Alkermes plc. Q3 FY2020 Earnings Call

Greetings, and welcome to the Alkermes Third Quarter 2020 Earnings Call. My name is Jim, and I will be your operator for today's session. Please note that this conference is being recorded. I'll now turn the floor over to Sandy Coombs, Vice President of Investor Relations. Welcome, Sandy.

Thank you. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended September 30, 2020. Thank you so much for joining us on short notice. We apologize for the technical difficulties with our earlier scheduled call, but appreciate you all taking the time to join us at this time. With me today are Richard Pops, our CEO; Jim Frates, our CFO; and Todd Nichols, our Chief Commercial Officer. During the Q&A section, we'll also be joined by Iain Brown, our SVP of Finance. 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 two of the accompanying presentation, our press release issued this morning, and our most recent annual and quarterly reports filed with the SEC 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.

That's great. Thank you, Sandy, and hello everybody. We've got a lot of important updates to get to today. So, I'd just like to start by noting our progress and some of the significant accomplishments we've achieved over the last several months. We are positioning the company for what we expect will be our next major phase of growth. The foundational pillars of that growth are our distinctive commercial capabilities, our R&D engine, and our focus on the efficient management of our business. Our third quarter results reflect strong commercial performance in a complex and dynamic environment and demonstrate the resilience of our business and execution of our commercial strategy. We also achieved critical milestones in our ALKS 3831 and ALKS 4230 clinical development programs, and I'll talk about that more later in the call. While advancing these key priorities, we continue to efficiently manage expenses and drive non-GAAP profitability. As a result, today we've improved our financial expectations for the year and now expect to end the year with non-GAAP profitability back in line with our original expectations from February prior to the impact of COVID-19. Jim and Todd will provide additional detail on the performance and the outlook for the remainder of the year, and I'll end with an update on our clinical development activities. And with that, as a brief introduction, I'll hand the call over to Jim.

