Greetings, and welcome to the Alkermes Second Quarter 2020 Earnings Call. My name is Melissa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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 ended June 30, 2020. With me today are Richard Pops, our CEO; Jim Frates, our CFO; and Todd Nichols, our Chief Commercial Officer. During the Q&A section, we'll also be joined by 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 conference call will include forward-looking statements. Actual results could differ materially from these forward-looking statements.

Please see slide two 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.

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 Rich..

Thank you, Sandy, and good morning, everyone. So we're now midway through 2020, an unprecedented year in terms of the health and social challenges facing our country.

In this setting, we've actively responded to protect the health and safety of our employees and to help ensure that health care providers and patients have uninterrupted access to our medicines. We were pleased with the progress and execution of our business objectives in a complex environment during the second quarter.

Three strategic imperatives currently drive our management of the business. The first is commercial execution, maximizing the opportunities for both ARISTADA and VIVITROL and preparing to leverage our commercial infrastructure with the potential launch of ALKS 3831.

The second is aggressive development of our most promising pipeline candidates, focusing on those high-value opportunities that we believe have the potential to drive significant value in both the near-term and the long-term. The most prominent of these is ALKS 4230 in oncology.

The third is efficient management of the operating structure and governance of the company, with a focus on rigorous expense management and careful prioritization of our investments. Taken together, these present meaningful opportunities for value creation in 2020 and beyond. COVID-19 continues to be deeply disruptive across the country.

In response, we've evolved the way we conduct our business to suit this new environment and are identifying new efficiencies as part of that process, efficiencies that we expect will endure throughout the pandemic and beyond.

In the market, ARISTADA has demonstrated resilience, and we are encouraged to see a stabilization for VIVITROL in June and July, following declines in new patient starts in April and in May.

While we expect it will take some time for patient flow patterns to return to pre pandemic levels, with disciplined management of our operating expenses, we believe we're well positioned to maintain our commitment to non-GAAP profitability.

Consistent with that commitment and with a deeper understanding of COVID's expected impact on our business today, we're reestablishing financial expectations for 2020. Turning briefly to our performance in the quarter.

For VIVITROL, our commercial team quickly adapted to virtual engagement and worked to provide important digital tools and resources to health care providers and patients. ARISTADA continue to demonstrate strong growth in the market for long-acting antipsychotics.

ARISTADA has features that suit the current environment with its proven clinical efficacy, its two-month dosing interval and its tolerability profile. ALKS 3831 is designed to provide a similar profile, antipsychotic efficacy and tolerability in a convenient dosage form.

The ALKS 3831 regulatory review is ongoing, and launch preparations continued in Q2. For ALKS 4230 in oncology, we believe this program is entering a stage now where first, the medical and then the economic value of our investment is going to become clear. Each of these assets represents a valuable element of our business.

Our focus is on maximizing that value and positively impacting the lives of patients struggling with serious mental illness, addiction and cancer. Over the past several years, we've invested significantly in our development programs and our commercial capabilities in order to position the company for long-term growth.

This is evidenced in our psychiatry portfolio. The investments we've made in the ARISTADA product family, including the development of both the two-month dose and ARISTADA INITIO as well as in our psychiatry commercial infrastructure are yielding solid results with momentum behind the growth of that product family.

Our specialized commercial and medical capabilities in psychiatry, which include marketing, medical sales, sales leadership, commercial field operations, national account infrastructure, state and federal policy, are distinctive assets in their own right, and we believe can provide operating leverages for other psychiatry products, including ALKS 3831.

We've also been investing in the ALKS 4230 development program in oncology. 4230 diversifies our portfolio and represents a different value proposition from our addiction and psychiatry assets.

Yet at the same time, it also leverages the significant in-house capabilities we've established in research, discovery, clinical trial operations and medical affairs through our work in CMS. The oncology therapeutic space is characterized by challenging clinical development and rapidly developing, rapidly evolving treatment landscapes.

However, it's also characterized by significant unmet medical needs. The potential for rapid adoption of efficacious new products and a recognition of the value of medicines, both in the market and earlier in the development phase.

Immunotherapies have revolutionized the way cancer is treated, providing hope for patients that previously would have exhausted all available treatment options. We believe that ALKS 4230 development program is an important potential growth and value driver.

