Alkermes Plc

NASDAQ:ALKS

Earnings Call Transcript 2019-Q2

[Operator]

Greetings and welcome to the Alkermes plc Second 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, Investor Relations]

Good morning. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended June 30, 2019. With me today are Jim Frates, our CFO; Craig Hopkinson, our Chief Medical Officer; and Richard Pops, our CEO.

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 the 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 report 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.

Our prepared remarks today will include preliminary data from certain clinical trials. These data may change as patient enrollment continues and as more patient data becomes available and may not be indicative of final data from such trials or results of future clinical trials.

After our remarks, we'll open the call for Q&A.

Now, I'll turn the call over to Jim for a review of our financial results.

[James Frates]

Thank you, Sandy. Good morning, everyone. We're pleased to report Q2 earnings that are slightly ahead of expectations overall. In the second quarter of 2019, we generated $279.9 million in total revenues, driven by the solid year-over-year growth of our proprietary products and upside from our royalty and manufacturing revenues. We recorded a GAAP net loss of $42 million and non-GAAP net income of $13.7 million.

With half the year behind us, today we're reiterating our financial expectations for 2019. With the exception of our net sales expectation for ARISTADA, which we're revising today based on our results to date and current growth trends.

You should note, however, that this decrease in ARISTADA net sales guidance is expected to be offset by upside from other revenues, such that our expectations for our total revenues, GAAP net loss, and non-GAAP net income remain intact.

I'll provide additional detail on our expectations for the remainder of the year in a moment but will start with an overview of our key financial and commercial highlights for the second quarter.

Starting with VIVITROL, net sales in the second quarter increased 16% year-over-year to $88.2 million, driven primarily by underlying unit growth of 12%. VIVITROL net sales continued to be concentrated with our top five states representing 43% of volume in the second quarter, while new funding and initiatives to improve access to treatment continue to be rolled out across the country.

We believe the progress being made in these areas will diversify VIVITROL's growth, with more than 25 states having demonstrated greater than 25% year-over-year unit growth.

During the second quarter, gross to net adjustments decreased to 47.5%, primarily due to favorable adjustments to our Medicaid reserve based on the latest utilization data from various states. This Medicaid utilization adjustment increased Q2 net sales by approximately $3 million. Looking ahead, we continue to expect gross to net adjustments to be approximately 50% for the full year.

In Q3, we expect VIVITROL net sales to be approximately $85 million as gross to net normalized and consistent with seasonal trends that we've observed in the past. We then expect growth to resume in Q4.

Today, we're reiterating our expectation of VIVITROL net sales for the full year in the range of $330 million to $350 million.

Turning to the ARISTADA product family, net sales in the second quarter increased 60% sequentially and 44% year-over-year to $48.4 million, driven by underlying year-over-year unit growth of 40%.

We're making progress with ARISTADA as underlying total prescription data demonstrated solid growth of 13% quarter-over-quarter and 43% year-over-year in terms of months of therapy.

We continue to share the recently presented ALPINE data and rolled out commercial initiatives to drive growth. We've received positive feedback from thought leaders and physicians on data from the ALPINE study and further educating physicians on this dataset, together with the ongoing launch of ARISTADA INITIO will be important priorities for our commercial team in the second half of the year.

In the second quarter, our commercial team also began to focus on the new opportunity we have with the Department of Veterans Affairs following the addition of ARISTADA to the VA formulary in April. It is early days, but we're pleased to see an uptick in volumes through this channel in recent weeks. We look forward to updating you on our progress as we advance throughout the year.

During the second quarter, gross-to-net adjustments for ARISTADA were 48%, consistent with our expectations for full year gross to net.

Inventory levels increased by approximately one week from the end of Q1, when ARISTADA levels had been drawn down significantly. The increase in total inventory during Q2 equates to approximately $3.5 million in net sales, and we now believe that we've returned to a more normalized inventory level across the channels.

That said, today, we are reducing our expectation for 2019 ARISTADA net sales to a range of $200 million to $210 million from a previous range of $210 million to $230 million. This revised expectation reflects our results for the first half of the year and current growth trajectories.

Our additions to the sales force, hospital team, and key account managers have started to make an impact, albeit at a slightly slower rate than we anticipated in February. We'll continue to focus on execution through the balance of the year.

Importantly, the adjustment to our ARISTADA guidance does not impact our expectation for total revenues, which remains in the range of $1.14 billion to $1.19 billion or our bottom line expectations for the full year of 2019.

Moving on to our manufacturing and royalty business. We saw revenues of $127.9 million in the second quarter compared to $128.2 million in the prior year. These results reflect a $9.9 million decline in revenues from our AMPYRA/FAMPYRA franchise following generic competition to AMPYRA entering the market in 2018, offset by an 8% increase in year-over-year revenues to $91.9 million from RISPERDAL CONSTA, INVEGA SUSTENNA, and INVEGA TRINZA, driven by the timing of manufacturing batches for RISPERDAL CONSTA and increased end market sales of INVEGA SUSTENNA and INVEGA TRINZA.

As expected, our 1.5% US patent royalty for INVEGA SUSTENNA expired in May of 2019.

Looking ahead, we expect that royalty and manufacturing revenues from our partnered LAIs will continue to be a meaningful contributor to our top line into the mid-to-late 2020s, with our patent royalties for SUSTENNA ending in the EU in the early 20s and our knowhow royalties for SUSTENNA ending in the US and EU at various dates into the mid-2020s.

For RISPERDAL CONSTA, we'll continue to receive a 2.5% US net sales royalty into 2023 and a minimum manufacturing fee of 7.5% based on worldwide net sales for as long as we manufacture the product.