Thank you, Richard, and good morning, everyone. Our third quarter financial results reflect strong commercial execution and a continued focus on expense management as we advance our key business objectives. While the results reflect the continued impact of COVID-19-related disruptions on VIVITROL demand, growth trends were stronger than anticipated during the quarter. Accordingly, we're raising our financial expectations for 2020, primarily driven by the strength of VIVITROL net sales. We now expect our bottom line non-GAAP net income for 2020 to be in the range of $50 million to $70 million, back in line with our expectations we provided in February, prior to the impact of COVID-19, reflecting our commitment to driving continued non-GAAP profitability. I'll provide additional detail on our expectations for the remainder of the year in a moment, but first I'll start with an overview of our financial highlights for the quarter. In the third quarter of 2020, we generated $265 million in total revenues, reflecting a year-over-year increase of approximately 4%. We recorded a GAAP net loss of $0.1 million compared to a GAAP net loss of $52.9 million in the third quarter of 2019. Non-GAAP net income was $41.5 million for the quarter, improved from a non-GAAP net loss of $7 million in the same period last year, driven by higher revenues and lower operating expenses in the third quarter of 2020. Starting with VIVITROL, net sales in the third quarter were $80.3 million, reflecting a 6% year-over-year decrease, primarily related to the impact of COVID-19 disruptions. Importantly, on a sequential basis, VIVITROL net sales increased 12% driven by underlying unit growth of 22%. This was partially offset by an increase in gross-to-net adjustments from 46% in Q2 to 53% in Q3, which reflects a higher mix of Medicaid patients. At the beginning of the third quarter, wholesaler inventory levels were at their lowest point in several years. During the quarter, those inventory levels rebounded to normal levels. We're raising our full-year expectations for VIVITROL net sales to be in the range of $305 million to $315 million, from a previous range of $270 million to $300 million. This new expectation assumes continued normalization of patient flows and access to health care providers. We expect gross-to-net adjustments to continue to increase in the fourth quarter to approximately 54%, driven by increased Medicaid utilization resulting from current elevated unemployment rates. Turning to the ARISTADA product family, net sales in the third quarter increased 6% sequentially and 16% year-over-year to $62.4 million, driven primarily by unit growth. Underlying total prescription data for ARISTADA demonstrated solid growth of 22% year-over-year in terms of months of therapy. During the third quarter, gross-to-net adjustments for ARISTADA were 54%, as compared to 48% in Q3 2019, reflecting increased Medicaid utilization. Inventory levels increased slightly during the quarter, but were within normal levels at the end of September. Based on our solid performance through the first three quarters and expectations for continued execution through year-end, today we're raising our expectation for ARISTADA net sales for the full year to a range of $230 million to $240 million, which is higher than the range we set out at the beginning of the year of $220 million to $235 million. Moving on to our manufacturing and royalty business, we recorded revenues of $120.4 million in the third quarter, compared to $103.8 million in the same period last year. This increase was driven primarily by higher revenues from INVEGA SUSTENNA and RISPERDAL CONSTA. Our results for the quarter were also positively impacted by a gain of $8.3 million that we earned on our investment in Fountain Healthcare Partners, which was recorded as other income. Turning now to expenses, we continue to diligently prioritize the investments that support our business objectives to grow the top line, advance our pipeline of development candidates, and manufacture commercial supply of our proprietary and partnered products. As a result, our total operating expenses were $275.7 million for the third quarter, down from $308.9 million in the same period in the prior year. R&D expenses for the third quarter were $95 million compared to $107.7 million for the same period in the prior year. The decrease was primarily driven by the restructuring that we implemented in late 2019 and the completion of the VUMERITY development program late last year, somewhat offset by increased activity and patient enrollment in the ALKS 4230 clinical program. SG&A expenses for the third quarter were $127.7 million compared to $148.7 million in Q3 2019, reflecting lower expenses due to the 2019 restructuring as well as expense management measures in 2020. Looking ahead, we expect an incremental increase in SG&A expense in the fourth quarter as we invest in pre-launch activities for ALKS 3831. Turning to our balance sheet, we ended the third quarter with approximately $597 million in cash and total investments compared to approximately $540 million at the end of the second quarter, primarily reflecting our positive financial performance in the quarter and changes in working capital. The company's total debt outstanding was approximately $276 million at the end of the third quarter. I'll shift now to our updated financial expectations for 2020, which are fully outlined in the press release we issued earlier this morning. Recent trends reflect both the changes that health care providers have implemented to provide continuity of care for patients and the productivity of our evolved commercial strategy. Our expectation for the remainder of 2020 assumes continuation of these trends. However, new COVID-related restrictions may impact our ability to meet these expectations. With that for the top line, we now expect total revenues to be in the range of $1.01 billion to $1.035 billion. We're also narrowing the ranges of our operating expenses. R&D expenses are now expected to be in the range of $375 million to $390 million. SG&A expenses are now expected to be in the range of $530 million to $545 million and reflect an anticipated sequential increase in the fourth quarter of 2020 related to the pre-launch activities for ALKS 3831. We expect the strength of our top line and our expense management efforts to improve bottom line non-GAAP results by approximately $45 million for 2020 compared to the financial expectations we set forth in July, demonstrating the operating leverage of our business and our continuing commitment to non-GAAP profitability. We now expect 2020 GAAP net loss to be in the range of $95 million to $115 million and we expect non-GAAP net income to be in the range of $50 million to $70 million. These non-GAAP expectations are now back in line with our original expectation from February 2020, reflecting the reduction in operating expenses implemented in response to the impact of COVID-19 on our top line. Looking ahead, we're focused on driving the continued growth of our proprietary commercial portfolio while advancing our development programs and capturing operating leverage. The data presentation for ALKS 4230 at ESMO highlighted the potential of this pipeline candidate and the positive outcome of the advisory committee meeting for ALKS 3831 was another step toward the expansion of our commercial psychiatry portfolio. We have important milestones ahead and believe we're financially well positioned to execute on our business strategy, drive profitability, and support shareholder value creation in the years to come. With that I'll hand the call over to Todd to review our Q3 commercial results.

