Robust Product Demand And Critical Innovations Set To Propel Growth, Amid Analysts' Concerns And Revenue Diversification Challenges

Key Takeaways

• Proprietary products and strategic sales like the Athlone facility sale signal robust revenue growth and operational efficiency, showing promise for future earnings.
  
• Investment in neuroscience and improved market access for products like LYBALVI indicate a focus on pipeline diversification and expanding patient base for revenue growth.
  
• Alkermes faces challenges with the end of U.S. royalties, revenue diversification, a pivotal clinical program, and operational changes affecting profitability and growth.

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 proprietary commercial product portfolio, demonstrating significant year-over-year growth, is expected to drive future revenue growth, especially with products like LYBALVI showing robust demand and double-digit growth.
  
• The operational focus on driving profitability, which saw GAAP net income and non-GAAP net income from continuing operations increase significantly in the second quarter, indicates an improving financial operating profile that could positively impact net margins and earnings.
  
• The strategic sale of the Athlone, Ireland manufacturing facility and the execution of the $400 million share repurchase program reflect a commitment to operational efficiency and shareholder return, potentially influencing earnings per share positively.
  
• Investments in neuroscience development programs, particularly the advancement of ALKS 2680, a novel investigational oral orexin 2 receptor agonist for narcolepsy, highlight a strong pipeline that could lead to future revenue streams and diversification of the product portfolio.
  
• Enhanced market access and contracting strategies for key products such as LYBALVI, which now reaches approximately 50 million additional lives with improved access, could significantly impact future revenue growth by expanding the patient base and potentially increasing prescription volume.

Assumptions

• Analysts are assuming Alkermes's revenue will decrease by 1.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.6% today to 25.2% in 3 years time.
• Analysts expect earnings to reach $391.7 million (and earnings per share of $2.2) by about October 2027, up from $385.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $555.3 million in earnings, and the most bearish expecting $256.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.3x on those 2027 earnings, up from 12.3x today. This future PE is lower than the current PE for the US Biotechs industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 1.13% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Risks

• The upcoming end of U.S. royalties for INVEGA SUSTENNA in mid-August could significantly impact third quarter results by approximately $20 million, influencing revenue streams and potentially affecting the company's overall profitability.
  
• A sharp decrease in Manufacturing and Royalty revenues from INVEGA products is observed, from $321.2 million in Q2 last year to $78.7 million this year, which might indicate a vulnerability in the company's revenue diversification and could negatively impact future earnings.
  
• Operational efficiency initiatives and the sale of the Athlone, Ireland manufacturing facility indicate a transition phase for Alkermes, posing risks to productivity and continuity that could affect net margins.
  
• The focus on a single clinical program (ALKS 2680) as a significant element of growth strategy could impose risks if the program does not meet clinical or regulatory milestones, potentially impacting future revenue and earnings.
  
• The company's share repurchase program, although a sign of returning capital to shareholders, could constrain liquidity used for operational advancements or other strategic investments, affecting the company's growth capabilities and net margins.

Valuation

• The analysts have a consensus price target of $34.69 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 $50.0, 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 $1.6 billion, earnings will come to $391.7 million, and it would be trading on a PE ratio of 17.3x, assuming you use a discount rate of 7.1%.
• Given the current share price of $28.83, the analyst's price target of $34.69 is 16.9% 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.