Alkermes plc (ALKS) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Alkermes Fourth Quarter and Year-End 2019 Financial Results Conference Call. My name is Rob and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Sandy Coombs, Vice President of 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 and year ended December 31, 2019. With me today are Richard Pops, our CEO; Jim Frates, our CFO; and 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 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. Our prepared remarks today will include preliminary data from the ARTISTRY clinical program. These data may change as patient enrollment continues and as more patient data becomes available and may not be indicative of final data from such trials or results of future clinical trial. 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 Jim.

Thank you, Sandy. In 2019, we achieved $1 billion in revenue for the second consecutive year. The back half of the year was particularly active for us. We saw the addition of a new revenue stream with the approval of VUMERITY and set the stage for the potential addition of another revenue stream with the submission of our NDA for ALKS 3831 for the treatment of schizophrenia and bipolar I disorder. We implemented a restructuring in the fourth quarter that recalibrated our cost structure and focused our R&D investments in programs with the highest potential value. And we acquired Rodin Therapeutics, which further diversified our pipeline. I will start with an overview of our key financial and commercial highlights. For the full-year 2019, total revenues grew 7% year-over-year to $1.17 billion and we recorded non-GAAP net income of $112.2 million that was ahead of our expectations. For the fourth quarter, we recorded total revenue of $412.7 million and non-GAAP net income of $131.4 million. These results were driven by growth of our proprietary product sales, continued strength of our base royalty and manufacturing business and the receipt of the $150 million milestone payment from Biogen related to the approval of VUMERITY. VIVITROL net sales in the fourth quarter increased 11% year-over-year to $92.8 million, driven primarily by 14% unit growth. VIVITROL experienced solid growth in key states, such as Arizona, California and Texas and broad-based growth in states with lower VIVITROL share with 19 states growing more than 25% year-over-year. This growth was partially offset by an increase in gross to net adjustments of 47.7% as compared to 46.3% in the fourth quarter of 2018. Sequentially, VIVITROL net sales grew 9% compared to the third quarter of 2019, driven by 7% unit growth and slightly lower gross to net adjustments driven largely by payer mix. For the full-year 2019, VIVITROL net sales increased 11% year-over-year to $335.4 million, driven by unit growth of 12%.Gross to net adjustments for VIVITROL were 48.3% for the year, relatively flat compared to full-year 2018. Turning to the ARISTADA product family. For the fourth quarter, net sales increased 16% year-over-year to $56.8 million, driven primarily by unit growth of 24% and partially offset by higher gross to net adjustments of 50.7% compared to 43.5% in the fourth quarter of 2018. Due to payer mix and the addition of the ARISTADA -- of ARISTADA to the formulary at the VA. Sequentially, ARISTADA net sales grew 6% compared to the third quarter of 2019 driven by a 11% unit growth, and again partially offset by higher gross to net adjustments. Underlying total prescription data for ARISTADA demonstrated solid growth of 40% year-over-year in terms of months of therapy. In December 2019, ARISTADA's market share for new prescriptions, in terms of months of therapy was 32% in the long-acting Aripiprazole market and 9% in the overall market for long-acting atypical antipsychotics. For the full-year 2019, ARISTADA net sales increased 28% year-over-year to $189.1 million, driven by volume growth. Gross to net adjustments were 49% for the year compared to 44.3% in the full-year 2018. Moving on to our manufacturing and royalty business. In the fourth quarter, our manufacturing and royalty revenues were $107.3 million compared to $167.4 million in the same period in 2018. For the full-year, we recorded manufacturing and royalty revenues of $447.9 million compared to $526.7 million in the prior year. This decrease reflects a decline in revenues from the AMPYRA/FAMPYRA franchise following generic competition to AMPYRA entering the market in the United States in 2018 as well as a one-time payment of $26.7 million from Zealand Pharma that we -- was recognized in the fourth quarter of 2018. 2019 revenues from RISPERDAL CONSTA, INVEGA SUSTENNA and INVEGA TRINZA increased 3% compared to 2019 -- 2018, excuse me, to $323.3 million. As increased end market sales of INVEGA SUSTENNA and INVEGA TRINZA were largely offset by fewer manufacturing batches and lower end market sales for RISPERDAL CONSTA and by the loss of the INVEGA SUSTENNA 1.5% patent royalty in the United States as of May 2019. In 2019, we recorded R&D revenues of $11.1 million for the fourth quarter and $52.8 million for the full-year, primarily driven by the reimbursement of development expenses for VUMERITY related to our collaboration with Biogen. Following FDA approval of VUMERITY in the fourth quarter, we received a $150 million milestone payment, of which $144.8 million was recorded as license revenue and $5.2 million as R&D revenue. We received a 15% royalty on net sales of VUMERITY and this royalty has the potential to be an important financial