As we look ahead to Q3 of this year, we expect SUSTENNA royalties to be relatively flat as growth in net sales of the product are expected to offset the loss of the 1.5% patent royalty in the US, and we expect a decrease in RISPERDAL CONSTA manufacturing revenues due to quarter-to-quarter differences in the timing of shipments.

In the second quarter, we recognized R&D revenues from our collaboration with Biogen of $13.6 million related to the reimbursement of development expenses for diroximel fumarate.

As a reminder, its PDUFA date is expected to occur in the fourth quarter of 2019 and is associated with a potential $150 million milestone payment upon FDA approval.

Turning now to expenses, overall, our expenses for the second quarter were in line with expectations. Our R&D expenses for the second quarter were $104.4 million compared to $106.8 million for the prior year. We expect R&D expense will increase into the second half of 2019 as investments in our ALKS 4230 program accelerate.

SG&A expenses for the second quarter were $155.1 million compared to $138.3 million in 2018, reflecting investments in our commercial organization in support of both ARISTADA and VIVITROL. Looking ahead, we expect SG&A expenses to remain fairly stable for the remainder of the year.

We've invested in our commercial infrastructure to build a comprehensive capability to navigate these complex treatment systems and government payers, with the intent to be able to further leverage these investments as we plan for the potential launch of ALKS 3831.

Turning to our balance sheet, we remain well-positioned and ended the second quarter with approximately $594 million in cash and total investments compared to approximately $625 million at the end of the first quarter, primarily reflecting changes in working capital and capital expenditures.

The company's total debt outstanding was approximately $278 million at the end of the second quarter.

Overall, we're well-positioned as we enter the second half of the year. We're focused on executing on our strategy to drive growth in our commercial portfolio while advancing our pipeline candidates in both CNS and immune-oncology.

With that, I'll turn the call over to Craig for an update on our pipeline.

[Craig Hopkinson]

Thank you, Jim. This morning, I'll focus primarily on important updates we've made regarding our expanded NDA submission for ALKS 3831 and recent progress with our ALKS 4230 oncology program.

For ALKS 3831, earlier this month, we announced that we plan to expand the NDA submission for the treatment of schizophrenia to also encompass the treatment of bipolar I disorder.

This follows a constructive pre-NDA interaction with the FDA to align on this regulatory submission and the proposed pathway to support the bipolar indications for ALKS 3831.

The NDA will include data from the completed ALKS 3831 ENLIGHTEN clinical program in patients with schizophrenia as well as pharmacokinetic bridging data comparing ALKS 3831 and olanzapine and data from completed drug-drug interaction studies that the FDA requested to support the bipolar filing strategy.

Our team is diligently preparing the expanded file with plans to submit the NDA in the fourth quarter.

These data are intended to support an indication for the treatment of adults with schizophrenia and indications for the treatment of adults with manic or mixed episodes associated with bipolar I disorder as a monotherapy or as an adjunct to lithium or valproate and for the maintenance treatment of bipolar I disorder as a monotherapy.

Importantly, the proposed fixed dosage strength for ALKS 3831 include 10 mg of samidorphan co-formulated with 5 mg, 10 mg, 15 mg or 20 mg of olanzapine which reflect the spectrum of olanzapine doses commonly used to treat bipolar I disorder and schizophrenia.

Both bipolar I disorder and schizophrenia are serious degenerative mental illnesses and each is estimated to affect more than 1% of the US adult population.

Oral atypical antipsychotics are a mainstay of the treatment of bipolar disorder. However, patients often discontinue at a fairly high rate due to inadequate efficacy or intolerable side effects. This creates a dynamic similar to schizophrenia where patients may cycle through multiple medications and risk degenerative relapses.

In practice, olanzapine has been relegated to second line treatment in bipolar disorder, largely due to weight gain and safety concerns despite established efficacy. We believe that ALKS 3831 has the potential to be a useful treatment option for adults suffering from schizophrenia and bipolar I disorder.

Turning to ALKS 4230, a novel immuno-oncology candidate. The clinical development program for ALKS 4230 is progressing on multiple fronts. But let me take a step back to provide some background on the interleukin-2 biology, the molecule and the design hypothesis for ALKS 4230.

At high doses, interleukin-2, which I'll now refer to as IL-2, binds to the intermediate affinity IL-2 receptors expressed on tumor-killing, CD8 positive T cells and natural killer cells.

Recombinant human IL-2, known as Proleukin, is approved for patients with metastatic melanoma and renal cell carcinoma and is associated with complete and durable responses in a subset of patients.

However, IL-2 more potently activates the higher affinity IL-2 receptor resulting in preferential activation and expansion of immunosuppressive regulatory T cells and poor tolerability with capillary leak syndrome, a significant concern. This toxicity profile significantly limits the use of IL-2 despite its established anti-tumor efficacy.

ALKS 4230 is a stable, single polypeptide comprised of modified IL-2 and IL-2 alpha receptor chain. The novel design allows 4230 to selectively bind to intermediate affinity IL-2 receptors. This binding initiates a cascade of intracellular signaling that leads to proliferation of CD8 positive and natural killer cells.

Importantly, the stable fusion design of ALKS 4230 systemically hinders its ability to bind to high affinity IL-2 receptors, which minimizes the activation of regulatory T cells.

The pharmacodynamic data we have observed to date support our design and mechanism of action hypothesis.

Now, I'll provide a brief overview of the status of our ARTISTRY clinical development program and then I'll provide some insight into the early efficacy signals that we are observing.

The ongoing ARTISTRY-1 trial is evaluating 4230 administered intravenously daily for five consecutive days in both monotherapy and combination settings. The study is comprised of three distinct parts – monotherapy dose escalation, monotherapy expansion and a combination stage with the checkpoint inhibitor, pembrolizumab.