Data from the program and the opportunity for strategic collaboration have the potential to significantly shift its value profile within our own portfolio and the growth potential of the company moving forward. Collectively, we believe these programs have the potential to enhance our profitability and create significant value in the future.

So with that as an introduction, I'm going to turn the call over to Jim to review the financial results and financial outlook for the remainder of 2020..

Thank you, Rich, and good morning, everyone. We are pleased with our Q2 results, which were largely in line with or ahead of our expectations as we delivered another quarter of non-GAAP profitability in spite of a difficult environment. As we discussed in our April earnings call, VIVITROL was significantly impacted by issues arising from COVID-19.

However, with four months of insight into provider and patient behavior in response to COVID-19, we've adapted our approach in order to stabilize our business and support continued patient access to our medicines.

Today, we're issuing updated financial expectations for 2020, which reflect our understanding of the current environment and our commitment to non-GAAP profitability. I'll provide additional detail on our expectations for the remainder of the year in a moment. But first, I'll start with an overview of our second quarter financial highlights.

In the second quarter of 2020, we generated $247.5 million in total revenues, reflecting a year-over-year decline of approximately 12%. This is driven primarily by the impact of COVID-19 on VIVITROL net sales and lower R&D revenues following FDA approval of VUMERITY in 2019, partially offset by a solid growth in our ARISTADA franchise.

We recorded a GAAP net loss of $29.4 million, and non-GAAP net income of $8.9 million for the quarter.

Starting with VIVITROL, net sales in the second quarter decreased 19% year-over-year to $71.6 million, driven primarily by underlying unit decline of 22% due to the impact of COVID-19 disruptions on patient volume and access to health care providers.

Partially offsetting this unit decline during the second quarter, VIVITROL net sales were positively impacted by approximately $6.5 million in gross-to-net adjustments, reflecting a low return rate and favorable Medicaid true-ups from a number of states. As a result, gross-to-net adjustment decreased to 46.4% in the second quarter from 49% in Q1.

Excluding the favorable adjustments, gross-to-net adjustments would have been 51.2% in Q2. In addition, inventory levels decreased by just over 5,100 units during the quarter and are now at their lowest levels in almost three years. Looking ahead, we expect gross-to-net adjustments to be approximately 51% for the full year.

We expect an increased Medicaid utilization resulting from current elevated unemployment rates will drive an increase in gross-to-net adjustments in the second half of 2020 to 54%, reflecting the higher rebate associated with Medicaid units.

Our current expectation is for VIVITROL net sales for the full year to be in the range of $270 million to $300 million. We believe this range accommodates a spectrum of scenarios based on current trends and current expectations of continued normalization in patient volume and access to health care providers.

The decrease in patient volume in Q2, particularly the decrease in new patient starts, is expected to have a prolonged impact on overall unit demand into the back half of 2020. Looking ahead to Q3, we expect net sales for VIVITROL to be in the range of $60 million to $65 million.

This is comparable to Q2 when excluding the favorable gross-to-net adjustments recorded during the second quarter. Turning to the ARISTADA product family; we were encouraged to see net sales in the second quarter increase by 15% sequentially and 21% year-over-year to $58.8 million, driven primarily by unit growth.

We've made progress with ARISTADA as underlying total prescription data demonstrated solid growth of 29% year-over-year in terms of months of therapy. During the second quarter, gross-to-net adjustments for ARISTADA were 53.1% as compared to 48% in Q2 2019, reflecting increased utilization amongst the Medicaid patient population.

Inventory levels increased by approximately 1,000 units during the quarter, within normal levels. Today, we're reinstating our expectation of ARISTADA net sales for the full year in the range of $220 million to $235 million.

This is in line with our expectations that we previously provided for ARISTADA in February, reflecting the solid performance in the first half of 2020 and continued stability as we enter the third quarter. Moving on to our manufacturing and royalty business.

We reported revenues of $116.5 million in the second quarter compared to $127.9 million in the prior year. This decline was driven primarily by lower revenues from RISPERDAL CONSTA, reflecting a continued decline in end market sales and lower manufacturing shipments in Q2 as compared to the same quarter last year. Turning now to expenses.