contributor for us. In terms of expenses, our total operating expenses for 2019 were in line with our expectations. Our R&D expenses for 2019 were $512.8 million compared to $425.4 million for the prior year. The year-over-year increase was primarily due to our acquisition of Rodin in the fourth quarter, which included an upfront cash payment of $98.1 million. This transaction was accounted for as an asset acquisition and $86.6 million of this upfront payment was determined to be in process R&D and consequently recorded as R&D expense in Q4. If you exclude this R&D expense related to the acquisition of Rodin, R&D expenses of $111.6 million in Q4 were relatively flat compared to Q4 of last year. SG&A expenses for 2019 were $599.4 million compared to $526.4 million for the prior year, reflecting investments in our commercial organization in support of both ARISTADA and VIVITROL. Turning to our balance sheet. We ended 2019 with approximately $614 million in cash and total investments compared to approximately $620 million at the end of 2018. The company's total debt outstanding was approximately $277 million at the end of 2019. Let me now shift to our financial expectations for 2020, which reflect activities we’ve undertaken to position Alkermes for long-term growth and profitability. Our full financial expectations are outlined in the press release we issued earlier this morning. For the top line, we expect total revenues to be in the range of $1.03 billion to $1.08 billion, which includes expectations for continued growth of VIVITROL and ARISTADA. For VIVITROL, we expect net sales to be in the range of $340 million to $355 million and gross to net adjustments of approximately 50% due to the consolidation of certain Medicaid plans and the broader buying consortiums that we expect will increase the supplemental discounts in certain states going forward. For ARISTADA, we expect net sales in the range of $220 million to $235 million, reflecting approximately 20% year-over-year growth to the midpoint, despite expected gross to net adjustments increasing to approximately 52% due to similar consolidation of certain Medicaid plans and anticipated increased volume through the VA. In line with historical seasonal patterns, due to the impact of year-end inventory build and the reset of commercial plan deductibles, we expect our first quarter 2020 net sales will be down sequentially for both VIVITROL and ARISTADA with growth expected to resume in the second quarter. It's important to note that our 2019 top line results included approximately $200 million of license in R&D revenues from Biogen related to the development and approval of VUMERITY. For comparative purposes, our 2020 revenue expectations reflect top line growth of just over 8% year-over-year when excluding those Biogen contributions to our 2019 results. In terms of our operating expenses, as we evaluated our cost structure last year, we implemented a restructuring design to deliver savings of approximately $150 million in 2020 with about one-third related to R&D and two-thirds driven by SG&A, while preserving our ability to invest appropriately in what we believe to be our highest value opportunities. The $150 million in planned savings was measured against our pre-restructuring 2020 internal budget, which align with the September 2019 sell side consensus for our 2020 expenses. We subsequently adjusted this number by $20 million following the acquisition of Rodin to account for anticipated incremental R&D spend. The financial expectations that we're providing today reflect our expected achievement of these savings. R&D expenses are expected to be in the range of $405 million to $430 million, reflecting the predicted impact of the restructuring and incremental investments in the HDAC-inhibitor platform that we required from Rodin. Included in this overall R&D expense are expected investments in advancing the ALKS 4230 clinical development program and lifecycle management initiatives for our commercial products and ALKS 3831 and investments in our preclinical portfolio, including the HDAC-inhibitor platform. Our R&D expenses also include investment in our medical affairs efforts and manufacturing operations, both in support of our commercial products and pipeline candidates. SG&A expenses are expected to decrease to be in the range of $535 million to $560 million in 2020, also reflecting the impact of our restructuring. Expected investment in SG&A is primarily related to the complex infrastructure needed to commercialize our proprietary products in addition to schizophrenia as well as investments in prelaunch activities for ALKS 3831. With an assigned PDUFA target action date in November 2020 and assuming a 90 day DEA scheduling period, the majority of investments and the expansion of our sales organization in support of ALKS 3831 would not occur until early 2021. We expect 2020 GAAP net loss to be in the range of $130 million to $160 million and non-GAAP net income to be in the range of $40 million to $70 million. Excluding the $150 million milestone payment that we received from Biogen in 2019, our expectations for non-GAAP net income in 2020 reflect a year-over-year increase of approximately $90 million to the midpoint of our 2020 guidance range. We enter 2020 in a position of financial strength and look forward to advancing our development pipeline candidates in both neuroscience and oncology, growing our commercial portfolio and further leveraging our P&L to drive sustained non-GAAP profitability. With that, I will turn the call over to Richard.