The monotherapy dose escalation stage of ARTISTRY-1 was designed to assess the pharmacodynamic markers in all-comer patients with refractory advanced solid tumors.

Data from the five completed dose escalation cohorts, spanning a dose range of 0.1 µg per kg to 6 µg per kg per day have demonstrated a dose-dependent pharmacodynamic effects of circulating natural killer cells and CD8-positive T cells and minimal and non-dose dependent effect on immunosuppressive regulatory T cells.

These data are consistent with our pretest hypothesis, with effective T cell expansion in line with what you would expect to see with high-dose IL-2.

The side effect profile across the completed cohorts was consistent with what one would expect to see with cytokine therapy such as fever, chills and low-grade hypertension. Importantly, no capillary leak syndrome has been observed to date.

Based on these data, in June, we announced the initiation of the Phase II expansion portion of ARTISTRY-1 to evaluate the efficacy, safety and tolerability of ALKS 4230 as monotherapy in patients with renal cell carcinoma or melanoma, refractory to prior PD-1 therapies.

The decisions to advance monotherapy expansion followed the identification of our recommended Phase II dose of 6 µg per kg per day. Data from this dose demonstrated the tolerability profile we set out to achieve for 4230 along with the desired lymphocyte cell expansion without corresponding Treg activation in dose escalation.

In this monotherapy expansion cohort in melanoma and renal cell carcinoma, we will assess objective efficacy measures of ALKS 4230 in up to 105 patients.

Following disease progression on PD-1 therapy, these patients have often very limited treatment options. These cohorts are currently enrolling in both inpatient and outpatient settings.

Given the cell expansions we have observed clinically, our hypothesis remains impact that there is the potential for ALKS 4230 to have monotherapy efficacy in these initial tumor types.

In parallel to the ongoing monotherapy dose escalation and expansion cohorts, we will also be steadily enrolling patients in the combination stage of ARTISTRY-1, evaluating ALKS 4230 in combination with pembrolizumab in a variety of tumor types in both inpatient and outpatient settings.

Cohorts we are evaluating to PD-1 approved tumor types in both refractory and treatment naïve patients as well as tumor types that were PD unapproved at the time of enrollment including colorectal, triple-negative breast, ovarian carcinoma, soft tissue sarcomas and subjects with metastatic non-small cell lung cancer whose tumors express low or undetectable PD-L1 levels.

Based on investigator feedback, we recently expanded the combination therapy portion of ARTISTRY-1 to add three cohorts evaluating patients with first-line melanoma, second line non-small cell lung cancer and second line head and neck squamous cell carcinoma.

Since initiation in the fourth quarter of last year, we've enrolled approximately 20 patients in the combination therapy cohort of PD-1 unapproved tumors and are nearing completion of enrollment in this cohort. Data from these patients reviewed to date have indicated no new toxicities.

Given the enrollment trends and initial signals being observed, we may expand this cohort to enroll additional subjects.

In addition to ARTISTRY-1, earlier this year, we initiated ARTISTRY-2, our Phase I/II study to explore the safety, tolerability and efficacy of ALKS 4230 administered subcutaneously once weekly and once every three weeks.

ARTISTRY-2 is off to solid start as we have fully enrolled the initial cohort at once weekly dose of 0.3 mg of ALKS 4230, which is intended to roughly correspond to the 3 µg per kg per day times five of the IV regimen.

All seven patients from this initial cohort currently remain on therapy and initial pharmacoeconomic data from these patients have demonstrated NK and CD8 positive cell expansion, similar to what we have previously observed at the corresponding 3 µg per kg per day IV dose of 4230 with minimal activation of Tregs.

I'll provide some insights into the efficacy activity we are seeing today, but I'll note that while enrollment is picking up momentum, the sample size is relatively small and we do not yet have final data or sufficient months of therapy to have a clear view into the ultimate potential of ALKS 4230.

With this context in mind, we have seen initial signals of efficacy across the ARTISTRY program.

When used as monotherapy treatment in the dose escalation stage of ARTISTRY-1, we also observed disease stabilization starting at the 3 µg per kg per day dose level.

While we didn't expect to see much in terms of efficacy activity in this refractory all-cover population, as of the cutoff date of June 14 at 3 µg per kg and 6 µg per kg per day doses, 8 of the 14 patients who completed on-study first scans demonstrated stable disease on monotherapy treatment. Clinical benefit appears to be maintained as the majority of these eight patient continued to have stable disease upon their second scan.

In the combination portion of ARTISTRY-1, we have also observed initial signs of antitumor activity.

Also, as of 14 June, five of the nine patients who completed on-study first scans, demonstrated stable disease or better on their initial scans. All five patients had PD-1 unapproved tumor types. We will continue to allow these data to mature and plan to disclose additional details later this year.

In ARTISTRY-2 subcutaneous study, patients receive an initial six weeks of monotherapy 4230 prior to moving into combination. While the initial six week monotherapy lead-in period is short, we have observed disease stabilization on the initial scan during the 4230 monotherapy period and look forward to following these patients as they advance into the combination stage of the study.

Across the program, the feedback from the medical community thus far has been positive, with encouraging thought leader engagement at ASCO and accelerating enrollment trends across the program.

We are moving into a period we expect to learn more about the profile of ALKS 4230 and look forward to providing more detailed data at a medical meeting this fall pending congress [ph] acceptance.

Before I turn the call back to Rich, I'll provide a brief update on diroximel fumarate, a novel oral fumarate being developed in collaboration with Biogen for relapsing forms of multiple sclerosis.

We submitted the NDA for diroximel fumarate in December of 2018 and expect regulatory action on our NDA submission in the fourth quarter of this year.

We continue to expect the results of the EVOLVE-MS-2 study which is evaluating the gastrointestinal tolerability profile of diroximel fumarate head-to-head against TECFIDERA soon.

