Alkermes plc. Q1 FY2021 Earnings Call

Greetings, and welcome to the Alkermes First Quarter 2021 Earnings Call. My name is Rob, and I'll be your operator for today's call. I will now turn the call over to Sandra Coombs, Senior Vice President of Corporate Affairs and Investor Relations. Sandy, you may begin.

Thank you. Good morning. Welcome to the Alkermes plc conference call to discuss our financial results and business update for the quarter ended March 31, 2021. With me today are Richard Pops, our CEO; Iain Brown, our CFO; and Todd Nichols, our Chief Commercial Officer. 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 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. Now I'll turn the call over to Richard.

That's great. Thank you, Sandy. Good morning, everybody. The first quarter's solid results were driven by our focus on commercial execution and disciplined management of our cost structure. Iain and Todd will take you through the Q1 performance in detail. But at the highest level, we're on track to deliver on our financial objectives for the year and over the longer term, consistent with our value enhancement plan. The way we create value in biopharmaceutical companies is by making important medicines that address unmet needs of patients. Alkermes is at an exciting point in our evolution. We've achieved $1 billion top line driven by a portfolio of marketed drugs. We've developed specialized commercial capabilities and identified new revenue growth opportunities with the expected launch of LYBALVI, which will be a second antipsychotic in our portfolio, and the anticipated growth of VUMERITY, a drug for the treatment of MS developed by us but sold by Biogen. Coming next, we're focused on new neuroscience and oncology development candidates. Our objective is to develop truly innovative medicines with a clear value proposition relative to current and anticipated future standards of care. We do this through developing new molecular entities based on strong biologic rationale and leveraging our established strength in molecular design, both small and large molecules. At our recent Investor Day, we announced new development programs that reflect this approach. In neuroscience, our CoREST-selective HDAC inhibitors have the potential for broad utility in neurodegenerative and neurodevelopmental diseases and are advancing toward first-in-human studies later this year. Our orexin two receptor agonist program leverages our core competencies in small molecule medicinal chemistry and pharmacokinetic and formulation expertise with candidate nomination planned for later this year. In oncology, we have developed a cytokine engineering capability that is yielding innovative new approaches to some of the most challenging and high-potential immune modulation pathways, in addition to nemvaleukin, our most advanced oncology clinical candidate. We also highlighted our preclinical work engineering a tumor-targeted split IL-12 fusion protein and unveiled our IL-18 program. These presentations are archived on our website. Each of these programs is designed to address a specific unmet need in neuroscience and oncology and are designed to have clear competitive advantages. We test those assumptions throughout the development process. If a candidate doesn't meet these prespecified criteria, we stop investment. If we create value through new medicines, the way we can enhance that value and make it rewarding to shareholders is through an equivalent focus on structure, efficiencies, and profitability. The value enhancement plan we introduced in December of last year furthers our focus on business excellence and makes explicit our intention to increase efficiency and profitability. It also provides a framework for allocating capital and prioritizing investments in our major cost areas of commercial and R&D and drives a clear focus on programs with the highest expected return on investment. The combination of scientific excellence and business excellence is a powerful concept that we've incorporated into all aspects of the way that Alkermes operates, and it's what will drive our ability to grow value in the future. So now with that as an introduction, I'll turn the call over to Iain to review the first quarter results.