That’s great. Thank you, Jim, and good morning, everyone. So we built a $1 billion top line business through developing important medicines. 2019 was highlighted by important operational achievements across the portfolio. With the approval of VUMERITY for multiple sclerosis, the submission of the ALKS 3831 NDA, the presentation of initial efficacy and safety data from our ALKS 4230 clinical program, and important positive Phase 3 data from the ARISTADA ALPINE study and the VUMERITY EVOLVE-MS-2 study. In 2019, we also focused on actively shaping the future of the business through a rigorous assessment of our products, our pipeline and our structure and took important steps to position the company for long-term growth. We implemented a strategic restructuring in order to reduce our cost structure, and in so doing accelerate and drive sustained non-GAAP profitability. We acquired Rodin Therapeutics, building on our experience in CNS diseases and expanding our development efforts into a wide range of neurodegenerative disorders and we strengthened our Board through two new Independent Directors. One a formal public company CFO, focused on value creation and the other in oncology thought leader, an expert. So as we enter 2020, our key priorities are clear: drive the growth of VIVITROL and ARISTADA through commercial execution; prepare for the launch of ALKS 3831 in schizophrenia and bipolar 1 disorder; advance the development of ALKS 4230 in oncology and build out our HDAC-inhibitor platform. So I will take these briefly in turn. Our work in addiction and in schizophrenia with ARISTADA exemplifies many of the core values of this company. We are out there every day through our science, our medicines and our advocacy working to advance patient centered care for people with these serious conditions. We are making a real-world impact and we are very proud of it. Alkermes is a positive force for change and these medicines are incredibly important elements of our business. VIVITROL is helping to address the public health crisis represented by opioid dependence. Its unlike any other pharmaceutical products. From the infrastructure required to foster adoption to its geographically driven growth, which is reliant in large part on state policy and funding. We've invested many years into understanding this landscape. And the treatment paradigm in order to increase access and drive awareness for VIVITROL. Its growth trajectory is dynamic and challenging to predict. In 2020, we will continue to focus on driving growth and profitability and extending the impact of this medicine. ARISTADA demonstrated solid year-over-year growth in 2019. 2020 is about execution. With a differentiated product family, a strong pair access profile and a compelling value proposition, we have a clear opportunity to grow -- to drive the growth of ARISTADA in 2020. These two products are growing and comprise an increasing percentage of our revenue. And this revenue engine continues to evolve. In 2020, we expect a new stream of royalty revenues from VUMERITY, a novel next generation l oral fumarate for the treatment of relapsing forms of MS, which was discovered and developed by Alkermes and which received FDA approval last quarter. Biogen is launching VUMERITY into a large and dynamic U.S market for MS. And last week, TECFIDERA's IPR decision was a positive development for this market. We received a 15% royalty on net sales of VUMERITY. This product has been profitable for us from the first unit sold. So we're off and running, and we are looking forward to tracking the progress of Biogen's launch. The acceptance of the ALKS 3831 NDA for schizophrenia and bipolar 1 disorder last month was an important milestone in this program. We are planning for potential approval of 3831 at the end of the year, which would contribute to and grow our psychiatry franchise. The investments we've made in our ARISTADA commercial organization provide a strong platform for the launch of 3831 and we are well-positioned to leverage our established presence with physicians, thought leaders, payers and policymakers in the psychiatry space. Across schizophrenia and bipolar 1 disorder, efficacy is key to successful outcomes. With the efficacy of olanzapine and a differentiated tolerability profile, 3831 has the potential to be an important new treatment option. We look forward to working with the agency through its review of the NDA and updating you on the preparations for launch. Our prelaunch work is focused in two areas: disease state education and engagement with a range of payers. So I'll turn to the development pipeline. 4230 is our investigational engineered IL-2 fusion protein designed to selectively expand tumor killing immune cells, while avoiding the IL-2 induced activation of immunosuppressive cells. Harnessing the antitumor activity of the IL-2 pathway continues to be one of the most exciting opportunities in immuno-oncology. The 4230 clinical development program has two core elements, ARTISTRY-1, our intravenous dosing study; and ARTISTRY-2, our subcutaneous dosing study. In 2019, we made important progress in both and presented initial efficacy and safety data from ARTISTRY-1 at SITC last November. The ARTISTRY-1 data have continued to emerge since our presentation. As of December 23 data cut, we had observed new partial responses in both pembro approved and unapproved tumor types and a safety profile consistent with what we presented at SITC. As of February 11, both patients with partial responses that we’ve reported on at SITC had been on therapy for more than a year. And we will discuss the results and others in more detail at future medical meetings. Notably, 4230 is the only IL-2 variant program in active clinical development with the potential for subcutaneous dosing. We are particularly encouraged by the initial data emerging from ARTISTRY-2. And today I'll give you grief overview of some the initial findings from that study. In the initial escalation cohorts of ARTISTRY-2 examining weekly and once every three weeks dosing, the subcutaneous administration of 4230 showed a pharmacokinetic profile that was consistent with our predictions. The initial escalation doses also demonstrated biological activity as measured by expansion of effector cells. The emerging data observed thus far in ARTISTRY-2 suggest that both the weekly and once every three weeks subcutaneous regimen may have potential for improved tolerability profile as compared to the IV dosing regimen. As of a December '19 data cut, there were no reports of serious adverse events related to study drug or discontinuations due to adverse events in the subcu study. In the ongoing dose escalation phase of ARTISTRY-2, 11 of 19 patients that were dosed with the 4230 regimen continue on treatment as of February 11 with five of those subjects having received 6 months of treatment or more. In terms of efficacy, ARTISTRY-2 is designed to provide a number of interesting data sets. Patients enrolled have rapidly progressing disease and the 6-week monotherapy lead-in period has the potential to help demonstrate single agent activity of 4230. As of the December data cut, 9 of 11 patients with the first scan had stable disease and a majority of these 9 patients continue to have stable disease upon their second scan. As we expand the clinical development program, we are significantly expanding our clinical trial network outside of the U.S and we are in the process of opening new sites to accelerate enrollment. We expect the first of these sites to open for enrollment later this quarter. From a strategic perspective, with increased visibility into the potential of subcutaneous dosing regimen and ALKS 4230s emerging efficacy profile, we are positioned now to evaluate opportunities for strategic collaboration in 2020. With the potential to be complementary with a variety of cancer treatment approaches, collaboration will be key to exploring and maximizing the potential of 4230 as a treatment option. Next, I’m going to turn to our HDAC inhibitor platform. The Rodin transaction builds on our broad experience in psychiatry and allows us to explore a wide array of neuropsychiatric diseases that are characterized by synaptic loss and dysfunction, such as schizophrenia and depression as well as neurodegenerative diseases like Alzheimer's and Huntington's and other developmental disorders. HDAC inhibitors are powerful epigenetic regulators that have the potential to drive formation of new synapses in the brain. And by doing so, address some of the most disruptive clinical symptoms that accompany neurodegenerative diseases. HDAC inhibitors have been approved as oncology agents. However, these agents are limited by hematologic toxicities and it was never clear whether these toxicities could be separated from their prosynaptic effects. HDAC's function in association with specific multi protein complexes. Our chemistry targets these specific subsets, one of which is called CoREST, which is directly involved in repression of prosynaptic genes and neurons. This program is advancing with preclinical research and IND enabling activities with a primary focus on HDAC CoREST inhibitors for synaptopathies. Anticipating our move into the clinic, we're developing biomarkers and translational tools to give us early insight in clinical development. We are very excited about the biology and the chemistry around this platform. This investment is reflective of our long-standing commitment to bring new and innovative therapeutic options to patients living with chronic CNS diseases where the unmet medical need is high. So while in there, our strategy and path to driving value creation for shareholders is clear. We’ve a $1 billion top line with growing proprietary commercial products, a commitment to sustained non-GAAP profitability and an exciting pipeline in neuroscience and oncology. 2020 will be an important year across the portfolio and we look forward to updating you on our progress. So with that, I will turn it back to Sandy to run the Q&A.