Data from the EVOLVE-MS-2 are not part of our regulatory package or intended for labeling purposes. The study was designed to build upon the existing body of evidence demonstrating the differentiated GI tolerability profile of the DRF.

In the meantime, we look forward to working with the agency as they complete their review of the NDA submission.

Now, I'll turn the call over to Richard.

[Richard Pops, Chairman and Chief Executive Officer]

That's great. Thank you, Craig. And good morning, everyone. So, as we enter the second half of 2019, we have a clear vision and we know what we need to accomplish operationally to drive growth and value in both the near and the long-term.

The first priority is commercial execution for VIVITROL and ARISTADA. For ARISTADA, we have recent data from the ALPINE study and a full complement of product offerings that we've been developing over the last few years, including ARISTADA INITIO in a two-month dose.

Our team is focused on educating physicians, expanding our prescriber base and increasing the adoption of ARISTADA INITIO in the two-month dose where we have the most differentiated offering. The ALPINE data provided a new point of engagement with physicians and they will be an important element of our growth strategy into the second half of the year.

For VIVITROL, the policy changes that are beginning to be implemented in the treatment system could be transformative for the treatment of addiction. We're working with policymakers as they activate to address the opioid crisis and we're working to provide support to physicians to expand the use of VIVITROL in their treatment practices.

Changing the treatment paradigm for how addiction and serious mental illness are addressed in this country is challenging. It requires altering ingrained behaviors and engaging with the broader array of stakeholders to participate in the current system. But if we're successful in this endeavor, these changes have the potential to provide a platform for increased adoption of VIVITROL and ARISTADA.

I believe we have significant runway ahead for both of these important products and we're committed to the patients and the families and the communities dealing with the challenges of addiction and schizophrenia.

The second priority is regulatory approval and preparation for launch for ALKS 3831. As you heard Craig mention, we had our pre-NDA meeting with the FDA and we plan to submit an NDA for both schizophrenia and bipolar I later this year.

In the meantime, we're taking advantage of the time we have prior to potential approval and launch to educate thought leaders on the recently presented ENLIGHTEN-2 data and prepare to engage with payers.

Having both indications at launch expands the opportunity for 3831 and it delays the significant cost and risk that would be associated with dedicated efficacy studies to support the bipolar indication.

Generating new data will still be a priority as we move into the commercial stage for 3831. In today's competitive landscape, it's no longer sufficient to successfully develop and secure regulatory approval for new medicine. The healthcare community, patients and caregivers rely on drug developers to provide new research and information that can improve the patient journey.

Patient-driven drug development has always been at the core of our guiding principle. And our focus on these initiatives for 3831 is reflective of our belief this medicine may offer a meaningful new treatment option for patients and physicians who are dealing with this serious mental illness.

The third priority arises because of the emerging data for ALKS 4230. The momentum around this program is clearly building. We believe that ALKS 4230 is a biologically active, differentiated cytokine, consistent with our original design objectives. And we look forward to learning much more about its potential antitumor efficacy in the near term. As the data emerge for 4230 it opens new opportunities for us in terms of partnerships and business development.

So, looking beyond these near-term priorities and opportunities, we're focused on the next wave of pipeline assets as well. This is occurring on two fronts. The first is investment in our own internal research and discovery efforts. We've been cultivating early-stage assets in our labs, focusing on areas within CNS and also opportunities that fit within our biologics capabilities.

Guiding our internal investment is a strategy to develop multiple independent noncovariant lines of research that share a common scientific pedigree. These efforts are active and productive and we look forward to sharing our progress with your as these programs mature.

To complement internal discovery, we also have active business development efforts to identify interesting assets that map on to our current capabilities or establish new therapeutic adjacencies. This buys not only to our development pipeline, but also presents a potential to further leverage our commercial infrastructure in psychiatry, addiction and in the hospital setting.

While we continuously evaluate the landscape for these opportunities, we'll continue to be selective in how we deploy capital for that purpose.

So, I'll finish by taking a step back. In this field, innovation and evolution are key to survival and long-term success. Several years ago, we set out a strategy to evolve from our heritage as a drug formulation and manufacturing partner to a bona fide drug developer and proprietary commercial enterprise.

Our experiences underscore the value and importance of maintaining a diverse set of pipeline programs and commercial assets. As you look toward building the business for the future, we'll be guided both by the opportunity and what we believe is our responsibility to help address the unmet needs of patients. And we take this responsibility very seriously.

With a solid foundation for growth, science driven by compassion and by innovation, I'm proud of our mission and I'm optimistic about the opportunities that are ahead of us.

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

[Sandra Coombs, Vice President, Investor Relations]

Rob, you may open the call for Q&A please.

[Operator]

Thank you. [Operator Instructions]. The first question today comes from the line of Jason Gerberry with Bank of America. Please proceed with your question.

[Jason Gerberry, Bank of America]

Hey, good morning. Thanks for taking my question. Two for me. First, just on ARISTADA, can you just confirm that the revised outlook is not impacted by net pricing outlook due to mix for the product? And if you can comment at all in terms of the changes in the growth trends that you're seeing? Is this just come down to marketing? Is it something about the product profile that maybe isn't resonating with physicians as well as you may have thought or maybe just formulary challenges.

And then, my second question, you've got the VIVITROL IPR hearing next week. I believe, Monday. What are you focused on there? Do you think we can get any clarity in terms of how the PTAB is thinking about this key kind of issue around the Photoshop analysis that was submitted by Amneal? Thank you.