Thank you, Rich, and hello, everyone. This morning, we announced solid financial results for the first quarter derived from our two principal areas of focus: driving top line growth and disciplined expense management. Based on these results and our expectations concerning the ongoing recovery from the COVID-19 pandemic, today we are reiterating our financial expectations for the full year 2021, which were fully outlined in our press release and 8-K filed back on February 11. For the first quarter of 2021, we generated total revenues of $251.4 million, driven by the solid performance of our proprietary commercial products and our diverse portfolio of manufacturing and royalty revenues, including notably the continued acceleration in the uptake of VUMERITY. With operating expenses lower than the first quarter of 2020 across all line items, we achieved a GAAP net loss of $22.4 million and a non-GAAP net income of $17.8 million. VIVITROL net sales in the first quarter were $74.5 million. These results reflect a 5% decrease in units year-over-year due to continued pandemic-related disruptions in the treatment system. Despite this, Q1 net sales were ahead of our expectations for the quarter, driven by higher unit volume and some favorable gross to net adjustments related to Medicaid and lower product returns. Gross-to-nets were 51.5% in the first quarter as compared to an average of 49.9% in 2020. And in Q1, inventory levels decreased by approximately $2.3 million to a more normalized level as is consistent with typical seasonal patterns. Turning to the ARISTADA product family. Net sales in the first quarter increased 9% year-over-year to $55.4 million, primarily driven by underlying unit growth. As we anticipated on our year-end earnings call in February, ARISTADA net sales declined sequentially due to a decrease in inventory levels in the first quarter, representing approximately $8 million, and we ended Q1 with more normalized inventory levels. Gross-to-net adjustments of 53.3% in the first quarter were consistent with 2020. Now while ARISTADA demand has been resilient throughout the pandemic, we have seen an impact on overall market growth, particularly related to new patient starts, and Todd will provide more detail on that shortly. Moving on to our manufacturing and royalty business. In the first quarter, our manufacturing and royalty revenues were $119.8 million compared to $116.3 million in the prior year. This increase was driven primarily by accelerated uptake of VUMERITY, which contributed $13.4 million in the quarter and growth of royalty revenues from INVEGA SUSTENNA and TRINZA, partially offset by lower year-over-year RISPERDAL CONSTA revenues, driven primarily by lower manufacturing volumes. Total operating expenses were $267.9 million for the first quarter, down from $283.6 million in the same period in the prior year, reflecting our continued focus on disciplined expense management, and our ongoing investment in programs we believe will drive long-term shareholder value. R&D expenses for the first quarter were $92.3 million compared to $93.3 million for the prior year, reflecting investment in nemvaleukin and the earlier stage HDAC and orexin platforms. SG&A expenses for the first quarter were $125.2 million compared to $133.4 million for the prior year, primarily reflecting savings across the commercial organization. Turning to our balance sheet, we ended the first quarter well-capitalized with approximately $627 million in cash and total investments, while total debt outstanding was $298 million. We continue to focus our capital allocation on the highest return on investment opportunities that are consistent with our long-term growth strategy. Our priorities are clear: support our commercial portfolio to drive top line growth, invest in the potential launch of LYBALVI, advance the nemvaleukin development program and seek partnership opportunities, develop the newest pipeline programs emerging from our neuroscience and oncology platforms as we unveiled at our recent Investor Day, and explore other strategic opportunities around noncore assets, including early-stage R&D programs and royalty streams. We believe that we enter the second quarter with a solid foundation for long-term value creation and are well positioned financially to execute on our strategy, and I look forward to updating you on our progress. And with that, I'll hand the call over to Todd to review our commercial results.