Great. Thank you, Richard. Rob, we will now open the call for Q&A.

Thank you, Sandy. [Operator Instructions] Thank you. And our first question is from the line of Jason Gerberry with Bank of America. Please proceed with your questions.

Hey, good morning. Thanks for taking my questions. Rich, just first question for me, I wanted to follow-up on your comment about exploring collaboration for 4230 in 2020. So is it fair to say that everything is on the table in terms of the deals you’re looking at or you’re looking at the collaborations where perhaps you can partner with companies to help co-fund R&D to explore more combinations with 4230 in different tumor settings? And then my second question just the guide on VIVITROL, it looks like it implies about a low single-digit drag on net pricing. Just sort of curious if you would characterize that as the trend we should be modeling for VIVITROL on a go-forward basis that effectively net pricing is kind of down low single-digits? Thanks.

Good morning, Jason. I will take the first and I will have Jim and Iain take the second one. So, yes, I think it's fair to say conceptually everything is on the table as we look at 4230 collaboration. The caveat being the objective is to maximize the expected net present value of the whole program. And that’s going to be done by increasing the number of tumor types and lines of therapy that we can explore. What’s interesting is that already as the program is progressing, we are being approached to look at all kinds of different combinations from I-O/I-O combinations to targeted cancer therapies, radiotherapy, conventional chemotherapies and the like, because you can see why this IL-2 pathway be activated selectively as we're doing it, would just conceptually be a reasonable complement to a number of different application. So the value of the program will be maximized by the scope of the clinical program that we have to support. By ourselves we could -- we couldn’t close to finding all the different opportunities. And we’ve been waiting to do that until we had enough information to say, okay, we truly have an agent here that is meeting the profile that we designed to have. And I'm not ready to say we're completely there yet, but all the indications are going in that direction. I think during this year that dataset should mature at the point. So I don't know whether we will -- whether we would consummate a collaboration in 2020. We don't need to, it's not really limiting at this point. We have the funding and the capacity to do it. But I think over the course of this year, the dataset is going to be sufficiently complete, hope to get a good sense of what this molecule can become.

And Jason on the pricing, I mean, I think you picked up on two competing trends that are happening with VIVITROL. As we typically do, we take our volume growth and extrapolate that forward, because it's so hard to predict the changes that happen on a state-by-state level. And this year we are predicting a change by a few percentage points in gross to nets. Last year we are around 48%, we're predicting next year to be 50%. Again, that’s largely driven on where the state business comes from, because every state has a different Medicaid program. And so I would say that's really a course of adjustment that we see today. We are not yet ready to see that continuing out in the future. And again, a lot will depend on where we see the growth coming in the future from various states. The last thing I'd say is we are working really hard into 2020 to focus on the alcohol indication for VIVITROL, which is a part of the payer mix. It has more commercial payment as opposed to opioids. And so we are working hard there to see if we can counteract that pressure on pricing that we're going to see in 2020.

Great. And if I could just follow-up. Is there any impact to the warning letter on VIVITROL baked in the guidance?

No, I think our guidance was developed just in normal course.

Okay. Thank you.

Thanks, Jason.

Our next question is from the line of Chris Shibutani with Cowen and Company. Please proceed with your questions.

Hi, everyone. This is Pam Barendt on for Chris. I’ve a couple of questions. The first one is, looking forward to the next one to three years and the expenses, R&D and SG&A, what percentage of those do you think would be dedicated to oncology now that you’ve said you made partner, but that’s not for certain?

Well, I think a lot will depend, Pam, on the exact partnership. I mean, as Rich outlined, there's both commercial as well as scientific logic to partnering 4230. And I think if we -- the broadest sense, the way I think about it, if we have a partner, we can probably attack a lot more potential indications and spend a lot of money together with a partner. If Alkermes is pursuing it individually, we will certainly target that and it's the broadest guidance I can give you. So far for beyond 2020 is that we're committed to our profitability, and so our investment in R&D across our portfolio will be made with that discipline in mind.

Got it. Thanks. And the next question is specifically about the regulatory path for 3831. First, schizophrenia and secondly for bipolar disorder. Can you let us know how likely or not you think it would be that an AdCom would be held, and why?

Yes. So recall that we filed the NDA for both indications. So we expect if the drug is approved, there will be approved for both indications. And we've taken to the logic of how we arrived at that agreement with FDA. When we receive the notice of acceptance of the NDA last month, FDA indicated they’ve not made a decision yet on an AdCom. We are preparing for an AdCom because 3831 contain samidorphan, which is a new molecular entity. And by statute, typically FDA would think about taking that to an AdCom. So we are prepared for an AdCom and see what -- how the guidance evolves as they get further into the review.