Our total operating expenses were $281.2 million for the second quarter, down from $315.8 million in the same period in the prior year.

Our cost base reflects our full range of capabilities across research, discovery and development, manufacturing and commercialization as well as the resources needed to advance our business objectives, including execution of our strategy to grow the top line, advance our pipeline of development candidates and manufacture commercial supply of our proprietary and partnered products.

R&D expenses for the second quarter were $94.2 million compared to $104.4 million for the prior year, reflecting the completion of the VUMERITY development program in 2019, which was somewhat offset by increased activity in patient enrollment in the ALKS 4230 clinical program.

SG&A expenses for the second quarter were $132 million, compared to $155.1 million in Q2 2019, reflecting lower expenses due to the restructuring that occurred in late 2019 as well as impacts from COVID-19. Looking ahead, we currently expect a small increase in SG&A expense as we invest in prelaunch activities for ALKS 3831.

Turning to our balance sheet. We ended the second quarter with approximately $540 million in cash and total investments compared to approximately $550 million at the end of the first quarter, primarily effect impacting changes in working capital and capital expenditures.

The company's total debt outstanding was approximately $276 million at the end of the second quarter. We believe we're well positioned financially to execute on our business strategy and withstand currently expected COVID-19-related market disruptions.

I'll shift now to our financial expectations for 2020, which are fully outlined in the press release we issued earlier this morning. These expectations reflect our best estimates for the remaining five months of 2020, acknowledging that the impact of the pandemic continues to be dynamic and is rapidly evolving.

We believe these ranges are appropriate based on current trends and our expectation that treatment provider practices and patient flow will continue to normalize. Additional COVID-related restrictions or shutdowns could result in a decrease in patient flows or access to health care, which could impact our ability to meet these expectations.

So for the top line, we expect total revenues to be in the range of $970 million to $1.005 billion. This includes ARISTADA net sales in the range of $220 million to $235 million, and VIVITROL net sales in the range of $270 million to $300 million.

Operating expenses are expected to be approximately $50 million lower than our previous expectations announced in February, driven primarily by a reduction in R&D expenses and other savings across the business, some as a result of COVID-19.

R&D expenses are now expected to be in the range of $370 million to $395 million, and SG&A expenses are now expected to be in the range of $525 million to $550 million.

We expect 2020 GAAP net loss to be in the range of $145 million to $175 million and non-GAAP net income to be in the range of $0 to $30 million, reflecting our continuing commitment to non-GAAP profitability despite the current headwinds.

Reflecting on the past five years, we've dramatically transformed the composition of our revenues and grown both our top line and bottom line. Concurrently, we've invested significantly in the future growth drivers of our business.

Directly as a result of these investments, we've established VIVITROL as an important therapeutic option for patients suffering from opioid and alcohol dependence. We secured FDA approvals for the ARISTADA product family and developed ALKs 3831 with regulatory action expected in the fourth quarter.

We've built commercial psychiatry capabilities that support the growth of ARISTADA and that are fully leverageable for the potential launch of ALKS 3831.

We've successfully developed VUMERITY and entered into a collaboration agreement with a leading MS company that provides 100% gross margin royalty revenues from the net sales of that product, and we've advanced the development of ALKS 4230, while retaining optionality for strategic collaboration.

We believe these key investments have positioned the business for margin expansion, and we're focused on executing on our business strategy in order to efficiently drive profitability in the years ahead. Now I'll turn the call over to Todd for a more detailed review of our recent trends for our commercial products..

driving awareness through scientific exchange, establishing meaningful market access; and sales force planning. In order to drive awareness, we had a strong presence at virtual medical meetings this springs, with new data sets from the Enlighten pivotal program.

These congresses afford us an important opportunity to engage with thought leaders and build an awareness of the clinical data underpinning ALKS 3831 among the clinical community.

We have engaged with a number of the largest payers in the country thus far, accounting for more than half of the potential class volume in addition to key federal and regional channels. We are currently working to engage with the remaining pairs and key accounts in the fall.

Based on the feedback that we have received to date, we believe payers recognize the importance of offering patients with serious mental illness a wide variety of treatment options.

