INVEGA SUSTENNA Royalty Expiry Will Cause $215 Million Revenue Loss

Key Takeaways

• Expiration of INVEGA SUSTENNA royalty and loss of legacy revenues may significantly impact top-line growth.
  
• Increased R&D spending and competition in the psychiatric segment could pressure margins and dampen near-term EPS.
  
• Strong financial performance driven by proprietary products and strategic investments positions Alkermes for future growth and enhanced profitability.

Catalysts

A biopharmaceutical company, researches, develops, and commercializes pharmaceutical products to address unmet medical needs of patients in therapeutic areas in the United States, Ireland, and internationally.

• The anticipated expiration of the INVEGA SUSTENNA U.S. royalty in August 2024 and the conclusion of certain legacy manufacturing revenues could lead to a $215 million decrease in manufacturing and royalty revenues for 2025, impacting overall top-line revenue growth.
  
• Flat to modest growth is expected for mature products like VIVITROL and ARISTADA. Such expectations could dampen revenue prospects if the products fail to achieve significant demand growth in their respective markets.
  
• The uncertainty regarding competitive dynamics, especially in their psychiatric franchise with entrance of new competitors like BMS and J&J, could pressure both ARISTADA and LYBALVI sales and affect revenue margins.
  
• Investment in expanding the psychiatry sales team and promotional activities, including increasing R&D spend up to $335 million for pipeline programs like ALKS 2680, while essential for future growth, could compress net margins in the short term.
  
• The potential shareholder dilution through share repurchases and capital allocation to development programs, without significant realized gains from new product lines like ALKS 2680, could negatively impact earnings per share (EPS) in the near term.

Alkermes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alkermes's revenue will decrease by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.9% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $197.4 million (and earnings per share of $0.99) by about March 2028, down from $372.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $373.4 million in earnings, and the most bearish expecting $60.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.7x on those 2028 earnings, up from 15.0x today. This future PE is greater than the current PE for the US Biotechs industry at 19.6x.
• Analysts expect the number of shares outstanding to decline by 3.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Alkermes Future Earnings Per Share Growth

Risks

• Alkermes achieved a strong financial year in 2024, exceeding $1.5 billion in revenue primarily driven by its proprietary commercial portfolio. This success lays a foundation for continued revenue strength.
  
• The company has managed its business for robust profitability, achieving over $450 million in EBITDA, which indicates a positive impact on net margins.
  
• Alkermes has strengthened its balance sheet by repurchasing shares, retiring debt, and ending the year with $825 million in cash, which creates a strong financial position for future earnings.
  
• The ongoing development of ALKS 2680 in the promising orexin biology space, coupled with anticipated Phase II data, suggests potential future revenue streams from new therapeutics.
  
• Strategic investments in promoting and expanding access to key products like VIVITROL and LYBALVI, which have shown year-over-year growth, can contribute positively to revenue and revenue growth expectations.

Valuation

• The analysts have a consensus price target of $37.8 for Alkermes based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $197.4 million, and it would be trading on a PE ratio of 33.7x, assuming you use a discount rate of 6.9%.
• Given the current share price of $34.37, the analyst price target of $37.8 is 9.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.