Got it. And you would anticipate providing investors updates on whether the AdCom will be happening?

Of course.

Thank you.

Right. Thanks, Pam.

The next question is from the line of Umer Raffat with Evercore. Please proceed with your questions.

Hi, guys. Thanks for taking my question. I had two, if I may. First, perhaps, if I could clarify on VUMERITY. My understanding is there is a minimum Biogen will be giving you. I’m not super sure what that minimum is on dollar or percent royalty. If you could clarify for us, would be really helpful in modeling. Secondly, on R&D side, I noticed obviously there's a bit of an R&D increase year-over-year and we also saw Lilly ARMO failed their randomized CYPRESS trials in lung cancer with the Pegylated IL-10. So I guess my question is, how are you thinking about your R&D allocation to the IL-2 and IL-10 programs? And should or should we not read into the randomized CYPRESS trials that Lilly ARMO conducted? Thank you very much.

Hey, Umer, it's Richard. Both good questions. The VUMERITY minimums or contractual minimums that we expect to be -- our modeling and Biogen's forecast for us would be exceeded by the 15% royalty. So they’re probably not economically operational in 2020 or beyond. The Lilly failure absolutely affects our planning for IL-10. It was one thing in pancreatic, but in small cell in combination with nivo and pembro to strike out on both. So we are absolutely reassessing our decision to move forward into the clinic with our IL-10 construct. IL-2 unaffected, right. That’s 4230, that’s rolling. And so we are getting more and more positive momentum between the -- behind the 4230 program for the reasons I outlined in my early remarks.

Thank you very much.

Our next question is from the line of Cory Kasimov with JPMorgan. Please proceed with your questions.

Hey, guys. This is Matthew on for Cory and thanks for taking my questions. First one on ALKS 4230. And based on the updated data that you present today, just curious how you're thinking about the weekly dose relative to the once every three weeks regimen in terms of both PK and biological effect?

It's a super question and we don't know the answer to it yet, because we're still escalating in both. Both appear to have differentiated tolerability profile, both are driving biological responses, but it's too early to tell whether one is better than the other or whether they both might coexist. You can even -- people have speculated with the idea of induction with weekly and then maintenance on every three weeks, but we just don't know yet. But we're quite excited to see these early returns.

Got it. Thank you. And then on VUMERITY, is there a plan to submit regulatory filing outside the U.S? And if so, can you comment on potential timelines associated with that?

I think that question is best directed to Biogen.

Got it. Thanks for taking my questions.

You’re welcome.

Thanks, Matt.

Our next question is from the line of Brandon Folkes with Cantor Fitzgerald. Please proceed with your questions.

Hi. Thanks for taking my questions. Firstly, could you just elaborate on your assumptions regarding the competitive environment for VIVITROL in opioid use disorder in 2020 as well as some of the sources of growth in that business, especially as we’re seeing SUBLOCADE, gain some traction? And then, secondly, I know you touched on it, but could you just provide some additional insight into the alcohol use indication and whether you’re seeing growth there and sources of growth as well? Thank you.

I will take it, Brandon. It's interesting in opioid use disorder, there are really only three medicines that are used for the treatment of opioid use disorder. And that -- those being methadone and buprenorphine and VIVITROL. The first two, whether buprenorphine is used in the injectable form or in the sublingual or tablet form, it's -- these are both replacement medicines and they’re indicated for the maintenance treatment of opioid dependence. Whereas VIVITROL is indicated for prevention of relapsed opioid dependence following opioid detoxification. So they’re really different medicines for different purposes. So I don't see any change necessary conceptually in the positioning of VIVITROL in 2020 versus 2019 or 2018 or 2017. The principal impediment to growth of VIVITROL in opioid use disorder is the fact that the treatment system has never really been oriented to use an antagonist medicine. Its -- it was born and raised in the opioid replacement philosophy, and we've been fighting that and building around it for the last several years and we'll keep doing that. Alcohol is interesting because you may recall that the first approval for VIVITROL was for alcohol use. And it launched into a -- into an environment where medicines really weren’t used at all. 12-step program has been the dominant form of treatment. As VIVITROL has grown in opioid use disorder, now something on the order of 10,000 people will go on VIVITROL this week. You’ve had a much bigger halo or circle of physicians and treatment centers that are getting comfortable using VIVITROL. And there's been a virtuous cycle back to its use in alcohol as well. In alcohol, we really don't compete against buprenorphine or anything else. We compete against the lack of pharmacologic therapy at all. As Jim mentioned in his remarks, it's a different payer mix often in alcohol as well. It's a more commercial oriented payers. So because we've had some growing traction in alcohol in various states, we're going to shift some of our marketing resources more toward alcohol in 2020 and we think beyond. And we will let you know how that goes, but we’re excited about that opportunity. Jim, anything you want to add to that?

No, I think that’s right. And again, so much of it depends on the state-by-state ecosystem. Some states you see alcohol being the place where we're starting to make inroads in growth. And I think as Rich said, that offers a really nice growth opportunity for us in 2020, along with state and federal funding that’s continuing to come from the opioid crisis and we think VIVITROL should get its fair share of that as well. So that's where we're looking to growth in 2020. But since it's hard to predict how we are going, each state performs, we’ve -- we're going to maintain the tradition that we’ve had of guiding to the current growth rates essentially into the next year

Great. Thank you. Very helpful.