As a new molecular entity, we would expect ALKS 3831 to be treated just like other branded entrants in this space with certain requirements for patients to step through generic options.

The disruptions driven by COVID-19 have necessitated implementation of a new commercial model, one less dependent on face-to-face business between sales representatives and prescribers. For our sales force planning efforts, this opens up new possibilities and structures as we consider the commercial configurations of our teams going forward.

Upon potential approval of ALKS 3831, our existing ARISTADA team will be the core of the commercial effort for ALKS 3831.

We believe that a new hybrid promotional model that permanently incorporates virtual engagements will allow us to efficiently accommodate the broader footprint of prescribers for oral antipsychotics with a smaller commercial field infrastructure than we would have anticipated prior to COVID-19-related disruptions.

All of the strategies and configurations that we are considering can leverage and build upon our current psychiatry field sales organization, and we're excited about the possibility to bring ALKS 3831 to patients.

We distinguish ourselves from other biopharmaceutical companies by our focus on serious mental illness and addiction, chronic, highly prevalent conditions that affect millions of people and represents some of the most challenging public health issues of our time.

They impact, not only patients, their families and loved ones, but entire communities as well. Alkermes has been addressing the public health challenges posed by these conditions for many years. Our work focuses on the multitude of factors, not only medical, but also systemic and social that impact health outcomes.

We have built our organization with purpose and invested in specialized commercial capabilities to navigate fragmented treatment systems as we help address the complex challenges patients with these diseases face. Moving forward, we will continue to enhance our engagement model to support the value proposition of our medicines regardless of modality.

We remain deeply committed to serving the vulnerable population that suffer from serious mental illness and addiction, particularly as COVID-related disruptions are compounding the typical challenges these patients face in accessing treatment, and we look forward to sharing our progress with you. And with that, I'll hand the call back over to Rich..

That's great. Thank you, Todd. Our mission to make innovative medicines for people who truly need them begins with a patient-centered approach to drug development that's driven by science and by compassion. Alkermes' R&D efforts build on our heritage of innovative drug formulation and deep scientific expertise.

These capabilities and insights enable us to pursue new medicines for chronic disorders, where there remains significant unmet patient needs. The ALKS 3831 development program is an example of our commitment to developing new treatment options to help people living with serious mental illness. ALKS 3831 is our novel, oral atypical antipsychotic.

It is designed to provide the established efficacy of olanzapine while mitigating its associated weight gain. The ALKS 3831 NDA for schizophrenia and bipolar I disorder is currently under review with the FDA with a PDUFA target action date in November of this year.

We're preparing for an advisory committee meeting in October, which we expect will focus on the clinical meaningfulness of the ALKS 3831 weight data. Turning to ALKS 4230. We're making progress in the clinical development program.

We believe that harnessing the antitumor activity of the IL-2 pathway continues to be one of the most promising opportunities in immuno-oncology.

And ALKS 4230 differentiated from other IL-2 variant programs in active clinical development in a number of important ways, its molecular structure, its potential for subcutaneous administration and its current evaluation in the clinic as monotherapy.

The accumulating clinical data across our intravenous and subcutaneous dosing studies continue to support its potential utility and advancement and broadening of this development program.

As investigators gain more clinical experience with 4230, enrollment has accelerated in the ARTISTRY studies with approximately 60 patients enrolling since the beginning of March. This is despite the impact of COVID-19 on clinical trial enrollment more broadly across the sector.

Data from ARTISTRY-1, our study evaluating IV administration for 4230, has recently been accepted for an oral presentation at the European Society for Medical Oncology, ESMO. That annual meeting is in September, and it's a study to occur virtually this year.

For ARTISTRY-2, our study evaluating subcutaneous dosing, we're continuing to dose escalate for both once-weekly and once-every-3-week dosing schedules, and we plan to present initial data from these studies in the fall.

Across the program, the accumulating data has reinforced our belief that 4230 has the potential to be an important agent for use in multiple tumor types, lines of therapy and combinations.

So taking a step back, I'd like to highlight some of the planned changes to our Board composition and governance as part of our ongoing commitment to corporate governance best practices.