[James Frates]

Good morning, Jason. I'll take the ARISTADA one. And no – there’s really no changes in our estimations on gross to net. We haven't seen any changes. I think I'd mentioned specifically in the call that our 48% gross to net was exactly what we're expecting for the year. I think what we're seeing is just projecting forward the trends we've seen in the first six months and fine-tuning that number a little bit. As you know, we've been focused on three things this year, rolling out the ALPINE data, targeting the VA opportunity with the improved formulary access we've had since April, and the addition of our new sales people.

So, it's really estimating the productivity of those new sales people as they start in new territories, and it's just been slightly slower than we anticipated in February. But with overall year-over-year growth in the 40% to 45%, that's exactly where we anticipate it with ARISTADA, maybe slightly behind, and we think our efforts in the second quarter are going to drive that growth. So, a slight tuning of the guidance, but no real change in our underlying expectations for ARISTADA.

[Sandra Coombs, Vice President, Investor Relations]

Jason, I'll take the question on the VIVITROL IPR Patent Board hearing. We believe we have a strong case to put forward at the oral hearing next week. That said, we’ve had a back and forth of documents that have been related to the case that are all publicly available that you can read our positions in. And this coming week will be the first time that we'll hear how the Patent Board is thinking about this particular case.

[Jason Gerberry, Bank of America]

Thank you.

[Operator]

The next question comes from the line of Cory Kasimov with JPMorgan. Please proceed with your question.

[Unidentified Participant]

Hi. This is Nina on for Cory. So, I just wanted to ask about – if you could talk a little about generating some data in bipolar ahead of the launch. So, could you just elaborate a little bit on what types of data you think you'll be able to generate and when that might be available? We’re just more interested in how physicians will kind of guide their [indiscernible] given that there was no study specifically conducted onthis indication?

The second question is just on ARISTADA. In what parts of the market are you seeing the greatest uptake, and where are the biggest challenges? Thanks.

[Craig Hopkinson]

On the bipolar question, I can answer that one. So, our agreement with the FDA is really that we'd use a bridging strategy for bipolar. And as part of that bridging strategy, they asked us to conduct two drug-drug interaction studies, which we have completed, and we plan to include those in the filing later this year. Having said that, our launch will then obviously be based on the data in the olanzapine label for bipolar, and at this point in time, obviously, we're thinking about life cycle management opportunities. That would also include generating additional data in bipolar, but those plans are not yet finalized.

[Unidentified Participant]

Thank you.

[Operator]

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

[Chris Shibutani, Cowen]

Great, thank you very much. For 4230, it would be helpful to get a sense for what we can expect in terms of the efficacy profile on the subcu formulation. What the plans and the timelines are? And then, just help us understand the context, you’ve been developing the IV formulation with ARTISTRY-1 earlier and then the subcu with ARTISTRY-2 program. But my understanding has been that it's really the subcu formulation that you would anticipate being what you're aiming to essentially ultimately hopefully bring to market. So can you talk about what we should expect in efficacy profile on the subcu timeline for that data, and how we should think about the program overall since – unless I'm wrong – subcu is really the one that is going to market?

[Craig Hopkinson]

Yes, let me start off then with the expectations in terms of when we plan to present data. So, the first efficacy data from the overall program, we hope to present later this year. We'll be submitting abstracts to SITC, and pending acceptance of those abstracts, we'll be presenting the first efficacy data at SITC.

What you can expect in terms of the efficacy that we will present at SITC, that would largely be based on the monotherapy dose escalation cohort, so 8 out of 14 patients that we outlined this morning as well as in the combination stage of the ARTISTRY-1 program. Recall that we started enrollment in the combination stage of that program in the last quarter of last year. About 20 patients have been enrolled in that combination cohort, and we expect to present data on five of the nine patients that have stable disease at SITC as well. And the data will largely be based on the 3 µg per kg data and 6 µg per kg data that we've generated from ARTISTRY-1.

The ARTISTRY-2 program is enrolling rapidly. As we said, we've also enrolled the first seven patients in ARTISTRY-2. But obviously, we will present data as those data emerge and we plan on submitting a trials in progress abstract to SITC for that program as well.

And then lastly, maybe just to speak to the monotherapy cohorts, we opened up our monotherapy cohorts in renal cell carcinoma and melanoma. We expect that will probably take us about six to nine months of enrollment before data starts to mature from that particular cohort. So, it's unlikely that we'll have enough data at SITC on that monotherapy cohort later this year.

In terms of your question around the IV formulation, yes, our expectation is obviously that we want to progress both with the IV and that allows us to assess the initial efficacy signals and to get a monotherapy efficacy signal with 4230. The plan is that if, all goes well with the subcu program that we'll be able to – then obviously potentially look at amending the protocols to substitute that subcu formulation once we reach a recommended dose either at Q weekly or Q21 days. The first cohorts at Q weekly has been completed. We will be having a safety assessment in the coming weeks and that will allow us then to open up the Q21 day cohort as well.

[Chris Shibutani, Cowen]

Great. Just to switch over to VIVITROL on the IPR, from Jason's question, could you put in context for us what you see is the implication, for instance, of a negative outcome? What would be your sense for what the realistic commercial opportunity might be if there were to be a generic interest in what is obviously kind of a unique and complex market?

[James Frates]

Sure, Chris. Thanks. Maybe I'll take that. It's Jim. I think clearly we feel like we have a very strong argument from a patent perspective. And I think as Sandy mentioned, our detailed arguments are laid out in the documentation and we'll see how that goes.

I think it's interesting to look at a generic-type entry because this is a very unique market, as you mentioned. First of all, it's not a market that can be given the manufacturing and specific issues around making microsphere products that need to be made sterile-y throughout the process given their makeup of PLGA. This is not a manufacturing process that can be easily replicated by other generics.