Thanks, Iain, and good morning, everyone. I'm pleased with our commercial team's execution in the first quarter, with both ARISTADA and VIVITROL Q1 net sales slightly ahead of expectations. Our first quarter results reflect solid underlying unit demand and typical seasonal inventory fluctuations. Based on our Q1 results and current trends in the treatment landscape, we believe we are well positioned to achieve sales within our full year guidance ranges for both ARISTADA and VIVITROL. Now taking a step back, COVID-related disruptions continued to impact patient access to the treatment of both addiction and serious mental illness in Q1 as we anticipated. We continue to believe that patient access to care will improve as we approach the second half of 2021 as vaccinations continue to roll out across the country and capacity restrictions ease in settings of care. We have also seen encouraging trends in leading indicators such as new-to-brand prescriptions for both VIVITROL and ARISTADA in the first quarter compared to Q4. We continue to execute on our hybrid promotional model that incorporates both in-person and virtual engagements. This model was implemented in response to the COVID-19 pandemic last year, and it has allowed us to quickly adapt in this highly dynamic market environment. While virtual engagements have been critical to maintaining continuity, we look forward to increasing in-person engagements. We have seen these engagements pick up through the first quarter, with our sales force expanding the percentage of their in-person calls to approximately 50% in March, up from 40% in early January. Now starting with VIVITROL, net sales in the first quarter were $74.5 million, consistent with seasonal patterns. VIVITROL net sales declined sequentially, due primarily to the drawdown of Q4 inventory build as well as slightly higher gross-to-net adjustments, as Iain outlined. COVID-19 disruptions to the addiction treatment systems continued to negatively impact VIVITROL in Q1, and we are still working back up towards pre-pandemic unit demand levels. Pandemic-related restrictions broadly impacted patients’ ability to access the healthcare system for treatment and impacted the utilization of VIVITROL in particular, due to the requirement for injections, the need to be opioid-free before receiving treatment, which often requires detoxification in a medical setting, and the nature of substance abuse treatment settings of care generally. However, in our recent market research, about 50% of healthcare providers that we surveyed reported a slight to substantial increase in AUD and OUD patient volume in March compared to the prior month. In alcohol dependence, we have seen a resumption of growth in the market. During Q1, SAMHSA issued a new treatment advisory for prescribing pharmacotherapies for patients with alcohol use disorder, encouraging providers to consider FDA-approved medications when treating patients. Now part of our focus in 2021 is on driving awareness of VIVITROL as a treatment option for alcohol dependence among providers, caregivers, and patients. As the country begins to emerge from the isolation of the pandemic, public health organizations and experts have expressed increasing concern about the rise in heavy drinking and adverse alcohol-related health conditions. April is Alcohol Awareness Month, and we have been focused on launching campaigns designed to drive education around the disease of alcohol dependence and increased awareness of treatment options, including VIVITROL. The prevalence of alcohol dependence and the indication mix for VIVITROL continues its upward trend, driven by the growth of the category and new patient starts. Based on our results in the fourth quarter, we are reiterating our expectation of VIVITROL net sales in the range of $315 million to $345 million for 2021. Turning now to the ARISTADA product family. Net sales in the first quarter increased approximately 9% year-over-year to $55.4 million, driven by strong TRx months of therapy growth of 11% year-over-year that outpaced the broader long-acting atypical antipsychotic market, which grew at 3%. As anticipated, net sales were down sequentially from the fourth quarter, driven by seasonal inventory fluctuations. As Iain outlined, inventory had returned to normal levels at the end of the first quarter. As a result of the pandemic, we have seen some impact on prescribing patterns in the long-acting antipsychotic space, particularly to new prescriptions as psychiatry healthcare providers made fewer treatment changes in the COVID environment, particularly within the context of telehealth visits. As a result, new-to-brand prescription growth flattened in the second half of 2020. We are encouraged that in the first quarter of 2021, ARISTADA NBRx growth was 11% on a sequential basis, the highest in the LAI antipsychotic market. Further, our market research shows that healthcare providers experienced steady or increasing patient volumes in the quarter. Our recent market research also indicated that the value proposition of the ARISTADA 2-month dose plus ARISTADA INITIO continues to resonate with healthcare providers, as evidenced by 21% year-over-year TRx growth for the 2-month dose on a month of therapy basis. Based on our Q1 results and these leading indicators, we are reiterating our expectation for ARISTADA net sales within the range of $260 million to $290 million in 2021. Moving to LYBALVI, our oral investigational antipsychotic candidate designed to offer the efficacy of olanzapine while mitigating its associated weight gain, is under review with the FDA with a PDUFA date of June 1. As we prepare for a potential commercial launch in the second half of 2021, our team is focused on finalizing our payer strategy, driving disease state awareness, and engaging in scientific exchange. We believe LYBALVI, if approved, will represent an important new medicine for the treatment community. Olanzapine is widely recognized as being highly efficacious, but physicians and patients often avoid prolonged utilization due to concerns about its propensity for weight gain. Interestingly, olanzapine was the fastest-growing oral atypical in 2020, with a 15% increase in NBRxs in December 2020 compared to December 2019, suggesting that providers are increasingly seeking olanzapine's antipsychotic efficacy for patients. The oral atypical antipsychotic market is highly dynamic, with over 70,000 treatment switches occurring each month as patients look for the right medication to fit their needs. We believe this reflects persistent unmet need in the market and a potential opportunity for a new entrant with a profile like LYBALVI. If approved, LYBALVI has the potential to serve two markets: the treatment of adults with schizophrenia and the treatment of adults with bipolar 1 disorder, while leveraging our existing psychiatry infrastructure. LYBALVI, if approved, will join ARISTADA in our psychiatry franchise, adding a product with a differentiated value proposition suited for a different patient profile. Our ARISTADA field force already calls on about 60% of LYBALVI's targeted provider universe, and we plan to add approximately 50 additional sales representatives in a staged fashion throughout the first year of launch based on payer access. Looking ahead, we are focused on execution as we prepare for the potential launch of LYBALVI, work to achieve our expectations for VIVITROL and ARISTADA, and continue to drive awareness of the value proposition of these important medicines. Now I'll turn the call back over to Rich.