These actions reflect feedback from our extensive shareholder engagement efforts over the past year, and we believe will serve to further align the company's interest with those of our shareholders.

First, at the company's next Annual General Meeting in of Shareholders, Alkermes' Board of Directors will recommend that shareholders approve a proposal to declassify the Board. Once declassified, Alkermes shareholders will vote annually on the election of all directors.

Second, we've commenced a new search for independent director candidates whose experience and expertise can provide valuable insights and thoughtful leadership at this stage in our evolution. As part of this refreshment effort, we expect certain of our longer-serving directors will retire from the Board prior to our next Annual General Meeting.

This process will continue and build upon the Board refreshment effort that we began last fall with the appointment of two highly qualified independent directors. Having a strong Board with the expertise to provide insights and thoughtful leadership is a priority for us, and we will continue the dialogue that we've been having with our shareholders.

So, I'll end there. The second half of 2020 will be an important and busy time at Alkermes. We're focused on executing on our business objectives and delivering value for our many stakeholders. So with that, I'll turn the call over to Sandy to moderate the Q&A..

Great. Thank you, Rich. Melissa, we'll now open the call for Q&A, please..

Thank you. [Operator Instructions] Our first question comes from the line of Chris Shibutani with Cowen. Please proceed with your question..

Thank you. Good morning, everybody. A more nuts-and-bolts question perhaps on VIVITROL, and then a bigger-picture question on the AdCom that's coming up. With VIVITROL, can you just provide us with a little bit more granularity. In the past, you've talked somewhat about duration of use.

You really highlighted the limitations to new patient start, but comment upon what kind of trends you've seen as we've gone from first to second quarter and what's assumed in the second half of guidance. And you've also commented about the mix between opioid and alcohol use. The alcohol seems the strengthening.

And maybe you can comment there as well as the implications on payers. And my follow-up question is on the 3831 AdCom. You mentioned this is going to focus on clinical meaningfulness of the weight loss.

Can you remind us what you're expecting in terms of committee presence there and perhaps any interactions you've had with the agency to this point? Thank you..

Good morning, Chris. I'll have Todd answer the first block of questions on VIVITROL, if Jim has some to chime in as well. Then I'll take the 3831.

So Todd, why don't you start?.

Yes. Great. Yes. Chris, yes. That's an important a couple of important question you're asking. Within terms of persistency right now, from Q1 to Q2, we're not seeing any change at this point. VIVITROL remains at about 3.9 months of therapy. In terms of your comment, it is correct. We're very encouraged by the mix of indication use.

It's a little early to give concrete specifics on the actual increase, but I can tell you through our qualitative research we see and also there's some claims data, we are seeing a faster growth rate with alcohol dependence claims versus opioid dependence claims..

Yes. And I'm going to just add, Chris, that the range we're providing with VIVITROL, really, there's two dynamics going on. We're seeing that reengagement and increase in patient flow again that we started to see in June and into July, which is very important for us.

But against that is our expectation that given the unemployment rate across the country, we're going to see more Medicaid utilization. So our gross-to-nets are going to be moving up a little bit. And so that's where you get the bounding of our range on expectations with VIVITROL..

And Chris, on the 3831 question. So the NDA is submitted to the Division of Psychiatry within the Office of Neuroscience. But we know it's being reviewed in consultation with the Division of Diabetes, Lipid Disorders and Obesity.

So it and it's actually interesting because there are all types of guidances for weight loss agents, but there's no guidance for rate mitigation. So this is in some ways, a precedent setting application. We, of course, care less about the broader implications of weight mitigation as a therapy category.

We're interested specifically in the weight gain associated with the administration of olanzapine in the context of antipsychotic. So we expect the AdCom will focus on just that, how important is it to mitigate weight gain in patients who would be gaining significant amounts of weight with olanzapine.

We, of course, we believe the case for that is very, very strong..

Thank you. Our next question comes from the line of Brandon Folkes with Cantor Fitzgerald. Please proceed with your question..

Hi, thanks for taking my questions. So maybe just can you remind us of the process to initiate the patients under the alcohol dependent? And then maybe just talk us through the steps that patients have to go through before they're actually prescribe VIVITROL for alcohol? And then just on ARISTADA. Obviously, it's a great product for COVID.