Thanks, Jim and good morning, everyone. We are pleased with our strong commercial performance in the third quarter, which reflects a sequential increase in demand for VIVITROL and continued resilience in the ARISTADA product family, as we adapted our commercial strategy in response to the challenges that patients and health care providers are facing as a result of the pandemic. We have developed new and effective ways of engaging with health care providers including investments in digital capabilities that we believe will provide an important foundation for the growth of our products and the potential launch of ALKS 3831. I'll now provide a review of our Q3 results as well as our outlook for both products for the remainder of the year. Starting with VIVITROL, net sales in the third quarter were $80.3 million reflecting sequential unit growth of 22%. The rapid response, adaptability, and strong execution of our commercial team in the face of the COVID-19 environment was essential to this growth. And I want to acknowledge their commitment and resilience. The growth in VIVITROL net sales reflects an increase in new patient starts as well as the return of certain patients, previously using VIVITROL, whose treatment had been interrupted earlier in the year. While many treatment providers have adapted their practices and patient access to injections has increased, overall VIVITROL volume was still below last year's pre-COVID Q3 levels with a 3% decline in units year-over-year. We continue to see a healthy balance in the indication mix for VIVITROL with the contribution from alcohol dependence increasing over the last couple of years and growing at a faster pace than opioid dependence. With alcohol consumption on the rise across the country, as a secondary consequence of COVID-19, there may be increased need for treatment for alcohol dependence in the future. Due to the strong performance of VIVITROL in the third quarter, we are raising our full year 2020 expectations for VIVITROL net sales by approximately $25 million to a range of $305 million to $315 million. While the challenges presented by COVID-19 in addiction treatment landscape are not behind us, we are encouraged by the recovery trends that emerged during the third quarter. We will continue to adapt our commercial activities to help meet the evolving needs of health care providers and support patient access to our medicines in this dynamic environment. Turning to the ARISTADA product family, net sales in the third quarter increased approximately 16% year-over-year and 6% sequentially to $62.4 million reflecting underlying demand growth. Total prescription data for ARISTADA demonstrated solid growth of 22% year-over-year in terms of months of therapy and outpaced the broader long-acting atypical antipsychotic market which grew at 5% in the same period. The two-month dose remained at its highest share brand at 37% in terms of months of therapy. As a result of the pandemic, we have seen some impact prescribing patterns in the long-acting antipsychotic space. The year-over-year growth rate of the overall long-acting injectable market began to moderate from 13% in Q1 to 5% year-over-year in Q3, as market research showed that psychiatry health care providers made fewer treatment changes in the COVID environment. Our commercial organization is continuing to adapt to support providers and patients as we drive growth of ARISTADA in this environment. Today, we are raising our full-year 2020 expectations for ARISTADA net sales to a range of $230 million to $240 million and believe we are well positioned to exit the year with momentum. The commercial organization that we have built to support ARISTADA including capabilities tailored to the immediate commercial environment provides an important operational leverage as we prepare for the potential upcoming launch of ALKS 3831. The positive outcome of the ALKS 3831 advisory meeting a few weeks ago was a critical milestone. The open public hearing highlighted the significant unmet need that still exists for patients living with schizophrenia and bipolar one disorder, many of whom commonly cycle through multiple therapeutic options in pursuit of better outcomes, switching therapy on average five to seven times throughout their treatment journey. Prescribers of antipsychotics are often faced with a difficult trade-off between efficacy and tolerability for their patients. We believe ALKS 3831 has the potential to be an important new treatment option for patients and providers. As we approach our November 15 PDUFA date, prelaunch activities are ramping up. Our current expectation is that, subject to approval and DEA descheduling, we will be positioned to launch ALKS 3831 towards the end of the first quarter of 2021. Our deep psychiatry market expertise and established commercial capabilities provide a strong platform for the planned commercialization of ALKS 3831. We have a good understanding of the access environment and expect that at launch, there will be a range of access barriers in place, with some payers imposing more restrictive measures and other plans allowing more unencumbered access to ALKS 3831. For example, there are 11 states that have some form of mental health exemption policy to reduce or eliminate formulary restrictions on antipsychotic medications for Medicaid patients. We will engage with payers on a state-by-state and plan-by-plan basis and expect that access will improve throughout the first year of launch, as formulary decisions are made. While that is happening, we plan to implement programs to help mitigate the impact of initial restrictions that may be in place in year one. We have also extensively mapped the prescriber landscape and have a well-defined target universe for launch. Our sales force planning is now complete, and our strategy reflects the shifting competitive landscape in a COVID environment. We believe that a new hybrid promotional model that permanently incorporates both in-person and virtual engagements will allow us to officially target our broader footprint of prescribers for oral antipsychotics, with a smaller commercial field infrastructure than we initially planned. For competitive reasons, I won't provide specific numbers around the size of our commercial field organization or details on our deployment strategy at this time. I will share that at launch, we plan to target health care providers that represent approximately 70% of the oral antipsychotic market and about 80% of the branded oral antipsychotic market. Our existing ARISTADA team will service the core of the commercial effort for ALKS 3831 and already calls upon roughly 60% of the providers included in our anticipated prescriber call universe for 3831. We are focused on leveraging our existing commercial organization. We'll make additional investments to maximize the launch of 3831. A portion of that investment will occur prior to launch. Post-launch, we expect to add incremental headcount to our field organization as payer access for ALKS 3831 is established and as pandemic-related restrictions ease. Overall, the planned build and our commercial team to expand our reach and support ALKS 3831 is less extensive than what we anticipated prior to the adoption of our hybrid promotional model. Leveraging our existing commercial infrastructure with this flexible approach will provide an important foundation for the potential launch of ALKS 3831 and the continued commercialization of ARISTADA and VIVITROL. And with that, I'll turn the call back over to Rich.