Thank you, Todd. Commercial and financial execution are our main priorities. The value of our pipeline and R&D investments is starting to show. I want to highlight some key elements, particularly focusing on LYBALVI, which is currently at the NDA stage, and our immuno-oncology agent, nemvaleukin. I'll begin with nemvaleukin, which is making rapid advancements. It stands out as a late-stage IL-2 variant in a field gaining significant attention due to its promising biology. Nemvaleukin has progressed well from the conceptual stage, gathering clinical results that support its potential therapeutic benefits. Its design offers flexibility in dosing and demonstrates antitumor activity both alone and in combination with other therapies. Our clinical development strategy targets patients who have not responded to existing treatments. We recently shared select data at our Investor Day, with another presentation scheduled at ASCO. Today, I will highlight important operational developments. We reached a significant milestone by completing enrollment in parts B and C of ARTISTRY-1. This primary study for intravenous nemvaleukin is providing insights into dosing, tolerability, and preliminary efficacy. It consists of three parts: Part A focused on dose escalation and establishing safety, while Part B confirmed the monotherapy activity in melanoma and renal cell carcinoma. We saw partial responses in both melanoma and RCC, and this data continues to develop. Part C aims to find antitumor activity in combination with pembrolizumab across various tumor types. Preliminary results show promising activity in platinum-resistant ovarian cancer, which I will address shortly. We will keep reporting data from ARTISTRY-1 throughout the year, with updates at ASCO, where we will present our findings. ARTISTRY-2, our Phase I/II study on subcutaneous dosing of nemvaleukin, has also progressed. We identified a recommended Phase II dose of 3 mg once-weekly and started the dose expansion phase. At ASCO, we’ll present data on safety and tolerability from the dose escalation cohorts. We shared the first partial response from this study recently in a patient with platinum-resistant ovarian cancer and will release more data as the study progresses. Demonstrating antitumor activity via subcutaneous administration is critical, and we are committed to advancing this data set for broader collaboration opportunities. The encouraging antitumor activity seen in ARTISTRY-1 and 2 has propelled our development program to the next phase. We are now focusing on monotherapy efficacy in mucosal melanoma and combination therapy with pembrolizumab for platinum-resistant ovarian cancer. In ARTISTRY-1, we noticed initial signals of antitumor activity for nemvaleukin monotherapy in mucosal melanoma, a rare and aggressive form of the disease with limited treatments. Nemvaleukin received orphan drug designation for this indication last month. We also met with the FDA to align on study design and initiated ARTISTRY-6, a single-arm Phase II study for IV nemvaleukin monotherapy in patients with previous checkpoint-inhibitor treatment. This study aims to support possible registration based on its responses and safety profile. To maximize trial efficiency, we will also enroll patients with advanced cutaneous melanoma receiving subcutaneous nemvaleukin. We expect to dose the first patient soon. The second focus is on platinum-resistant ovarian cancer. We identified clear antitumor activity signals in ARTISTRY-1 with the combination of nemvaleukin and pembrolizumab, and we plan to start a Phase III study in the latter half of the year. This indication currently lacks an approved pembro treatment. We have established a clinical supply and trial collaboration with Merck to support this study. We are finalizing the study design with Merck and the FDA, with an agreed primary analysis of nemvaleukin and pembrolizumab versus investigator choice of chemotherapy. Partnering with Merck is a key validation of our findings. Importantly, this collaboration allows us to continue pursuing broader strategic collaboration opportunities for nemvaleukin, which is a strategic priority for us. There are many IL-2 variant programs in development due to the proven efficacy of the IL-2 pathway combined with various tumor-targeting methods. Each program needs to validate its hypotheses through human clinical data on response and duration across different tumor types. This is the path we are taking with nemvaleukin, and the accumulating human data is accelerating the program's development. Recognition from researchers and thought leaders and ongoing clinical trials are crucial validations, and we are eager to share updates throughout the year. Lastly, regarding LYBALVI, we are collaborating with the FDA as we approach our June 1 PDUFA date. In parallel, we are progressing with prelaunch activities to prepare for a commercial launch in the second half of the year. Our business priorities are clear, and we are focused on execution by rethinking our approach to drug development and emphasizing efficiency and value delivery. While some of these efforts will take time to materialize, we see significant opportunities to create substantial value going forward. Now I will turn the call back to Sandy for the Q&A.

Thank you, Richard. We'll now open the call for Q&A, please.

Our first question today comes from Brandon Folkes with Cantor Fitzgerald.

Congratulations on all the updates year to date. So I just want to actually focus on ARISTADA and VIVITROL. You talked about the COVID restrictions and the headwinds. These have been going on for a long time. So as we kind of open up, how much do you think there's been a bit of a permanent change in treatment paradigms in the addiction space as well as the atypical long-acting injectable market? How should we think about this ramp back to pre-COVID levels? Is this something that's going to take a lot of work from the commercial side? Just any color there would be great in terms of the ramp we should expect back to pre-COVID levels?