Thank you. Our next question is from the line of Biren Amin with Jefferies. Please proceed with your questions.

Yes. Hi, guys. Thanks for taking my questions. Richard on ARISTADA, I think you mentioned that you’ve captured 32% of nRxes in the LAI market. How is that split across institution channels versus community channels? And then, on 4230 in ARTISTRY-1, I think you mentioned that you’ve -- the two PRs are continuing out to beyond a year. Can you talk about the three stable disease patients? And if they’re continuing, if they progressed or if they’ve converted to responders? And then on ARTISTRY-2, I guest at SITC, the company was evaluating the 0.6 milligram weekly dose and the 1 milligram Q3 weekly dose. So can you just talk about, I guess the NK and CD8 expansion and how that compared to the Q.D dosing regimen?

Yes, I won't be able to answer all of those, Biren. I look to Jim on the first one, in terms of the split on the nRxes in channels. Do you know the answer of that, Jim?

No, we haven’t gone down to that level of detail and I would say it's pretty consistent across the institutional and community mental health centers. I think the one place where we’ve talked about where our national share is below, where we'd like to see it is in the VA. With the formulary acceptance early last year and then moving into the individual visions through the year, we think in 2020 we can start to get the VA penetration up to more national numbers. And just to be clear, that 32% was in terms of months of therapy in the aripiprazole LAI market, we're at about 9% share in the overall atypical LAI market.

And on the 4230 stuff, what I don’t want to do is give anything more than we gave in the prepared remarks simply because we made a decision about some incremental data we’ve put in on the call, but we still want to preserve the ability to present data at upcoming meetings. The -- with respect to the ARTISTRY-2, I will say as we escalate Q weekly and Q three weekly, we do think we'll will be mimicking one can achieve with high-dose IL-2 with so far looking like a tolerability profile that's different than what we've seen IV. And there are some reasons for that that will explain at some later time, but we're quite excited about that. So those escalations continue in both of those dosing duration arms.

Great. Thank you.

You’re welcome.

Our next question comes from the line of Douglas Tsao with H.C. Wainwright. Please proceed with your questions.

Hi, good morning. Thanks for taking the questions. Just, Jim maybe to start on in terms of the guidance on the SG&A side. I think you indicated that most of the sales force build out for 3831 will occur in the early part of 2021, just given scheduling. Just curious, are there going to be other prelaunch activities that we should account for when we think about the cadence of SG&A through the course of 2020? And then just also curious on 3831, how much of a significant sales force addition we should expect and how much overlap between the script writing base do you see between 3831 and ARISTADA, or are they just really two different segments in terms of people who are writing LAIs versus patients who are writing something like 3831? Thank you.

Yes, you’re welcome, Doug. Thanks. Good questions. First on the cadence of SG&A spend, I think it's going to be pretty flat through the course of the year. And obviously there will be some variance, but market development work that we're doing with 3831, some of which we spent in 2019 will continue to do that, appropriate education of the disease state area in 2020, but really through a flat cadence as it were. When it comes to the sales force, I think we're still working on the exact sizing. There certainly is overlap between the targets that we are calling on now with our roughly 200 people with the ARISTADA field force. I think we're talking in the range of 100 to 200 people, not 400 to 500 people as you're looking at launching an oral product. So, those Venn diagrams overlap -- certainly roughly 50-50 in terms of the targets with the high-value prescribers and certainly institutions that are using LAIs, also use -- would use oral agents and be logical targets for that. But we'll give some more specificity on that as we do more fieldwork and research and come to exact decisions about how larger our sales force would be. But hopefully that gives you some parameters in terms of size.

Okay, great. Thank you very much.

You’re welcome.

Our next question in from the line of Paul Matteis with Stifel. Please proceed with your questions.

Hi. Thanks, guys. This is Nate on for Paul. Two questions maybe on opposite ends of the business. First off, on ARISTADA gross to net it seems like -- I've heard you talk in the past about being able to hold kind of steady around the 50% range. Is that a reasonable assumption still, or can we expect it to continue to slide up maybe 1% or 2% a year. And then secondly, maybe if you can just -- I know it's very early, but provide us with an update on the HDAC platform and where you are with candidates and when you think you might be able to hit humans or how IND enabling studies are going? Thanks.

Sure. I will take the first one. And then Rich can answer the one about Rodin and HDAC. In terms of gross to nets with ARISTADA, we did see a change this year, I think two things really drove that. There was a consolidation, which I would say is probably a one-time consolidation in the -- of the large insurers in the United States, Aetna, CVS etcetera, that really drives managed Medicaid business in the various states and so with larger buying power that affected our gross to nets a little bit. So the other part is the increasing opportunity we see in the VA. So I think it's hard to predict how those things will change in '21 and beyond, but I think -- so I would say, modeling at 52% is appropriate for 2020. I wouldn’t necessarily pick it up beyond that in future years, because that consolidation is more of a one-time thing. And the growth might be related to our growth in the VA, but hopefully we can offset that with growth in broader parts of the lower gross to net part of the business separate from the VA, if that makes sense.

I will take the question on the HDAC, because I know you guys have a lot of background with where Rodin was in their development. It's really interesting to see when you take it out of the context of the small venture backed company and put it into our capabilities, which much broader chemistry as well as formulation and biology capabilities, we’re running hard now in three parallel tracks. Rodin was focused primarily on the large synaptopathies that we’ve talked about, primarily Alzheimer's disease. We are as well. But we've expanded that now to include accelerating the FTD program, the progranulin program as well as looking at opportunities in oncology. So we're doing an IND-enabling work in that first category and perhaps in the second category, we hope to nominate a candidate by year-end.