Can you just talk us through how much of the growth you're seeing now, obviously, the with the two-month dose works on COVID. Have you well is it too early? Have you received feedback from prescribers that you think that this growth we're seeing now is actually going to persist in a post-COVID-19 world? Thank you..

Todd, why don't you go ahead and get on those?.

Yes, absolutely. Why don't I start with the last question first, is we are seeing encouraging trends. As you heard in my comments with for ARISTADA with the two-month dose, and that's actually part of our strategy. So the strategy around executing against the ARISTADA family is really starting to take hold.

The our strategy, ARISTADA provides the opportunity with INITIO to be the only long-acting injectable that you can initiate on day one for up to two months, and that is really resonating very well with our customers at this point. In terms of trends, as I said earlier, the two-month dose now represents about 37% of total months of therapy.

We're also seeing encouraging trends with our NBRxs as well, too. It represents approximately 39% of NBRxs. We've spent a lot of time with our customers over the last quarter, talking to them about the impact of COVID-related disruptions and how they're thinking about the long-acting market as well.

And our belief is that there's going to continue to be a shift towards long-acting injectables, and we're seeing the benefit with ARISTADA right now. In terms of the question with VIVITROL, again, as I stated earlier, we're seeing encouraging trends with alcohol adoption.

It's a little early at this point to give definitive answer on what the growth looks like. The qualitative feedback is very strong at this point as well, too. We're seeing a stronger demand in general for the alcohol use indication as well, too.

Patients don't have to go through detox services, as well too, which is also can be perceived as a barrier or at times for opioid dependence. So you don't have to do that with alcohol. So we're very encouraged, and we believe there's an opportunity to continue to build awareness for VIVITROL with the alcohol use indication.

So, we'll take the next question please..

Thank you. Our next question comes from the line of Cory Kasimov with JPMorgan. Please proceed with your question..

Hey, thank you for taking my question. This is Turner [ph] on for Cory. I was just hoping to get a little bit more granularity on the guidance. It seems as though it's really based a lot on current trends you're seeing.

But how much does the guidance manage future expectations or reflect or incorporate ongoing second waves of COVID-19 or potential waves in the future?.

Yes. Turner, well, I think we tried to take that into consideration. I think the other thing that we're seeing is the initial shock of the lockdowns and social distancing moves that various governors made across the states really had a very dramatic impact on what happened with our VIVITROL patient flow.

And we're seeing providers, like many of us, are they need to see their patients. They want to see their patients. That's why they're in business as well. And these patients need treatment. As we know, in many ways, the isolation and issues with COVID-19 are stressing our patients with addiction issues.

And so as the treatment paradigm across the different states starts to reopen. We think there's going to be a little bit more resiliency there even as states might be changing their responses to the varied levels of COVID diagnoses across the country that we're seeing. So we're seeing strength bounce off the bottom that we saw in April and May.

The market is growing. And of course, we don't have a crystal ball as to what's happening in the future, but we that's why we give ourselves ranges in the guidance because we feel like that's an appropriate place where we can target..

Great, thanks, that's helpful..

You're welcome..

Thank you. Our next question comes from the line of Jason Gerberry with Bank of America. Please proceed with your question..

Hi, good morning. Thanks for taking my questions. Yes, my first question is just coming to 3831 AdCom again. I'm just curious, the lack of worsening of some of the key metabolic parameters, it's encouraging, but I guess you could argue it's inconclusive.

And so I'm wondering how you might envision this issue kind of rearing its head in the context of an AdCom, be it a question for the panelists to vote on as it pertains to the label claims and/or post-market requirements. And then my follow-up question is just on the VIVITROL guidance for second half.

If you look at 2Q, if you look at the what's implied for second half based on your full year number, you're kind of down 20% to 25%. Can you give us a sense of how much shipments were down in your most recent month? I may have missed that.

And then also, what sort of impact you're seeing from these alternative injection sites like Albertsons being talked about in the last quarter? Thanks..

Good morning, Jason, it's Rich. I'll take the 3831 question, then Todd and Jim can take the second stuff on the VIV. So it's really important for people to understand what we're doing with 3831, which is an agent that's designed for the mitigation of weight gain, it's not a weight loss agent.