Yes, absolutely. And thank you. We are very pleased with the commercial performance for both products in Q1. We do assume a normalization of patient volumes in the second half of the year, which also includes moderate market growth, which really is going to be driven by improved patient access to treatment providers. All of our qualitative research supports that. One of the key metrics that we continue to watch is telemedicine utilization. The interesting fact from our surveyed physicians showed that right when the pandemic happened, you saw a huge percentage of HCPs in both therapeutic areas switch to telemedicine. We're starting to see a gradual shift back to in-person engagements and access to treatment providers opening up. So we are expecting that to normalize in the second half of the year. When that normalizes, we believe that we'll start to see an increase in the switching market. That really drives both of these products and drives LAIs, but also drives the injection treatment landscape for VIVITROL as well too. So that's how we're thinking about it. It's more of a normalization in the second half of the year.

The next question comes from the line of Vamil Divan with Mizuho Securities.

Great. I have two questions. First, regarding LYBALVI, it seems like things are on track for the June 1 date. From what we've heard from investors, prior to the PDUFA date in November, it appears that all the labeling discussions were completed and the manufacturing issues emerged later. Is that an accurate interpretation? Are there any restrictions regarding which patients may receive the product or any risk mitigation strategies that you already understand, or are those still topics of discussion with the FDA? My second question pertains to VUMERITY. We've observed a significant shift in prescription trends there. I know you've mentioned that royalty streams could be part of your value enhancement strategy. How do you assess a product like this, which is still in its early stages? Is it feasible to monetize it in the near term, or do you think it’s necessary to wait to better evaluate its long-term value, especially considering the ongoing questions surrounding the TECFIDERA patent as well?

Vamil, it's Rich. I'll start and then if Iain has some color, he can chime in. Yes, LYBALVI, we seem to be on track for the 6/1 date. You're right. In our previous iteration, we had some label discussions, and the manufacturing stuff came up at the last minute. We've continued to have label discussions with the FDA now in this cycle, which is why we think we're on track. But label negotiations are never over until they're over. But so far, there’s not been anything that has been unexpected in those discussions. So we're optimistic that we can get this finished off. But these days with the FDA, I think caution is always warranted, but we have no indication of it so far. On VUMERITY, I think you answered the question yourself. VUMERITY is really beginning a certain nonlinear part of its growth phase. So it's very difficult to project what the actual shape of the curve will be, that would be the basis of a monetization at this moment. With that said, it's something that we're interested in, and we'll pay attention to. Iain, any other further color on that?

Not much to add there. Obviously, I think we're just very encouraged with the revenue trends that we've seen in the fourth quarter and then into the first quarter. I think as Rich says, it looks like it's on a new trajectory. We do manufacture the products. So we get a little bit more of an insight into what's happening in those manufacturing trends. And the order patterns are very encouraging as well. But as Rich said, it's early. In order for us to establish value, I think we need to see a few more consecutive strong quarters from VUMERITY.

Our next question is from the line of Paul Matteis with Stifel.

This is Thor on for Paul. One question on VIVITROL and then one on nemvaleukin. In VIVITROL, how much growth in alcohol dependence is assumed in your guidance? And then on nemvaleukin, what does the path look like for ARTISTRY-6 that leads to registration?

Yes. I'll start off with the question on alcohol. We continue to make great progress in our strategy to maximize the opportunity for alcohol. It's a significant unmet need in the marketplace. Last year, we saw about a 4% growth year-over-year. We're expecting that to continue, so somewhat to be linear. We expect to continue to gain market share within the category. So we're expecting overall on a months of therapy basis. Overall, we think that growth is somewhere going to be within that probably close to 2% to 4% is the range that we're looking at.

And this is Rich. I'll answer the question about ARTISTRY-6. Mucosal melanoma is a disease with serious unmet needs. The patients we're looking at are people who have progressed beyond checkpoint inhibitors. So they have very limited treatment options. I think the clinical profile that is so exciting about an IL-2 variant like nemvaleukin is a combination of three things. One is overall response rate; number two is durability of those responses; and number three is tolerability. So that will be the profile we’ll be looking at as ARTISTRY-6 evolves.

Our next question is coming from the line of Cory Kasimov with JPMorgan.

Two for me, both on nemvaleukin. First one is following up on ARTISTRY-6. Can you talk about the rationale for evaluating both the IV and subcutaneous formulations there? I mean, I know you've talked about subcutaneous ultimately being more of a contingent factor for future partnerships. So if you can talk a little bit more about that strategy. And then for the upcoming posters at ASCO, how much should we be expecting in terms of follow-up for ARTISTRY-2? And for the abstracts themselves, are those going to be essentially placeholders relative to what you've disclosed already? Or should we be expecting meaningful updates there?

