Promising Pipeline Boosts Growth But Competitive Pressures And Shrinking Margins Pose Risks

Key Takeaways

• Expansion in proprietary products and focus on operational efficiency may enhance margins and drive profitability.
  
• Advancements in clinical programs and strategic investments in LYBALVI and ARISTADA aim to sustain market share and boost revenue growth.
  
• Competitive pressures in antipsychotics and potential risks from new drugs may impact Alkermes' revenue and profit margins amidst increasing operational costs.

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.

• Alkermes has strong growth prospects from its proprietary product LYBALVI, as evidenced by increased commercial access and expansion in the bipolar disorder space, potentially boosting future revenues and net sales.
  
• The company is focusing on advancing the promising ALKS 2680 clinical program for narcolepsy and idiopathic hypersomnia, which has demonstrated potential in early trials; this could lead to significant future revenue streams if successful.
  
• Alkermes anticipates an efficient operating structure by maintaining a concentrated focus on proprietary products and reducing manufacturing obligations, which could optimize net margins and profitability.
  
• The expansion of the sales force and increased investment in personal promotion for LYBALVI and ARISTADA are expected to preserve competitive market share, implying potential future growth in top-line revenues.
  
• Alkermes plans to leverage its strong cash position, including continued share repurchases and potential business development activities, which could enhance earnings per share and drive longer-term shareholder value.

Alkermes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Alkermes's revenue will decrease by -1.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.7% today to 15.5% in 3 years time.
• Analysts expect earnings to reach $223.9 million (and earnings per share of $1.24) by about December 2027, down from $387.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $391 million in earnings, and the most bearish expecting $35.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.6x on those 2027 earnings, up from 12.3x today. This future PE is greater than the current PE for the US Biotechs industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 3.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Alkermes Future Earnings Per Share Growth

Risks

• The end of royalties on U.S. net sales of INVEGA SUSTENNA and a transition in manufacturing revenues could negatively impact revenue by approximately $200 million in 2025.
  
• The company plans to modestly increase operating costs due to advancing clinical studies and expanding their psychiatry commercial footprint, which could pressure net margins.
  
• There is considerable competitive pressure in the antipsychotic market, particularly for LYBALVI and ARISTADA, which could impact future revenues.
  
• Concerns around the growth of GLP-1 drugs, which are being considered for alcohol dependence, could present future competitive risks to VIVITROL’s revenue.
  
• The potential impact of the IRA and the resulting decisions on the development of orphans could influence financial outcomes and earnings.

Valuation

• The analysts have a consensus price target of $34.08 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 $43.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $223.9 million, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 7.0%.
• Given the current share price of $29.48, the analyst's price target of $34.08 is 13.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.