The patients who are enrolled in this six-month study in the, actually in the weight study had normal BMIs. That was we needed that in order to be able to see the weight difference. And so they didn't have baseline metabolic aberrations.

So in a six-month period of time, we wouldn't expect to see a huge change in the lengthy control that we could be we could offset. I think clinicians understand that the benefit of the metabolic consequence is it comes from not gaining 60, 70, 80 pounds over time.

And that's exactly what we will be prepared to talk about with ourselves and our experts at the AdCom. And I think it's reasonable for FDA to not have had any exposure to this type of clinical settings. So I don't think it's an unreasonable question to ask. And I cannot speculate how they'll frame the question, how as it relates to labeling or PMRs.

I have no idea. We'll wait to see as we get further into the review if we can get any more clarity on that. I'll turn it over to the guys now for the other questions..

Yes. Maybe I'll start, Jason. Thanks. In terms of patient flow for VIVITROL, we really saw the need occur in April and into May. And in June, that patient census started to grow again. It's not back to pre-COVID levels yet, but we're seeing encouraging growth trends on the patient side. So that's where our guidance comes in.

I would also point out that in Q2, we did have roughly $6.5 million of benefits from those Medicaid adjustments and an adjustment to our return reserve coming down.

So if you look at the baseline of what we saw in Q2, we're seeing patient growth at modest levels, sort of single-digit levels is where our expectations are based around into Q3 and Q4 with a little bit of headwind from an increased gross-to-nets, which we're assuming are going to be, again, in that 54% range for the second half of the year.

So for the full year, around 51% for gross-to-nets because, again, we have that expectation that given the unemployment rates across the country, more and more of our patients on VIVITROL are going to be accessing the medication through Medicaid, which has slightly higher discounts.

So modest increase in patient flow and then a headwind with the gross-to-nets gives us that range of $270 million to $300 million..

Jason, this is Todd. I'll address the questions on alternative injection sites. I'm actually glad you asked that question. You'll remember in May, we did issue a press release in May that we did add a majority of stores from the Albertsons network umbrella to our provider locator.

We added approximately 900 alternative injection sites through Albertsons in May. That number now is close to 1,000. So we're very pleased, in approximately a little over two months, of just the progress that we're making and just providing expanding our footprint. I think that's really the key message, is that we are actively expanding our footprint.

It's a little early to give you any type of specifics on the type of volume that is flowing through there, but we do hear qualitatively from our customers that they are seeing increased patient appointments that are coming through the pharmacy channel. So we've are very encouraged by that..

Thank you. Our next question comes from the line of Umer Raffat with Evercore ISI. Please proceed with your question..

Hi, thanks so much for making it for taking my questions. I have two for Richard and one for Jim, if I may.

Richard, first, can you remind us what percentage of olanzapine volumes are in bipolar? And if you could also remind us what studies you guys ran in bipolar outside of the DDI work? And I asked because I wonder if there's more risk to getting the bipolar indication than Street may understand.

So it might be just very helpful to understand that broadly. Jim, for you, on OpEx. I feel like I'm always puzzled on the share magnitude of OpEx of SG&A that Alkermes as a company spends and the amount it has increased over the years. And I was more puzzled today because R&D was paired back 10%. SG&A was only paired back 2% in the guidance.

And a lot of biopharma companies have talked about how interactions have gone down, OpEx the sales spend has come down. But we didn't quite see that in the Alkermes guidance. So if you could speak to that.

And perhaps on that note then, Richard, if you could talk about, is there any out-of-the-box possibilities for Alkermes with other neuropsych players, several of them are now either commercial stage or late clinical stage. I realized you don't have the balance sheet to do any meaningful transaction.

Was there any out-of-the-box possibilities where this SG&A expense can be shared?.

Good morning. Yes. So there's a bunch in there. Let's see if I could pick through them all. Sandy can probably give you the specific percentage of olanzapine used that's used in bipolar.

But it's significant in both bipolar disease and in schizophrenia, which is interesting because obviously, it's not promoted and it's not indicated first line in schizophrenia. So it what we found in the market research is that clinicians are very receptive to the idea of the olanzapine efficacy.