Cory, good to hear your voice. I'll take the first part, and Sandy is more expert on the second part. Throughout the program for nemvaleukin, we think of the IV as the leading edge of the wedge followed then by the subcu with the hope and expectation that subcu could recapitulate essentially the activity and the efficacy that we see with IV. And that’s exactly what we're doing in ARTISTRY-6. While we have great investigator thought leader interest in treatment for patients with mucosal melanoma at that stage, there’s really very little for them. So moving ahead with the IV could be life-sparing, lifesaving, life-changing therapy for these patients. But introducing the subcu into that clinical setting as well would give us an option if we see that type of efficacy as well of advancing the subcu dose within the context of the same protocol. So when we’re putting in this clinical network to do mucosal melanoma around various countries and various sites, it's a great asset to leverage to feather in the subcu piece as well, and we’ll see how those subcu data evolve.

And Cory, your question on the ASCO posters. Recall that we did just give an update on the nemvaleukin program at our Investor Day. So we'll refresh that data, but there'll be probably a month worth of additional follow-up data in that poster. But as that data set evolves, we'll try to keep investors as updated as possible.

Our next question is from the line of Jeet Mukherjee with Jefferies.

Two for me. Back to ARTISTRY-6, perhaps. Just wanted to get a sense of perhaps how many cutaneous melanoma patients you plan to enroll? And what do you believe are perhaps the respective bars for efficacy to meet in mucosal and cutaneous melanoma? And the second question was, at your Investor Day, you had highlighted perhaps several steps to facilitate that expense management. Could you perhaps elaborate on what steps will continue to be implemented throughout the year and hopefully be reflected on the bottom line?

Sure. Jeet, this is Sandy. I'll take the question on the patient enrollment number. So overall, in ARTISTRY-6, we expect to enroll approximately 110 patients. Of that, approximately 40 will be in the cutaneous melanoma arm using the subcu, and 70 will be in the mucosal arm. Rich, do you want to comment on the response?

Yes. I think that our biostatistical approach to this is that we want to see response rates in the 20-plus percent level. But it’s also with the additional feature that I mentioned before of durability. I think durability is really important. It's striking with the first response we had, the partial response we talked about previously that patient has been on therapy for, I believe, over a year now. And that's really an encouraging aspect of nemvaleukin in this setting. Iain, do you want to comment on the expense side?

And then on the expense management side, yes, I mean, we're really looking across the business at everything, both internally and we also brought in an external consulting organization at the beginning of the year. So a number of initiatives came out of that, some of which we factored into our 2021 guidance. But as we go forward, the focus is going to continue. We're actively managing on the headcount side of things as people leave the organization. We're making sure that we have the right resources focused on the right programs. On a program basis, both within commercial and within R&D, we're ensuring that we're really focusing that investment on the opportunities that are going to maximize return on investment. We're looking at other opportunities as well, like with our real estate footprint. It’s a thorough process, and we're very focused on it in order to achieve the longer-term profitability targets that we've laid out in the value enhancement plan.

Our next question is coming from the line of Marc Goodman with SVB Leerink.

Yes. Just a continuation there. On the value enhancement plan, you've talked about monetizing noncore assets. I'm just kind of curious what your thoughts are back there. And additionally, in the oncology area, you were talking about partnering, but just curious, we're just still thinking about maturing this data throughout the year before you start those types of discussions or certainly signing anything. I'm just kind of curious about your thought process there. And maybe you could just lay out, secondly, just on spending, obviously, very light in the quarter. Just give us a sense of how the spending goes throughout the year just in the SG&A line.

If I start with the monetization of noncore assets, we've identified several areas that we are not focusing on internally. We discussed some noncore R&D programs, particularly those at earlier stages. Regarding the royalty monetization, we've touched on it previously, emphasizing the value proposition and the importance of obtaining sufficient value. Currently, VUMERITY represents our most valuable royalty stream, and we seek to see the maturity of this new trajectory to establish its value. From a spending standpoint, we were pleased with our performance in Q1, with expenses lower than both Q1 and Q4 of last year. Looking ahead for the rest of the year, we anticipate an increase in the cost of goods due to rising volumes of our proprietary products. On the R&D front, we expect expenses to rise slightly as the nemvaleukin program progresses, particularly with the launch into ARTISTRY-6 and the PROC program, along with a $25 million milestone in the latter half of the year for initiating the HDAC 1140 program. Regarding SG&A, as Todd mentioned, we will expand the sales force, resulting in some additional spending, which will be staged closer to the PDUFA timeline around June. We will also invest a bit more as we gain access for LYBALVI. Overall, we are very comfortable with the guidance provided back in February and therefore, we reiterated that guidance today.