That's great Todd. Thank you very much. We have achieved a number of critical milestones in our development programs against this backdrop of strong commercial execution and disciplined management of our expenses. The positive outcome of the ALKS 3831 FDA advisory committee meeting and the presentation of accumulating antitumor activity and safety data for ALKS 4230, including in the monotherapy setting were important achievements that underscore the potential value of these investigational medicines. I want to spend a minute on each of these two developments. First, ALKS 3831. This is our novel oral atypical antipsychotic candidate, designed to provide the established efficacy of olanzapine while mitigating its associated weight gain. We submitted the 3831 NDA treatment of schizophrenia and bipolar I disorder last November, and the advisory committee meeting was held three weeks ago. This was a joint meeting of the Psychopharmacologic Drugs Advisory Committee and the Drug Safety and Risk Management Advisory Committee to discuss the clinical meaningfulness of ALKS 3831's weight mitigation and the safety profile of ALKS 3831. Three votes were taken and all three outcomes were positive. More specifically, the nearly unanimous vote 16:1, supporting the clinical meaningfulness of ALKS 3831's weight mitigation was an important reflection of its intended clinical profile. The panel also voted that the safety profile of 3831 had been adequately characterized and that labeling would be sufficient to mitigate the risks related to the opioid antagonist action of samidorphan, while not binding, the committee's recommendations will be considered by the FDA and we're looking forward to working with the agency to complete its review of ALKS 3831 NDA in advance of the PDUFA date on November 15. I'd like to thank the thought leaders, the patient advocates, and people living with schizophrenia or bipolar disorder who participated in the open public hearing to share their clinical perspectives and lived experience. A guiding principle of our company has always been to make medicines to address real-life concerns for patients suffering from chronic diseases. We believe it's critical to incorporate patients' perspectives into the drug development process. I'm also extremely proud of the Alkermes team that represented 3831 at the meeting. I'd like to thank them for the month of preparation to help produce this positive outcome. If approved, ALKS 3831 will be an important offering for patients struggling with schizophrenia and bipolar I disorder and will underscore our leadership position in the field of serious mental illness. As Todd commented, our current presence in the antipsychotic market with ARISTADA provides a valuable foundation for the anticipated commercialization of 3831. You've heard us say for some time, the commercial infrastructure required to bring these medicines to patients is substantial. Approval of 3831 will provide an opportunity to add a new revenue stream and drive topline growth while leveraging this infrastructure. Turning to ALKS 4230 in oncology. ALKS 4230 was designed to retain the therapeutic benefits of recombinant human IL-2 by selectively activating antitumor effector cells while mitigating the IL-2-associated expansion of immunosuppressive regulatory T-cells. From the outset, we've been rigorous in staging the advancement of this program, predicated on the accumulation step-by-step of data supporting and validating our design hypothesis. The ALKS 4230 data presentation in September at ESMO was a defining moment in this development program. We present data from ARTISTRY-1, which is our multi-part study of intravenous ALKS 4230 as monotherapy and in combination with PD-1 pembrolizumab. The data showed evidence of antitumor activity for ALKS 4230, with durable and deepening responses as monotherapy and in combination with pembro in a diverse set of difficult-to-treat tumor types. I'm going to briefly summarize some of the most important features of the data here. But for those of you wanting a deeper dive, I encourage you to view the ESMO presentation archived on the Investors section of our website and follow up with our peers at the company. So let's start with the monotherapy arm of the study. We view the emerging signs of monotherapy efficacy as foundational to the program, with the potential to distinguish ALKS 4230 from other IL-2 variant programs in development. The partial responses observed with ALKS 4230 monotherapy that were described at ESMO were in patients with refractory mucosal melanoma, who had received prior PD-1 therapy. Mucosal melanomas are a rare and highly lethal variant of melanoma that carry a poor prognosis and treatment options are very limited. With this early evidence of monotherapy efficacy in this tumor type, we're currently in the process of evaluating potential clinical development and regulatory strategies that may support expedited development. The data presented at ESMO also provided new insights into the potential clinical value of ALKS 4230 use in combination, in this case with pembrolizumab. Durable and deepening responses have been observed with ALKS 4230 in combination with pembro in a number of tumor types for which there are limited treatment options. These include ovarian, triple-negative breast, esophageal, and pancreatic cancer. The complete and partial responses we've seen in ALKS 4230 in combination with pembro in platinum-resistant ovarian cancer are particularly encouraging. This indication represents another potential registration pathway. Given the high unmet need and limited treatment options for patients with platinum-resistant ovarian cancer, we plan to meet with the FDA to discuss clinical study and data requirements that could support potential registration in this indication. Across the ARTISTRY-1 study, ALKS 4230 demonstrated a safety profile generally consistent with the anticipated effect of cytokine therapy. The transient fever and chills were the most frequently observed adverse events in both the monotherapy and combination cohorts. Importantly, there were no reports of vascular leak syndrome, which is the hallmark toxicity of high-dose IL-2 treatment. Another distinctive feature of the ALKS 4230 clinical development program is the potential for subcutaneous dosing. ARTISTRY-2, our subcutaneous study, is ongoing in its dose escalation phase for both once-weekly and once-every-three-week dosing regimen. We're narrowing in on the recommended Phase II dose and will share pharmacokinetic, pharmacodynamic, safety, and tolerability data from the initial dose escalation cohort at SITC in November. We believe that we'll be positioned to declare the recommended Phase II dose around year-end. We'll then plan to begin dose expansion cohorts in dedicated tumor types in both monotherapy and in combination with pembro. The accumulating data from the ARTISTRY development program provides a clearer picture of ALKS 4230's potential clinical value. Our focus is on maximizing the medical and economic value of ALKS 4230 for the benefit of patients and our shareholders. Strategic collaboration remains an important opportunity to fully elaborate the potential of ALKS 4230 across a variety of tumor types and in combination with a variety of immunotherapies and other cancer treatments. Looking ahead, we'll continue to focus on the three strategic imperatives that currently drive our management of the business: strong commercial execution, effective advancement of our development programs, and efficient management of our operating structure. We have a significant amount to accomplish and I look forward to updating you on our progress in the days ahead. So with that, I'll finish it and I'll turn the call back to Sandy for the Q&A.

