Is Alkermes Poised for a Comeback in 2017?

By Jim Crumly Markets Fool.com

Shares of mid-cap biotech Alkermes (NASDAQ: ALKS) finished 2016 with a loss of 30%. And that was the good news for investors. At one point, the stock had lost two-thirds of its value after two phase 3 trials failed. But while the market focuses on the prospects of one particular pipeline drug, other big opportunities are about to come into focus in 2017.

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Depressing results for ALKS 5461

Alkermes has historically taken a conservative approach to drug development. The company specializes in drug delivery -- specifically, taking proven, approved drugs and creating long-lasting versions of them. In the early years of the company's history, it worked with the companies that developed the original versions of drugs and licensed the delivery technology to them. This has created a steady, albeit small, stream of licensing fees to the company.

A few years ago, the company pivoted to creating its own pipeline of original drugs for diseases of the central nervous system, again leveraging proven therapies -- and last year illustrated the potential setbacks in this approach. Two phase 3 trials of ALKS 5461, a drug that had held much promise for treating cases of Major Depression Disorder (MDD) that do not respond to existing medications, failed to meet their endpoints. The market basically wrote off the drug as a failure, and management's commentary didn't seem to discourage that view. The stock crashed 44% in a single day.

Then, Alkermes management surprised the market with a reversal in October, revealing that a third phase 3 trial of 5461 had successfully met endpoints and providing a plausible case for the how the earlier trials actually demonstrated efficacy after all. The company said it will proceed with filing a new drug application with the FDA with a fast track designation, and the stock has recovered about half of what it lost in the debacle.

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What the market is ignoring

Alkermes' approach of focusing on proven pharmacology has already resulted in two drugs on the market that are still in the early stages of rapid growth. Vivitrol, a once-monthly injection to treat alcohol and opioid dependence, has been on the market for years, and sales are finally taking off. They came in at $56M in the most recent quarter, having grown 47% year over year. The company had to work for years to get the proper market ecosystem in place for success, as these addictions are often treated within the legal system rather than by traditional doctors.

Alkermes is optimistic that Vivitrol sales are on the path toward billion-dollar blockbuster status. The company has theproduction capacity to support sales of $700 million to 800 million by 2018 and has recently started building additional capacity to support higher sales in 2019-2020. Growing public awareness of the opioid addiction epidemic is a strong tailwind for this drug's sales.

A second approved drug, Aristada, is an extended-release injectable for schizophrenia with doses for treatments at monthly and six-week intervals. Soon, a version will be released that can be given every two months. The long intervals between doses are particularly important for treating schizophrenia patients who have difficulty maintaining a pill regimen. The long-acting injectable market for antipsychotic drugs is growing at over 20% and is expected to reach between $3 billion and $6 billion by 2020. Aristada is still early in its life, but it's expected to exceed $500 million in annual sales by 2020.

Continued growth of these two drugs would be a major boost for a company that did $695 million in sales in the last 12 months. But, that's not all shareholders have to look forward to: Other drugs with blockbuster potential are in phase 3 testing. ALKS 3831 is an improvement on the third-most-prescribed schizophrenia drug olanzapine, greatly reducing the side effect of severe weight gain. Data readouts are expected in late 2017 and mid-2018.

ALKS 8700 is a biosimilar of existing Biogen multiple sclerosis drug Tecfidera that Alkermes believes will have fewer GI side effects. Tecfidera is a $4 billion dollar drug with annual patient growth of 9%, so the target market is big. The new drug application to the FDA is expected in 2018.

ALKS 5461 may yet succeed

While the market is uncertain about ALKS 5461, management is confident, and success with this one candidate could return the stock to its earlier high, which is 30% above today's price. One study failed because it looked only at one point in time for results, whereas when results over multiple time periods are considered, the drug showed clear efficacy. The other failure was due to an abnormally high response to the placebo. In the words of CEO Richard Pops, "I don't think there is a single anti-depression medication that has not failed one or more clinical trials due to high placebo response. That comes with the turf in developing these medicines."

In fairness, the stock will plunge again if the FDA rejects the application. But the potential upside is tremendous. The drug targets the 63% of MDD patients that don't respond to today's first-line treatments, which equates to over seven million people in the U.S. The next meeting with the FDA is coming this quarter, so we should get more information soon.

The market has focused on developments around ALKS 5461, but long-term investors need to recognize that this drug is only one of five potential billion-dollar drugs in the company's arsenal. Two of those are already shipping and growing rapidly, and two others are in late stages of the pipeline and are based on the well-understood pharmacology of existing drugs.

I think the tendency of the market to over-focus on recent bad news is giving long-term, risk-tolerant investors an opportunity with Alkermes. 2017 will be a year when we could hear a stream of good news that rewards the patient investors who stuck with the story.

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Jim Crumly owns shares of Biogen. The Motley Fool owns shares of and recommends Biogen. The Motley Fool recommends Alkermes. The Motley Fool has a disclosure policy.