Marc, it's Rich. I want to take on your question about the partnering because I think what's so interesting in this IL-2 space right now is how the various programs are segregating into their own lanes. They are clearly not interchangeable. I think nemvaleukin, in particular, is emerging as a really important entrant in this field. The existence of monotherapy efficacy and the durability of the subcu dose are two highly differentiating features of it. We really do want to elaborate that subcu efficacy. It's just beginning to emerge now. We would recommend the Phase II dose in ARTISTRY-2 being achieved at the end of last year. We just opened up the expansion cohort. We were fortunate that right on the threshold of the Investor Day we saw with our first patient, our first response in PROC. We expect that this subcu profile will continue to elaborate. You'll see at ASCO some actual pharmacodynamic features of the subcu presentation that are slightly different than the IV that we're encouraged by. I've said before, we really don't want to spend time in a partnering discussion trying to adjudicate whether the subcu dose works or whether the drug is efficacious. We can do that all on our own. When we move into the partnering discussions, it’s about what indications should we go after, how do we expand this program, how do we create the most medical and economic value for nemvaleukin. I think that data set will continue to mature this year, but I think we can hear the drumbeat in the distance now.

The next question is from the line of Akash Tewari with Wolfe Research.

This is Amy on for Akash. I just have a couple on your orexin program. As you think about the design of your lead candidate and the competitive space, what specific proximities are you optimizing for? Is it half-life, blood-brain barrier penetration, or selectivity? Just looking at your early data in DTA mice, it looks like you're leading to more potent drops in cataplexy and benefits on wakefulness at lower doses compared to Takeda. Although we acknowledge it's early data, we wanted to kind of think about how you're looking at the design of your molecule? And then another one in terms of the blood pressure increases and polyuria indicated in the orexin trial. Do you think this is an on-target OX2R related effect or an off-target OX1R related effect? Any color you can add here would be super helpful.

It seems you’re interested in discussing this with our research team, but I can share our viewpoint. Technical aspects like PK profile, PK trough, partition coefficient, and half-life are important in our design, but what really matters is how we translate these into a patient perspective, focusing on a once-daily, well-tolerated treatment option with minimal side effects for the clinical condition. We believe there’s an opportunity here compared to what other companies are doing, and we have dedicated significant time to understanding the relationship between pharmacokinetics and pharmacodynamics, including how substances penetrate the blood-brain barrier and their effects on the central nervous system versus peripheral exposure. I won’t delve into all the specifics of your questions now, but I suggest we have a follow-up conversation to discuss the extensive science and data involved.

Our next question is from the line of Douglas Tsao with H.C. Wainwright.

You might be muted, Doug.

Why don't we move on, and we can certainly go back if Doug can reestablish his line.

Our next question will be coming from Jason Gerberry of Bank of America.

This is Chi on for Jason. Two from us. First one on VUMERITY. Partner Biogen declined to comment on the impact of TECFIDERA patent rulings, possibly removing generics from the market. But I'm curious if you can comment on how big of a positive would VUMERITY be if generic TECFIDERA came off the market? I guess, a follow-up on nemvaleukin. Are you able to confirm the couple of unconfirmed responses that you showed at Investor Day? Or is this something an update that we can look forward to at ASCO?

I'll take the first one, and maybe Sandy can take the second one. Look, the experts on the interaction between VUMERITY and TEC are Biogen, and you should really focus there. From our perspective, I can tell you VUMERITY was designed as a next-generation fumarate with benefits for patients, namely in the form of preserving the proven efficacy of monomethyl fumarate in a dosage form in a molecule that's more GI tolerant. That’s what we're seeing in the real world. Our view is if VUMERITY represents a generational advance for the benefit of patients. That's what should drive its increased utilization in the clinic. On the nemvaleukin side, Sandy, you want to answer that one?

On the nemvaleukin side, sorry, repeat your question, Chi?

Yes, the couple of unconfirmed responses. Are you able to confirm them?

Yes. We won't comment on that on this call. You can look forward to ASCO for an update on any additional confirmation.