Great. Thanks, Rich. Can you open the call for Q&A now, please?

Thank you. We'll hear first from Vamil Divan at Mizuho Securities.

Great. Thanks so much for taking the question. So I just have a couple, if I could. One, I guess, your comments you made around the gross-to-net impact this quarter gone up a little bit. I'm just trying to understand how much of that do you think is sort of due to the pandemic and sort of maybe more one-time sort of adjustments, or how much of this is more of a steady-state? I guess, I'm sort of wondering about what you think gross-to-net might be for next year. I don't know if you're ready to comment on that, but sort of what I'm hoping to get some color on sort of forward-looking gross-to-net thoughts. And then on 4230, I guess, for Richard. I appreciate the comments you just made. I know we'll get some more data on this again subcu at SITC. I'm just trying to get a sense maybe around some of the discussions you are having or plan to have with potential partners there. Do you think after SITC is maybe a reasonable time for us to expect more communications to pick up on that asset, or do you think you still need to do sort of additional work and maybe more, say, middle of next year or something along those lines? Thank you.

Thanks, Vamil. Jim, why don't you go ahead on the gross-to-net and I'll pick up the 4230.

Yes, of course. Thanks, Vamil. Yes, I think we do see the gross-to-net changes this year, as related to COVID. I think we signaled that a little bit earlier in the year when the COVID crisis started to hit. The unemployment rates, as we know, across the country have gone up dramatically from where they were before the crisis. And those funnel through as Medicaid patients into the VIVITROL channel. One of the benefits in this quarter was, I think, gross-to-nets came in a little bit lighter than we had anticipated in Q3 at 53%, and I think we see them more in the 54% range in Q4. And at this stage, I think that's probably the best thing to do is model that out consistently in 2021 until we get a sense of how the unemployment rates change in the country going forward and when they start to change. I think being conservative in that regard around the 54% range makes sense. Rich?

On the 4230, our view of this, and I think we've been consistent on this through the year, Vamil, has been, we wanted in 2020 to lay out and establish the data around three major areas in the program. One was monotherapy efficacy. Second is combo efficacy with pembro, particularly in pembro-unapproved tumor types. And the third is subcu, because it looks like we're at this point the only subcu presentation in development of an IL-2 variant. So I think we're checking the boxes. The first two I think we're well along our way in terms of monotherapy efficacy signal as well as pembro combos. Now the subcu, and we'd like to get to that recommended Phase II dose and regimen, which we expect towards the end of the year. With that, it will expand in the subcu way, the same way we did in ARTISRY-1, which is into the indicated tumor types as monotherapy and combo. And then I think the program is really, really on a solid foundation. That's the time that I think that we’ll be leaning into a collaboration discussion. There is interest in the program already. I mean, obviously, people in the field are watching new developments in the field. And I think 4230 is beginning to distinguish itself, but we're in no rush at this moment until we really check all the boxes necessary to really be sure that we have the profile that we designed.

Okay. Thank you.

Our next question comes from Brandon Folkes with Cantor Fitzgerald.

Hi. Thanks for taking my question and congratulations on the results for this quarter. Continuing with the discussion on VIVITROL, you mentioned that alcohol was a stronger growth driver this quarter. Could you elaborate on how much of that growth is due to patients avoiding inpatient alcohol treatment centers during COVID, compared to a lasting shift towards assisted treatment for alcohol, given that it remains a very under-penetrated market? Additionally, regarding ALKS 3831, you mentioned reimbursement over the first year. Can you provide some expectations on the pace of these reimbursements and coverage gains in that first year? Should we anticipate some relatively quick wins, or how should we consider that pace? Thank you.

Yeah. Hi Brandon, this is Todd. I'll take the questions. In terms of VIVITROL for alcohol, to your point, it's a very large market and a growing area of opportunity for the brand. 14.4 million patients suffer from alcohol use disorder about 400,000 on treatment. Our qualitative research and our discussions with HCPs tell us right now that a lot of the growth overall for VIVITROL is coming in the outpatient setting. We have seen some relaxed restrictions on the inpatient setting. But it's still a little too early to call and to see what the impact of COVID is on those restrictions. So right now we are seeing a little bit more of stronger growth in the outpatient setting. To my earlier comment, we are seeing a little stronger growth for the alcohol indication versus the opioid indication. And it's something that we plan to maximize moving forward as well. In terms of reimbursement for 3831, I think the important point to really think about with 3831 in this category is there really is no uniformed approach to market access. There are three very distinct channels in Medicare Part D, commercial, Medicaid. Formulary decisions will be variable based upon the timelines, at the local level. And we're very in tune to that. To-date, we've had over 40 interactions with payers across the U.S. market that control over 50% of the lives. And we're talking with them very closely about timelines. We do expect that launch. There's always going to be a percentage of lives that will have open access and is variable at this point. And so we expect that the access profile will become more clear throughout the first year. To support the launch, we have various programs and tactics that we will be putting in place such as patient reimbursement programs, patient access programs, and so forth, that will help mitigate any types of formulary restrictions at launch. But the key message is that it will evolve over the first year launch.