Also clinical data is going to be very important because the comparison of monthly doses of products is a complex one and there is many points that need to be compared. So the question is, will the product even be AB substitutable? That's a question that's going to have to be determined in the future.

And then finally, if there's one potential entry, if the competitor makes it through the regulatory process, makes it through the manufacturing process and then comes to market with VIVITROL or a product like VIVITROL, the question is how is that market uptake going to happen? How are they going to sell the product in a complicated market in the United States with all the infrastructure and relationships that we've built over time? And then finally, where do they price it?

As we've seen in many pharmaceutical markets, actually the entry of another competitor actually grows the market rather than taking away from the market leader. So, lot of complexity still to play out over time, but I'd say again we feel very confident in our patent position to begin with. But we think that, longer term, the market for a long-acting antagonist therapy is one that's going to be growing markedly over time as the problem with opioid dependence isn't going away in this country and a relapse prevention medication in a monthly injection form is something that really hasn't reached anywhere near its peak of potential use by the market.

[Unidentified Participant]

Great. Thanks. Very helpful additional detail.

[Operator]

Our next question is from the line of Umer Raffat with Evercore. Please proceed with your question.

[Umer Raffat, Evercore]

Hi. Thanks so much for taking my question. I found it very interesting, some of the comments you guys have shared on. Stable disease observations on monotherapy, the 8 out of 14 patients as well as on the subcu trial. So, my question is, can you provide us a little more color on the percent resist reduction? So, I guess, what I'm getting at is, is it stable disease at zero resist change or is it more like 20% to 25% tumor regression? Because what I'm trying to get at is, are we very close to the 30% threshold for potential partial responses, among these patients that you've seen stable disease on. That's first.

I also want to touch up on Alkermes' 8700. And my question was, we know there's another MMF that's been approved, the 55 B2 [ph], but it's not a pro-drug. So, the question is, is it fair to assume that 55 B2, the other one that's approved, does not infringe ALKS' 8700.

And finally, Richard, if you can give us some broad framework on the type of product we should be expecting for IND soon. Is it reasonable to expect some sort of small molecule for an orphan neuro disorder? Thank you very much.

[Craig Hopkinson]

So, perhaps I'll take the 4230 question first. So, where we stand at the moment, obviously, as we said, we have seen some monotherapy – some combination therapy responses with 4230. Details in terms of those specifics, we plan to hold for the SITC meeting. So, we're not going to get into any specifics around resist criteria or specific tumor types today, but rather want to sort of keep those data for SITC.

Also bear in mind, as patients continue to mature on therapy, we'll be doing subsequent data cuts closer to the SITC program which will be more reflective of where we are with the program at that point in time.

[Richard Pops, Chairman and Chief Executive Officer]

And, Umer, it's Rich. The banner product we don't think infringes our VUMERITY patents, but we really don't know a whole lot about it. It's a MMF pro-drug. But our IP on VUMERITY is very specific and very strong and we've had no indication at this point that it infringes.

And I probably won't make any disclosure about the next INDs that we'll be filing other than to say that small molecules have been our historic strength. But this cytokine biology that we've been pursuing here is also extremely active in the lab. So, depending on the sequencing of the development, I'd expect to see over time candidates in both.

[Umer Raffat, Evercore]

Thank you very much.

[Operator]

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

[Nate Tower]

Hi, thanks for taking the question. This is Nate on for Paul. Maybe two from me. For 3831, can you just talk about how you're thinking about preparing for the launch in terms of the commercial infrastructure and then the timing of that buildout?

And then on VIVITROL, outside of the moderation in 3Q, how are you thinking about the core growth rate for the franchise at this point? Thanks.

[Craig Hopkinson]

Hi. Good morning, Nate. I'll take the VIVITROL one first. The core growth rate I think remains solid. Year-over-year, from a sales perspective, we saw 16% growth. From a unit perspective, 12% growth. And I think it's right in line with where we are which is why we didn't tune our expectations for VIVITROL this morning. But I think the franchise is solid. And we are continuing to see, as I mentioned, that broader growth in additional states. So, with 25 states growing at north of 25%. Remember, back in 2016 and 2017, when we saw much higher growth levels for VIVITROL, that was really driven by one or two states. So, broadening out that top 5 is something we are very focused on and committed to working on. We haven't seen it yet, but the groundwork is being laid and we're very optimistic about VIVITROL's future.

Just in terms of the 3831 launch and commercial infrastructure investment, I think as we mentioned, a lot of that infrastructure now is in place with our ARISTADA. The growth that we've seen in the last six months really around our hospital sales force, our commercial systems group that's targeting large health systems in this area as well as our field reimbursement management team and slightly broader sales force into the range of about 250 is really the bulwark of the investment that's going to be there for 3831. As we get closer to launch, we will increase our sales size. We're still doing the sales force sizing exercise now, but you'll probably see that investment certainly a quarter to six months ahead of launch. So, really in the second half of next year when you will see the change of investment around 3831, if all things continue to go positive with the FDA review. So, we'll update you more on that as we get closer to the PDUFA date.

[Nate Tower]

Great, thanks.

[Craig Hopkinson]

You're welcome.

[Operator]

Our next question is from the line of Terence Flynn with Goldman Sachs. Please proceed with your question.

[Unidentified Participant]

Hi. Thanks for taking the question. This is Missy [ph] on for Terence. I was just wondering if you could share any perspective on the Senate drug pricing bill that was released earlier this week and any potential impact you think that will have on your business? Thanks.