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

Great. I was just wondering if you can provide us with your latest expectations for how the weight data for LYBALVI might be incorporated into the label? What the potential outcomes are there? And then I know you mentioned adding an additional 50 sales reps here. How much additional coverage would that give you of your targeted provider universe? I know you said 60%. So would that go to 70%, 80%? Maybe just help us think about how much extra expansion you get from those additions?

Yes, absolutely. I'll take both of those. You're referring first to the weight efficacy trial, which is ENLIGHTEN-2. That was a pivotal Phase III trial, which showed the benefit of LYBALVI versus olanzapine. So we still, to Rich's earlier point, we're still in communications with the FDA. So we're not going to really comment on what the label is until we have approval. But we are very encouraged, and discussions have been consistent with our expectations. In terms of the footprint coverage, that's something we're really excited about, and it's actually a key leverage point for us as we launch into this new category with an oral product. Currently, our sales force covers about 60% of the targeted audience. That's going to significantly ramp up once we add in a staged fashion the additional sales professionals. Our expectation is when we get to launch, that we're going to cover approximately 80% of the branded oral marketplace, which, as you can imagine, is a substantial amount of coverage, which is going to allow us to have a very strong share of voice in the marketplace.

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

I had a few, if I may. Maybe just one follow-up to a prior comment. Can we just level set, Richard, how we should expect the setup going into ASCO? I realize there's a lot of companies reporting a lot of things. And I know you guys emphasized safety and tolerability. So maybe if you could level set us on if we should or should not expect any further meaningful updates on efficacy? That's one. On subcu, I guess my question is, we know there hasn't been monotherapy responses so far. And so we'll see how that shakes out. But meanwhile, we also know the PK profile is quite different from IV. I almost wonder why not perhaps try out a subcu regimen where it's given 5 days in a row and then no further for the rest of the cycle? Could that create an opportunity for subcu, assuming there hasn’t already been some sort of monotherapy activity? And the last one, there's a lot of buzz from the new administration on new funding for Suboxone. I wonder if there's anything unusual in the works, which could truly move the needle on VIVITROL?

Umer, I wonder where you were in the queue this morning. If you got...

I was in the Israeli call.

I was very impressed by the questions regarding orexin 2. Sandy is the expert on what we will present at ASCO. In relation to ARTISTRY-2, there is a significant amount of interesting data concerning the PK/PD relationship and tolerability on the subcutaneous side. We haven't shared all of that yet; we had some prepared for ASCO, but understanding the biology of the different presentations is very important. Regarding monotherapy subcutaneous, we believe that the weekly regimen at 3 mg will enhance monotherapy efficacy, and we're confident in that. Your question brings up a broader issue about whether there are other more tolerable IV regimens instead of daily IV for five days, and we think there are. Also, there may be combinations of IV induction with subcutaneous maintenance that we believe could work. There are numerous possibilities. Currently, our focus in the program is on streamlining costs and concentrating on its initial approval pathways. However, if we discovered other regimens that could increase our chances of success on the subcutaneous side, we would make changes, but we are satisfied with the weekly regimen. We also have a regimen every three weeks that we believe produces a suitable pharmacodynamic response, but we view the weekly regimen as the best starting point. Regarding Suboxone, there are a couple of notable developments. The liberalization of Suboxone prescribing is expected, and since Suboxone accounts for 95% of the market, changes in this market don’t significantly impact VIVITROL, which is targeted at a different patient demographic. VIVITROL is for patients seeking detoxification with monthly antagonist therapy. Another significant change in the Suboxone space is related to opioid settlements, with companies like Teva proposing to provide free Suboxone to states, but we don’t think this will alter the situation for VIVITROL at all. Todd, feel free to add your thoughts on this.

Yes, I completely agree, Rich. We view Suboxone as being entirely distinct. The indications for these products differ, as do their clinical uses and the patient experiences. We are very aware of the changes in administration following the removal of the waivers, and we monitor that closely. However, we are confident and engage in discussions about the patient journey with our customers, and we understand that these products are utilized in different ways. The opportunity for VIVITROL is best understood through the evidence-based standards that support its broad clinical application, particularly regarding alcohol, as we have discussed in recent months. The potential is significant, with 14 million Americans affected by Alcohol Use Disorder and only 400,000 currently receiving treatment. We are observing a healthy growth in prescriptions, increasing by approximately 3% year-over-year. We believe VIVITROL presents a strong value proposition for these patients, and we are highly focused on that opportunity right now.

Okay. Thanks, everyone, for joining us on the call this morning. We appreciate the questions. If there are any follow-ups, please don't hesitate to reach out to us at the company. Have a great day.

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