Great. Thank you very much.

Thanks, Brandon.

Our next question will come from Cory Kasimov with JPMorgan.

Hey. Thank you for taking my questions. This is Turner on for Cory. Just coming away from the ad com for 3831, has your view on the product's potential changed at all? Is the commentary from the general physician community differ from that of the panel? Any comment there would be helpful. Thank you.

Hi. This is Rich. Perhaps I'll start. And I'll hand it over to Todd, who's on the front lines of this. No. In fact, we were really pleased with the clarity of the vote, with respect to the clinical significance of the weight mitigation that samidorphan provides. That's a really important box to check because that allows the efficacy of olanzapine to come through. And what we find in our market research is that the acceptance and the belief in the efficacy of olanzapine is quite graceful and quite strong. But I'll let Todd elaborate from there.

Yeah. That's right. Turner. I would say that our main takeaway is that it supports all of our research and our position on the value proposition of ALKS 3831. And really the unmet need, just for context, I think it's important to remember that there's over 2.1 million patients from schizophrenia, over 2.4 million patients that suffer from bipolar one disorder. It's a very large market that is growing. It's a large branded market over $3.5 billion in branded sales. We believe that the critical milestone of getting through the AdCom actually supports the value proposition of the brand. It actually supports the trusted power of olanzapine, without the potential long-term weight gain. So, we're very excited about that.

We'll move forward to Paul Matteis with Stifel.

Hey thanks. This is Alex, on for Paul. Just a quick follow-up question on your views on the AdCom, curious if you could comment on the discussions surrounding bipolar, and if you still remain confident in having that bipolar indication on the label upon approval? And then another follow-up on 3831, you talked a lot about disciplined expense management. Can you talk a little bit about where you expect SG&A going forward with the 3831 launch? Great. Thank you.

So, I'll take the bipolar side. Yeah, we didn't really hear anything as yet that would undermine our belief in the approval for both schizophrenia and bipolar I disorder. That's an agreement we've had with the review division for quite some time. It was based on a PK bridging study and some drug-drug interaction studies that we ran with valproic acid and lithium. So we'll stay the course on that. And we expect approval for both. On the expense side, I know we're not going to guide for 2021 at this point. But I'll let Jim and Tom give you some qualitative sense of that.

Sure. Thanks, Alex. So as we guided for the remainder of 2020, we do see roughly a 10% increase at the midpoint for SG&A as we move into beginning our educational programs. And post-PDUFA works in the fourth quarter as we prepare for 3831. I would expect that increase to continue moderately in 2021. We haven't prepared guidance yet obviously, but as we hire the complement of the sales force as Todd mentioned and begin education activities post launch, that will be a normal bolus for a launch year for a product like 3831. Importantly, though we're committed to non-GAAP net income profitability here. And we think we have the ability to invest strategically in the launch but also maintain that discipline on profitability as we move into 2021. And we'll give more guidance in February, as we typically do around the specific.

I would like to add to Jim's comment that we are dedicated to successfully launching ALKS 3831. We believe this brand offers a unique value and addresses a large market with considerable unmet needs. Currently, we are focusing on several key areas, including investments planned for the fourth quarter. We have a very active and productive disease state education program. Our experiences during the pandemic with the commercialization of ARISTADA have provided us with valuable insights, along with successful channels and strong digital marketing capabilities that we intend to use when launching 3831. We will be increasing these activities in 2021 and plan to expand our sales force, although not to the extent we initially expected. Nonetheless, we will be hiring sales professionals to support the launch throughout the coming year.

Thank you so much.

Next we'll hear from Marc Goodman at SVB Leerink.

Yes, hi. First, regarding 3831, are you expecting any type of REMS related to the current discussion? Secondly, about manufacturing and royalty revenues, could you provide insight into what influences you foresee in 2021? Are there any new products anticipated that might significantly impact the lineup? That would be helpful. Lastly, concerning VIVITROL, the revenue expectations for the fourth quarter appear less balanced than we anticipated. Do you think that the Q3 results might be affecting the fourth quarter? It seems to be a bit flatter than we would expect. Thanks.