Great. Very helpful. Thanks, guys.

Welcome.

Our next question is from the line of Akash Tewari with Wolfe Research. Please proceed with your questions.

Hey, guys. Thanks so much for taking my questions. So I wanted to maybe reconcile some of the comments you were making on the R&D spend with what we kind of had in 2019. And I know that the K isn't out yet, so I’m kind of extrapolate a bit. But for 3831, let's just say that for your external R&D there's $31 million, VUMERITY $30 million, 5461 $20 million, 4230 $34 million and then the other external R&D programs about $70 million. If we are going to take down the IL-10 spending, it looks like for 3831, VUMERITY and 5461, that should at least decrease over time. Is it fair to say that if consensus is kind of modeling flattish R&D spend over the next two years, you do have some optionality here where it could be a bit lower than what -- where it kind of modeling at the moment? And then on VUMERITY expectations, and I guess maybe this is a better question for Biogen, but given the TECFIDERA IP win, how should we kind of think about how their switch strategy evolves? And I noticed there is not that much baked in for VUMERITY estimates, I guess in the 2020 guidance, how should we think about that evolving over time? Thanks a lot.

Very welcome. Good questions. I think what I would say about the spend shift between 2019 and 2020 in R&D is that, you're right, certain things obviously like 5461 and VUMERITY will be coming down. I think the place where we’re focused going forward to the large degree is 4230 and the expansion there. Its -- It is hard to predict just how fast the patients will accrue and exactly what course in each of the therapies that they will take, how long will they stay on therapy and obviously, if it's a study in combination with pembro, that’s quite expensive because right now we're purchasing pembro on our own, I think appropriately so as we gather more data there. So the real toggle in 2020 and beyond will be 4230 and that will depend again on the breadth of the program that we have and whether we're spending on it alone or potentially with the partner. I would say, importantly to note though there is an ongoing study in early in-illness study for 3831, which as that grows, that will -- so that spending for 3831 is not going to be decreasing as much as you might think, if you just said, well, the NDA is filed and so R&D will tail down on 3831. So we look every year as we make investments in R&D and we will continue to drive our focus on profitability, but also investing in the pipeline, which can really drive the top line which is going to get us to where we want to be in the long-term.

And this is Rich on the VUMERITY, you anticipated my response because I really do think Biogen are the right one to ask, but I will give you two cents on it, which is I don't think the IPR victory changed the switch strategy. I think early entry of generics might have. But I think the basic strategy has been to focus on new starts and let the differentiating features of the product reveal themselves over time. So we were pleased with that decision because it just gives a little bit more time for the organized launch and introduction of VUMERITY as a next generation product. And I think that with patent life into the 30s, there's a lot of reasons to evolve this market toward VUMERITY.

Thank you so much.

Thank you. Our next question is from the line of Marc Goodman with SVB Leerink. Please proceed with your questions.

Morning. Couple of questions. First of all, Rich, can you give us a flavor of what's going on behind the scenes in the oncology business, excluding 4230? What you guys are doing, whether it's molecule specific or just broad changes that are going on behind the scenes? And just to piggyback on the last question, maybe you can just give us a sense of how much you will be spending on 4230 this year in the R&D budget? I mean are we talking $100 million? Are we talking more than that? And then, second of all VIVITROL, can you give us a sense of how much of the business today is alcohol versus opioids? Thanks.

Good morning, Marc. I will take the first and I will let Jim in on the second two. There's a couple different areas we talked about publicly on the oncology side that we're excited about. One is embodied in the IL-2 program, which is this idea of engineered cytokines. And our -- the way we -- the ability that we’ve to engineer proteins as well as antibody constructs in oncology, exploiting known features of cytokines is -- hopefully, that will continue to bear fruit for us. With the caveat that Umer raised on IL-2, on IL-10, where we have some other things cooking in the labs as well. The other one is HDACs in oncology, particularly the most immediate adjacency, what we’re doing with the CoREST complex targeted HDACs, is for neuronal specific brain penetrant HDACs in things like neuroblastoma, medulloblastoma, glioblastoma. So those programs are active right now and we'll see where they go, but that pharmacology and obviously for -- as HDAC as oncolytic agents is established. And then we’ve some other small molecule stuff going on in the LAIs, we haven’t disclosed, but hopefully we'll get to the point where it's worth talking about in the future.

And I think the R&D spends of 4230 in 2020, we are anticipating an increase as compared to where we were in 2019. I think overall about 20% of the total R&D budget would be focused on external expenses related to 4230. And then in addition to that we have obviously an internal team of people working on the program as well. So that'll give you a sense as to how much we are spending in the year.

And then, Marc, in terms of the alcohol opioid split, it's a good question and the only way we can really get a look at that is through the prescriptions that come through our hub. That’s about 30% of our business and if you looked at that, the actual percentage of alcohol is moving up a little bit and we predict now that it's about 60-40, opioid alcohol being around 40%. Again, that's in the business through the hub. So it's a little hard to extrapolate on the whole business, but that's the sense that we have and that's why we're focused on trying to drive additional growth in alcohol in 2020.

Thanks.

You’re welcome.

The next question is from the line of Vamil Divan with Mizuho. Please proceed with your questions.