[Richard Pops, Chairman and Chief Executive Officer]

Hi. This is Richard. I'll answer that. There's been a lot of attention on this markup that will be probably done today in the Senate Finance Committee. But it's the beginning of a long legislative process. There were some concern last week that drug pricing bills might be fold into a budget deal, which will put them on a very accelerated timeline. But now it appears to be regular order. I heard today that there is over 100 amendments that have been proposed to the mark. So, I think we've got a long way to go between a Senate Finance markup and law. But the good thing about the process under regular order is that everybody is paying attention now. To the extent it involves a restructuring of Part D, that affects 100 senators in 50 states and a lot of interest groups. And I think that the jeopardy for us and for our patients and for the industry is people moving fast on major reconstructive elements of Part D. But if it happens deliberately and carefully, I'm confident it will come out in a position that's good for everyone.

[Operator]

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

[Brandon Folkes, Cantor Fitzgerald]

Hi. Thanks for taking the question. Firstly, can you just provide a bit more granularity on the growth initiatives that you highlight for ARISTADA in the second half of the year? Your guidance implies that there still is going to be meaningful growth in the second half of the year, but I expect that the sales force and Veteran's Affairs to be a tailwind in this quarter. So, any color you can provide in terms of – among those growth initiatives, where we will see the most uptake?

[Craig Hopkinson]

Sure. Good morning, Brandon. And I think you're right. I think, right now, it's predicting the timing of when the focus on the VA and with the productivity of our additional sales folks come into play. And I think we've expected to see that in sort of the three to six month time period and we're right on the cusp of that right now.

I think we've seen really nice growth in our two-month formulation, the 1064. It makes up now approximately 30% of our months of therapy and it was 21% last year in Q2. So, that's really the main differentiating focus for us, is our INITIO plus two month opportunity. That's been reinforced with the ALPINE data that we've seen. And building out the breadth and depth in prescribers that we're focused on with our sales force.

Obviously, the VA helps there, but we've also learned the VA formulary win is a national win and it needs to be then implemented in each of the roughly 150 VA centers across the country and that just takes some time with the government.

So, I think we're on track. Maybe a month or two off of where we anticipated being more like a month rather than – more than that. And I think we'll be very focused on that in the second half of the year to see that productivity come into play.

I think we're getting now also too very good response from the initial education opportunities we've had with ALPINE. That data coming out really in – what was it, April, now being ready to be rolled out into educational programs now here in the second half of the year with our sales force trained in executing on that as we move forward.

[Brandon Folkes, Cantor Fitzgerald]

Great. Thank you very much. And just one more if I may on the VIVITROL growth. Can you update us in terms of the VIVITROL opportunity within the criminal justice system? And would any of the policy changes that you highlighted may increase the speed of adoption in that sector? Thank you.

[Craig Hopkinson]

Sure. Again, the criminal justice system is an important aspect for us as people are more and more focused obviously on drug offenses as opposed to violent offenses, how people can get treatment behind the walls. The prison system in the United States is not set up to deliver treatment, and so accessing drugs and reimbursement, et cetera, has been a slow process of change.

A lot of this money is coming through state and local authorities. And what we're seeing, we won't go into specific states, but we're seeing both legislative allocation of funds as well as additional prison programs going across the country. We're seeing growth in the programs in criminal justice in a number of those key states that are growing at those greater than 25% rates as I mentioned. And as more funds come into play, we ought to see that adoption continue to grow.

And as Rich has said in the past, really the start of use of VIVITROL is really a one way valve as people align those systems to use VIVITROL. Once we get that infrastructure in place, then the appropriate patients can be chosen and selected and we can move forward with treatment. So, that growth tends to build on itself over time once the treatment programs are up and running.

[Operator]

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

[Marc Goodman, SVB Leerink]

Morning. First of all, maybe you can help quantify the bipolar 1 additional indication relative to your original expectations for how big the product can be?

Second, some doctors on ARISTADA tell us they don't really have much of a choice of which product they use. It's usually the place that they work at, the system that they work at. I was just curious. Help us understand where the product is sold and how much influence the doctors actually do have? Because you're spending a lot of money to kind of make noise and you have good data and you have new product offering, so I was just curious how much you think that that will really matter.

And then third, I didn't hear whether you said that 3831 payer discussions, have they started or have they not started yet? I was just curious if they have, what kind of feedback you're getting from the payers on that product? Thanks.

[James Frates]

With the bipolar 1 indication, Marc, thank you obviously for bringing that up. That's an important part of the olanzapine market. It's also a part where it's mostly dominated by commercial pay as opposed federal or state involvement. I think in our modeling, the bipolar indication can increase the market anywhere from a third to more than half in terms of overall size. So, it's a place where Zyprexa has been used very deeply in the past. There's a lot of experience with it there. And matching the Zyprexa label, 43821 is going to be something that's very, very important.

In terms of the systems and choice with ARISTADA, I think everywhere from hospitals to community health centers to individual physician practice, the importance of being on the formulary is very real. And I think we're making progress there. And then it's a matter of changing physician behavior and what they're used to. So, I would say it's really a dual effort on our part, making sure that we're on formulary and the product is available and sourceable by those areas. And we are making progress there. And I think obviously the differentiation of our two month and INITIO opportunity, educating around that, we are seeing those 40% plus growth rates that we need to see to hit our numbers. And I think we'll – hopefully with the additional focus of resources, we'll be able to accelerate that with our new ALPINE data and other initiatives.

And the third question on payers with 3821, I think we're in the midst of reaching out. We're gathering more data. And those questions, those interactions with payers will take more specific – have more specific outcomes again as we get closer to launch. We want to make sure that the data is fully understood. We are focused on educating now and we'll have conversations about how payers will look at adopting and treating 3831 much more closer to launch as opposed to right now. So we'll update you there once the NDA is filed and that T minus 12 months is more in focus.

[Marc Goodman, SVB Leerink]

Thanks.

[Operator]

The next question is from the line of Doug Tsao with H.C. Wainwright. Please proceed with your question.