Hi, Marc, it's Richard. I'll address the 3831 and then Jim, Iain, and Tom will cover the other two. To clarify, we have proposed in the labeling for 3831 the most stringent aspect regarding the risk highlighted by the panel, specifically the presence of the opioid antagonist in the formulation for certain indications. We want to specify that this drug should not be indicated for patients currently using opioids. Therefore, we do not anticipate the need for a Risk Evaluation and Mitigation Strategy (REMS), but we have suggested an educational program that could function similarly to a REMS. We are comfortable with this approach as it is crucial for us to ensure that both physicians and patients are informed about the inclusion of samidorphan in 3831. We have been preparing for this throughout the entire development program, and we look forward to implementing it. We employ similar educational efforts with VIVITROL, where we extensively inform about the role of the antagonist for both patients and healthcare providers.

Certainly. The manufacturing revenues for next year are expected to see growth, particularly from VUMERITY, given the unique circumstances of this year, including the impact of COVID. We believe VUMERITY represents significant potential for our manufacturing and royalty revenue. For SUSTENNA and CONSTA, we expect them to remain stable to slightly declining, while the long-acting injection market continues to grow with our products from J&J. Overall, we're optimistic about our manufacturing and royalty revenue, especially with the upswing from VUMERITY anticipated in 2021. Regarding VIVITROL, we provide a range of guidance due to the unpredictability associated with COVID. In the last quarter, two-thirds of our growth was driven by volume, and one-third resulted from favorable adjustments in gross-to-net and increased inventory. As we approach the fourth quarter, we do not expect significant changes in inventory, although fluctuations can occur. We remain cautious about predicting recovery rates; however, we did see a strong rebound in Q3. Thus, we provide ranges for VIVITROL based on previous growth rates and demand trends, and we believe it is returning to last year's growth trajectory in the overall market moving forward. Thank you.

Our next question comes from Jason Gerberry at Bank of America.

Hi, thank you for taking my questions. So on ALKS 3831, there was some statistics in the AdCom briefing book about 20% to 25% of olanzapine patients getting concomitant opioid prescription. So curious is that ratio applicable more broadly across the entirety of the atypical antipsychotic world? Just wondering how you think about the potential addressable or eligible patient population if this contraindication is in the labeling. And then if you get REMS, is that commercially a major headwind in your view, or can you survive that? They'll have a commercially successful product? And then lastly just can you talk about what's going on at the ground level with VIVITROL in terms of the patient flow to the clinics versus the alternative distribution at places like Albertsons, which was talked about last quarter. Just kind of trying to get a sense thinking about fourth quarter next year depending upon how the pandemic evolves, how you're evolving to be able to make sure that patients are adherent to therapy? Thanks.

Yes, hi Jason, this is Todd. I want to start by addressing the first question regarding the consistency of patients receiving an opioid prescription. Our perspective is that this is stable across the market at around 25%. It's important to note that when we look at patients with serious mental illness and bipolar one disorder, the total number of patients is between 5% to 8%, which is relatively small. We believe that these patients are contraindicated, making the situation manageable and appropriate. Regarding the REMS program, we have carefully considered this and proposed an educational program, leveraging our experience with the REMS initiative for VIVITROL. We are confident in our ability to execute a REMS program, and given the small contraindicated patient population, we anticipate managing this effectively from a commercial perspective. As for patient flow, we are closely monitoring VIVITROL as the addiction market begins to recover, which is promising on several fronts. The majority of this recovery is occurring in the outpatient setting. We have undertaken significant efforts to expand access to injections at alternative sites like pharmacies, including Albertsons, and we are very optimistic about this. Overall, we have increased our provider locator for injections for ARISTADA and VIVITROL by about 2,000 additional locations. In discussions with our pharmacy partners, including Albertsons, they are starting to see an uptick in utilization. While it's still early to provide specific numbers for Albertsons, the volume of injections they are administering and the growth they are experiencing is beginning to improve, which is encouraging for us.

Can I just ask a follow-up? Can you explain a little bit the – why it's 5% to 8% of patients who get concomitant opioids versus the 25% of TRx? Just understanding the difference of those two numbers?

The 5% to 8% Jason is really a med analysis that's done talking about the population that would have an opioid use disorder and also serious mental illness. So those are the patients that would be contraindicated in the ALKS 3831 label.

All right. Thanks, Jason.

Our next question will come from Akash Tewari with Wolfe Research.

Hey. Thanks so much for taking my questions. I just wanted to confirm. On 3831, do you currently plan for there to be a REMS program, or do you not? And can you give some comment on what the trajectory will look like both in bipolar and schizophrenia given some of the comments you've made on reimbursement and your revised sales strategy? Additionally, on ARISTADA, how will the growth trajectory change after ABILIFY MAINTENA goes off patent in the mid 2020s? Any concerns on revenue growth being affected when you start getting generic competition from the J&J product? Thank you.

