Alkermes Nabs $250M It Doesn't Need, but Could Fend Off Barbarians
Alkermes doesn't want to be the little fish that ends up getting swallowed by a big fish someday, like so many other biotechs. Today it has raised another $250 million so that it can be more aggressive, and maybe even more acquisitive, when it wants to be.
The Dublin, Ireland and Waltham, MA-based biotech company, said this morning that it has snapped up $250 million in new cash. The money is coming through a registered direct offering of about 5.9 million shares, at $42.25 apiece, to a single shareholder-U.K.-based Invesco Perpetual. The investment was made on par with the share price on the open market on Thursday, says Alkermes CEO Richard Pops, although it does represent a 6.3 percent discount from Friday's closing share price of $45.13.
This deal was done for a variety of strategic reasons, Pops says. Alkermes is now worth more than $6 billion after seeing its shares more than double in value over the past year, meaning it can sell new shares on good terms without excessively diluting the value of existing shares. By bringing Invesco Perpetual into its shareholder mix with a 4 percent ownership stake, Alkermes now counts five deep-pocketed institutional investors— Fidelity, Wellington Management, T. Rowe Price, Blackrock, and Invesco Perpetual—who collectively control more than 50 percent of Alkermes shares, Pops says. That kind of shareholder bloc means Alkermes can stay in close contact with a small group of people who believe in its long-term growth plan, and could choose to fend off any unwanted takeover bid.
It also means that Alkermes has more money to be opportunistic, possibly through using its financial strength to acquire or in-license assets.
Alkermes doesn't need the money. The company reported a net loss of $7.7 million in its most recent quarter, but that accounting can be deceptive. Alkermes, even while reporting a net loss, has been consistently cash-flow positive since shortly after its 2011 acquisition of Ireland-based Elan Drug Technologies. The company had $209 million in cash and short-term investments in the bank on Dec. 31, 2012, and had amassed more than $339 million as of Sept. 30, 2013, according to its most recent quarterly financial update. Total revenue in its most recent quarter was about $140 million, a 12.7 percent increase from a year earlier. Alkermes gets revenue from five main product lines—the biggest of which consists of drugs for schizophrenia like Johnson & Johnson's risperidone (Risperdal Consta) and paliperidone (Invega Sustenna).
Pops added that the new $250 million isn't needed to support the company's R&D budget, which is now paid for by ongoing positive cash flow from marketed products. Instead, Alkermes will use the new money to seize opportunities that it might not otherwise have been able to grab if it were entirely focused on just minding the store.
Invesco Perpetual's Neil Woodford, a "star" fund manager who is leaving in April according to the Wall Street Journal, was the key player on the fund side of the deal. Pops says he's gotten to know him over the past two years, as Woodford watched Alkermes integrate Elan Drug Technologies and continue to grow in value. By getting a long-term "Warren Buffett buy-and-hold" kind of investor in the mix from Europe, Alkermes is also rounding out a mix of shareholders from Europe who aren't always on the same up and down cycles as American investors, which can provide some extra balance, Pops says.
Despite the steady upward trajectory of Alkermes' stock price, not everything has gone swimmingly. Not that long ago, many investors viewed Alkermes' prospects as being based largely on its royalty collections from exenatide once-weekly (Bydureon), a treatment for diabetes. That drug has fallen short of expectations, and Bristol-Myers Squibb recently announced it was handing over its stake in the drug to its partner, AstraZeneca.
The disappointment of Bydureon, however, looks more like a pebble in Alkermes' shoe more than anything else at this point. Cory Kasimov, an analyst with JP Morgan who has long recommended Alkermes, said in a note to clients on Jan. 8 that "[Alkermes] is one of our top picks headed into 2014, as we believe the company is well positioned for this year and beyond, with a diversified commercial story coupled with an increasingly compelling new product pipeline."
This year, the story investors want to hear from Alkermes is mostly about its R&D pipeline. The company is awaiting results from a pivotal clinical trial of its longer-lasting, once-monthly injectable version of aripiprazole. The original drug marketed as Abilify, used mainly for schizophrenia or bipolar disorder, generated worldwide sales of $2.8 billion in 2012. Results for the new version from Alkermes are expected in the first half of 2014. Alkermes also recently disclosed that it is developing an even longer-lasting version that may be injected as little as once every two months.
Another key Alkermes program investors are watching this year is ALKS 5461, a treatment for major depressive disorder that passed a mid-stage clinical trial last year. This year, the company has teed up a clinical development plan that calls for three pivotal trials that will start this year and collectively enroll about 1,500 patients.
Pops, who has been with Alkermes since he joined as CEO in 1991, has said for many years he wants the company to grow into the category of "Big Biotechs" populated by much larger enterprises like Amgen, Biogen Idec, Celgene, and Gilead Sciences. Alkermes, at a $6 billion market cap, is still a long way from that ballpark. But to get there, the company may choose use a combination of its own internal R&D, combined with the occasional acquisition.
In one breath during our interview, he noted that "We have one of the best CNS portfolios in the business." And then, a minute later, he added that he admires what Forest Laboratories and Valeant Pharmaceuticals have done in building strong companies through acquisitions. Adding $250 million in cash is really just one step in executing on a grander plan, Pops says.
"It's a strategic move, it gives us additional flexibility to be strategic should we choose to," he says. "This is what's exciting about being a $5-6 billion company, instead of $500m (market cap) company. In that stage, it's about funding R&D. We now have sufficient cash flow for R&D. This is about how you think about becoming a $50 billion company."
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