Great. Thanks for taking my questions. So one on 3831 just as we are sort of getting closer to potential approval here. Can you share any updated thoughts around the interactions you have with payers? I think there's a lot of question there in terms of the steps patients may have to go through in terms of getting on therapy? And I guess specifically, the questions around would, will there be a need for patients to take a generic version of Zyprexa before they would be able to take 3831. So any updated thoughts you can share would be helpful. And then the other one just on ARISTADA. Just curious, INITIO has been on the market for a little while now. Just -- maybe just some updated thoughts in terms of the impact that had on patients starting? And has been -- had the impact that you expected when you launch that version? Thanks.

Good morning, Vamil. I will take those. The first round of interaction with payers in 2019 was more general about how would you position, how would you treat a new branded antipsychotic agent. And so actually it's surprisingly none -- there aren’t a lot of questions. We know exactly what happened because we’ve been in this market with ARISTADA, which is that patients don't get access to branded medicines until they fail on generic medications often more than once. The specific answer about the step through on olanzapine, I don’t think we will have a definitive answer on that until we're able to present the clinical data in the label from our -- as we complete the interactions with FDA. We expect that there's a strong medical rational not to have -- force patients to gain weight or have metabolic perturbances as they cycle through olanzapine. But being the way the world is in schizophrenia, I would imagine at the end of the day, we will have a range of different access restrictions by various plans ranging from very open access to very restrictive access. But we will -- like we did with ARISTADA, we will sequentially seek to knock those down over time. But we know going in and anybody launching into the schizophrenia market should know that you're going to be step through generic medications before patients get access to its branded medications. And the countervailing force, of course, is it just almost everybody does cycle through multiple generic medications, and there is a tremendous amount of unmet need out there. In our case, we really feel like that the principal unmet need is efficacy and that's what we're bringing.

Yes, great. Well, hi, it's Jim. In terms of the INITIO and its impact on launch, I would say that INITIO is very much related to our 2-month dosage form. That’s the focus that we are educating the market around and I think that we're having a nice response from the market. And the 2-month is growing very nicely. It's now over 30% of our total scripts and that's directly related to INITIO. So that's a major differentiation between the other LAIs as you know to be able to comment and start in a matter of days and leave your place of therapy with 2 months of medication on board with ARISTADA is a very, very important opportunity for patients and physicians. So I would say, INITIO tied to 2 months that growth is really going quite nicely and we expect that to continue to grow.

In fact, I will put a finer point on that even for you, Vamil, that the marketing message for ARISTADA, as it evolve from its original approval through the approval of the multiple elements of the product family, in 2020 it's very much focused down on what Jim just said. INITIO plus 2 month. It's a really differentiated offering in the marketplace. Its six injections, six interventions across the year, and you can provide therapeutic concentrations of a very well-tolerated, highly efficacious medicine. And that regimen was supported by a large Phase 3 study called ALPINE, which we unblinded in the middle of last year. So all roads are pointing toward right now the clarity of message around INITIO in 2-month.

Okay. Thanks.

Thank you. The next question is from the line of Terence Flynn with Goldman Sachs. Please proceed with your questions.

Hi. This is Holly Barra on for Terence. Thanks so much for taking the question. One on 4230, what would you like to see from the ongoing combination trial to advance the drug forward and continue to invest resources there? Thanks so much.

I think you could probably answer that question yourself. I think we -- what we want to see is the efficacy of this medication. We already have demonstrated the biological activity and tolerability profile that now we're investigating its efficacy as an oncology agent in a number of different settings both as monotherapy and then in combination with -- at the moment, I-O agent like pembrolizumab, both in settings where pembro is approved and in settings where pembro by itself has not been approved. So what we’re hoping is that 4230 can unlock additional biologic potential of the PD-1s and also open up new areas of cancer treatment that are currently unavailable to patients if they're looking for a treatment with PD-1. Then, beyond that, we think that 4230 can be an effective combination agent with a number of other non-I-O agents as well across a number of different treatment settings and lines of therapy. So we've a lot to learn about 4230. What’s so encouraging to us is that the basic -- the hurdles that we set for ourselves in advance to get over to convince ourselves that we have an active agent here, we are sequentially crossing each of those hurdles successfully. So I think our optimism is growing.

Okay. We have time for one more question, please Rob.

The question will be coming from the line of Danielle Brill with Piper Jaffray.

Hi, guys. Good morning. Thanks for the question. Just a quick follow-up on the HDAC platform. Curious, how you're thinking specifically about the FTD opportunity considering gene therapy approaches targeting progranulin are already entering the clinic? And then I may have missed this, but how soon do you think you could get your progranulin program into the clinic? Thanks.

Yes. Good morning, Danielle. Good questions because the FTD program is one that I’m not ready to say that we’ve got a horse in this race yet. I know that we have a really strong hypothesis and the chemistry is promising. And I could -- I think our scientists would make the argument that it's not clear that gene therapy approach would be necessarily superior to a small molecule, a well-tolerated oral small molecule, given the regional distribution in the brain of where you might want progranulin expression. So if we can -- if we have highly penetrant drugs that are both driving progranulin as well as increasing synaptogenesis, that could be very interesting. But I think there are still plenty of risk here. So I’m not ready to say that we were better or worse than anybody else.

Understood. Thank you.

You’re welcome.

Thank you. We’ve reached the end of the time allotted for today's question-and-answer session. I will now turn the call over to Sandy Coombs for closing remarks.

Right. Thank you everyone for joining us on the call today. If you any follow-up questions, please feel free to reach out to us at the company.

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