[Doug Tsao, H.C. Wainwright]

Hi. Good morning. Thanks for taking the questions. Just maybe as a follow-up on 3831 and bipolar. I'm just curious if you can provide some perspective on how problematic weight gain is in that indication. We know with olanzapine and schizophrenia, the weight gain is very problematic in terms of treatment paradigms. If you could have any thoughts in terms of how getting the bipolar indication will add to the commercial opportunity for you.

[Craig Hopkinson]

So, I'll take that one. So, in terms of weight gain with bipolar, it's very similar to what one would see in schizophrenia. I think the difference is really the patient population is far more sensitive to side effects and weight gain in particular, and so patients often cycle off of therapies relatively quickly in bipolar I disorder and cycle through numerous therapies. And so, weight gain we know is of particular concern. So, we think 3831 will provide – would be an important new medication in that space.

[Marc Goodman, SVB Leerink]

Great. And then, second question for Richard, just a question on business development, which you mentioned in your prepared remarks. Just obviously what we've seen with the pipeline maturation. Just curious in terms of urgency on the part of the company to do something, especially in the context of the fact that your own R&D effort seem to be sort of very fruitful and productive recently. Thank you.

[Richard Pops, Chairman and Chief Executive Officer]

Well, I think that the – there's an immediate gratification about seeing a deal done on the business development side because it makes concrete a new potential opportunity for the company. So, we understand that fully.

But what's less obvious is the more organic growth of tapping our own laboratories of multiple product candidates. So, it's happening on both fronts. And there is a certain gestation period that's necessary and we're very active out on this development side.

And it does two things for us. One is, it gives us insight into potential opportunities for us to pursue, but also allows us to triangulate the quality of our own internal efforts versus what we see happening outside in the real world and how valuations are being assigned to those. So, I think that this is an ongoing process. There's not a biopharmaceutical company that's become a large company that has not augmented their own pipeline through external collaborations, but you also have to be world class internally. And I think we're going to do both.

[Operator]

Our next question is from the line of Danielle Brill with Piper Jaffray. Please proceed with your question.

[Danielle Brill, Piper Jaffray]

Hi, guys. Good morning. Thanks for the question. I guess just two quick ones for me. For the BIIB098 study that's expected, your head to head with versus TECFIDERA, should we expect that to be press released or is this something that will be presented at a conference?

And then, for 3831, are there any plans for additional label expansion since olanzapine is given in combination in the depression indication? Would you have to run additional studies?

[Richard Pops, Chairman and Chief Executive Officer]

Hi, Danielle. It's Rich. The BIIB098 data, we'll decide this with Biogen, but our initial instinct we will press release the top line for you and then we'll subsequently present the data at a meeting. And I'll let Craig comment on life cycle for olanzapine.

[Danielle Brill, Piper Jaffray]

So, for 3831, the ENLIGHTEN early program which is our [indiscernible] program is the first of our lifecycle management studies and that study is currently enrolling. And we believe that's going to be a really important population of patients because the younger patients are particularly prone to weight gain.

Building upon that, the team is currently working on a lifecycle management strategy. And once that is in place, we'll be able to update in terms of other indications that we might be interested with 3031. Our initial focus obviously is on the filing and making sure that all goes well and smoothly as we submit the file to the agency in the fourth quarter of this year.

[Sandra Coombs, Vice President, Investor Relations]

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

[Operator]

That question is coming from the line of Akash Tewari with Wolfe Research. Please go ahead.

[Andrew Newton, Wolfe Research]

Hi, yeah. This is Andrew Newton on for Akash and I have two quick questions. First, by our math, VIVITROL and ARISTADA are currently operating at a loss. Could you give us an idea of what kind of long-term operating margin we could expect from these products once they're fully ramped up and when we could expect this to breakeven?

And then secondly, if you do lose the VIVITROL IP earlier than expected, would you pursue any cost optimization efforts? Thanks.

[James Frates]

Sure, Andrew. Thank you for the questions. I think that the commercial investment that we're making now is really driven – we've expanded our commercial team recently focused on ARISTADA as you know. And that's really driven with the growth in ARISTADA in mind and the follow-on launch of 3831 coming not too far in the future. So, that investment – we're looking today right now and that investment has yet to really bear fruit in terms of the productivity of the sales force. So, I think over the longer term, we expect the margins, the net margin for ARISTADA and VIVITROL to be in that sort of target 20% to 30% net range where most large pharmaceutical products are. We've got to drive that growth. I think investing in a base of that growth over time will give us a lot of leverage as we move forward commercially. We're looking at an investment year right now.

And then in terms of the VIVITROL IPR, I think obviously, as I mentioned, this is a complex area. It's not like a square wave generic. There's a very real question about the substitutability of any product that might follow on for VIVITROL. There's also very established relationships in the field as people understand VIVITROL and the product offering and how to use it and the support programs that we have in place. So, one needs to not just get products approved, but also make sure that one can educate on how the products are used and the exact outcomes that people see on that with real data. So, we'll see how the impact of any potential future products have on the VIVITROL growth trajectory and, of course, we'll make choices about our investment in our commercial program. I think hopefully that goes without saying as we look at what the growth trajectories are going forward. But right now, that investment that you see is based on our expectation. The top line is growing very rapidly for both of these products which it is and we seek to reap the rewards of that from a profitability perspective over the next several years.

[Andrew Newton, Wolfe Research]

Perfect, thanks.

[Richard Pops, Chairman and Chief Executive Officer]

You're welcome.

[Operator]

Thank you. I will now turn the call back to Sandy Coombs for closing remarks.

[Sandra Coombs, Vice President, Investor Relations]

Hi. Thanks everyone for joining us on the call today. If you do have any follow-up questions, please don't hesitate to reach out to us at the company. Thank you.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.