Hey, Akash it's Rich. Let me give a couple of points, and then I'll have Todd fill in the details. We don't currently plan REMS right now, but we'll see how we end up through the review. And the reason we don't believe is because we actually proposed an educational program that is enhanced amounted to an educational REMS. And we think that will be more than sufficient to meet the needs in the market along with as Todd has mentioned multiple times the fact that the drug will not be indicated, the contraindicated for patients who are actively using opioids. So we think that will be sufficient, but if we get REMS, we can deal with that as well. I think one of the most interesting things about ARISTADA right now is its product family. And the space between ARISTADA and other long-acting injectables growth as we introduce new features and new data namely the range of doses the range of durations, the presence of INITIO, as well as the two-month dose, coupled with data PAUSE like from our ALPINE study that shows real-world use in those dose regimens. So we expect other entrants into the field although you have noted it's a very small number of competitors in such an important market, but we think the ARISTADA product family will continue to stand on its own based on data and the features and benefits of the family for a long time.

Yeah. What I would add is I think the question too was around uptake 3031 for payers schizophrenia and bipolar. Again, I think the important point to remember with this is that the payers don't look at these as distinctive products. They don't manage the indication separately. So our expectation again is that ALKS 3831 from a payer standpoint is going to compete in the branded space. And we're not expecting to see any difference in uptake from a payer standpoint for schizophrenia versus bipolar. In terms of the impact to – for ARISTADA with the potential of another product coming on to the market to Rich's point, I think the good thing to remember about ARISTADA is really our source of business. ARISTADA's source of business is not predicated on one or two products. It's very broad. We have a large source of business that comes from orals, and also a source of business that comes from LAIs. So one additional product coming on to the market will not drive a major difference in how we look at the outlook for ARISTADA as a family.

Thanks so much.

Our next question comes from – and I hope I'm saying your name correctly from Biren Amin with Jefferies.

Yeah. Hey, everyone. This is Jeet on for Biren today. Maybe just one quick question from me, I think back in September you had updated us on an ongoing litigation with Teva regarding the 499 patent for VIVITROL. Just wanted to know where things perhaps currently stand with that and if you foresee ultimately settling with Teva as you did in the previous annual lawsuit, and I guess theoretically if Teva does ultimately win would it be fair to assume Alkermes could launch after Teva's generic exclusivity period? Thanks.

Hi, Jeet, thanks for the question. Yeah, as we disclosed earlier in this quarter, we did file suit against Teva related to that end of filing. At this point, we will not comment on ongoing patent litigation, but we'll certainly keep everyone in the loop as things unfold on that front.

Our next question comes from Douglas Tsao at H.C. Wainwright.

Hi. Good morning. Thank you for taking the questions. Jim, can you quantify the inventory adjustments we saw for VIVITROL and ARISTADA in dollars this quarter? Also, regarding the VIVITROL franchise and its adoption in alcohol dependence, is the increased use still concentrated in the same top five states? It seems to be solidifying as a growth opportunity. Are you considering reshaping the commercial organization to take advantage of that, or can it be handled with the current sales force configuration? Thank you.

Good morning, Doug. I'll begin and then hand it over to Todd regarding the sales force. Regarding inventory, it can vary between products from quarter to quarter. For VIVITROL, we started the quarter with inventory at its lowest level in years, which was somewhat challenging in Q2. However, it rebounded to normal levels during the quarter, resulting in about $4 million in net sales. This was likely due to a brief period of reduced inventory that we believe was cleared into the market, and the inventory now stands at approximately 2.5 weeks, which is what we expect. Thus, VIVITROL is back to normal inventory levels rather than being overstocked, a decision likely influenced by the significant impact of COVID in Q2. As for ARISTADA, we have also returned to normal levels, which are slightly higher at around four weeks, reflecting typical patterns over the past few years. The impact for this quarter was about $1 million in Q3, so we are again at normal levels and experiencing regular quarterly fluctuations.

Hi, Doug, it's Todd. Regarding VIVITROL and alcohol, our VIVITROL business performance has been fairly stable quarter-over-quarter. The top 10 states account for about 58% of VIVITROL's volume. In Q3, most states have shown recovery; they're not back to pre-COVID levels, but we've observed solid growth. The landscape for alcohol is changing, and we're noticing increased usage, particularly in California. Over the past four months, we've been working on optimizing our commercial organization’s deployment. We're currently updating this deployment to better target healthcare providers who have the majority of alcohol patients. This initiative began in Q3, and we plan to continue refining it into next year.

Okay. Great. Thank you.

And that does conclude our question-and-answer session for today. I'll turn it back to the management team and to Ms. Coombs for any additional or closing remarks.

Great. Thank you everyone for joining us on the call today. We appreciate the patience with our difficulties this morning, but please do reach out to us at the company if you have any follow-up questions that we can be helpful with. Thanks so much.

Ladies and gentlemen, this does conclude today's conference. We thank you all for your participation. You may now disconnect and we hope that you enjoy the rest of your day.