then randomized again into either the placebo or the drug. And the FDA basically said, "We've never really considered this for any trial. We would need to see a lot more evidence to be convinced that this is a good way to design it." And, apparently, obviously, Alkermes did not deliver that.

That wasn't the only problem. They also designed the trial to take an average of outcomes over multiple weeks. Historically, when trials are designed for this indication, they use a fixed endpoint, so the improvement at the six-week mark or the four-week mark or the five-week mark, whatever. In this case, Alkermes was trying to convince them, "No, use an average." They actually wrote in this background, "The division did not prospectively agree on this approach." [laughs] So they already had told Alkermes, "Listen, we're not really comfortable with this."

And the third problem that Alkermes had, the third decision that they made that went against what the FDA was hoping that they would do, is that they used entirely new rating scale that they crafted. The Montgomery-Asberg Depression Scale rating is commonly used, but it's a 10-item questionnaire. And they cherry picked it. They created their own six-item version of it that excluded some pretty important stuff like suicidal thoughts.

Jones: The actual important things, and particularly more so, the things that really have not just a long-term impact, but, to your point, suicide, concentration difficulties, reduced appetite, reduced sleep, these are all things that are important for someone who suffers from depression.

In terms of what's next for the company... to back up a little for our listeners the FDA Advisory Committee makes a recommendation to the FDA whether or not to approve a drug. The FDA doesn't have to follow those recommendations. Sometimes, you've even seen the FDA be a little more lenient when it comes to psychotic therapies. But right now, Alkermes is still running a phase 3b study. Not a lot of hope, especially given the trial results that we've already seen, but they have an approval date of Jan. 31. We could find out before then whether or not the FDA gives the green light. Thankfully, it sounds like this isn't the only thing that Alkermes has in the pipeline. Right, Todd?

Campbell: Yeah, it's not a one-trick pony. It already generates about $250 million in sales per quarter. If you look at last quarter, sales were up about 14%. It markets a drug, Vivitrol, that's used to help prevent relapses for people who are addicted to alcohol or that use drugs. Sales of that drug were $80 million last quarter, up 15% year over year. It also has an atypical anti-psychotic drug, Aristada, that's approved and generating revenue growth for the company. It also collects royalties on a bunch of different anti-psychotic drugs that are on the market already and marketed by some of the largest companies in the world.

This is definitely a company that generates revenue on an adjusted basis. It turns a profit. But this is obviously a disappointing failure because it's a multibillion-dollar marketplace, and it could have turned this 5461 into a billion-dollar blockbuster for them.

Their next thing that investors are going to want to keep an eye out for is results from a drug called 3831 that's being evaluated in schizophrenia. Basically, it's a version of Zyprexa, which is commonly used but its patent expired, so they can manipulate it if they want, and they are. They're manipulating it so that it doesn't result in weight gain, which has been a big drawback of Zyprexa. Phase 3 results are expected before the end of this year. If they're positive, they could file for FDA approval next year. Zyprexa's peak sales were above $2 billion, so theoretically, this could add nicely to its sales in the future.

Jones: Absolutely. Also, what's really interesting is, Alkermes also has an early immuno oncology asset in their pipeline now. It'll be interesting to see this traditionally CNS-focused company pivot into immuno oncology. Certainly something to keep an eye on.

Shannon Jones has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alkermes. The Motley Fool has a disclosure policy.