We don't need to spend time convincing prescribers that olanzapine is a highly efficacious drug. On the bipolar indication, there's a couple of points I want to make.

One is that the studies that we did to support the inclusion of the bipolar I label or agreeing with FDA in advance, which is essentially PK bridging to show that exposures in these patients would be similar and the drug-drug interactions with other commonly used bipolar agents.

At the mid-cycle meeting, we confirmed with them that the bipolar I registration strategy was intact. And they were satisfied with that. So we've had no indications that there's an issue with receiving the bipolar I label. At the same time we received the schizophrenia label.

And your last one, what was the last you just asked me, Umer?.

I guess my question really was, Richard, that with so many players in the neuropsych space now, either commercially or clinically..

Oh, Yes. Yes. No, I think it's a great question. And it's part of the reason why we emphasized in this call, the investments that we've made in the psychiatry commercial infrastructure.

I think investors and I think certain companies have minimized the amount of fixed cost or infrastructure you need to be able to address these patient populations, particularly those that for drugs that span commercial, Medicaid and Medicare, the dual eligibles.

Because it's a very complicated reimbursement and commercial environment as well as a complicated medical affairs environment, a complicated payer environment, so absolutely. And our belief is that what we're building in terms of a commercial foundation is leverageable. 3831 will be the first example of that.

But we hope to put additional products through that. And particularly, as other companies begin to realize the daunting amount of expense they might have to undertake to launch a single product. So that's part of our long-term corporate objective..

And I'll just close the loop on the bipolar question. So about 20 nearly 25% of olanzapine total prescriptions are in bipolar disorder, and that represents about 11% of atypical antipsychotic market share..

And I might just chime in, Umer, it's Jim on the OpEx side and our investments there. I mean, I think we're trying to we've demonstrated our commitment to non-GAAP profitability. I think we look at our cost structure every year and make sure that we're justifying what we're spending.

I think Rich touched on the importance of the infrastructure that's required to sell in psychiatry in addiction. These are unique areas.

And the most important thing I think we can do is continue to leverage that as we've built these capabilities, if we could put more products through with VIVITROL, with ARISTADA, with 3831 and potentially others, we'll certainly work to do that.

I might just also say, we are increasing our spend on the marketing side and sales side in preparation for the 3831 launch. This has the potential to be a very important drug for us.

And we have the resources, and we want to make sure that this year, we don't underinvest in preparations for the launch of 3831 that so we're sharing some of those expenses in 2020 even though the launch expectation will obviously be in 2021.

So we'll continue to keep an eye on those operating expenses and work to leverage those as much as we can and to be as efficient as we can..

Thank you very much..

Yes. We will take the next question please..

Thank you. Our next question comes from the line of Paul Matteis with Stifel. Please proceed with your question..

Hi, This is Nate [ph] on for Paul. Maybe the first question. I think I heard you guys mention maybe reducing slightly your expectations around the sales force build for 3831.

Could you elaborate on that? And was I correct am I correct in stating you guys had originally expected somewhere around 150 to 200 new sales reps?.

Yes..

Yes. Nate, this is Todd. I'll take that question. And you're correct. Our original assumption prior to COVID is that we would add between 100 to 200 sales representatives. COVID has allowed us to take stock, take a look at the marketplace.

As I mentioned earlier, our focus right now is really building this capability and hybrid personnel promotion and we believe we have some good results to date with that, and we're going to continue to improve with it. So our original assumption was 100 to 200 sales representatives.

We believe that's going to be in the mid- to low range of that number now, and we're going to be finalizing that as we get closer to launch..

Got you. And then maybe as VUMERITY brought up yet, do you guys have any visibility into what's happening on the ground? I mean, we heard a significant shift in tone from Biogen this quarter..

Nate, it's Rich. I would say that the secret to understanding VUMERITY is to go to Biogen, okay? They're in charge of this launch, and we're really hopeful that we're just in the beginning, early days of VUMERITY..

Fair enough. Thanks, Rich..

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

Good morning. First, can you give us a little more color on your payer interactions? You were mentioning in your prepared remarks for 3831. Second, you've talked about a commitment to profitability.

So I was just curious, should we be assuming that with the additional spend to launch 3831 next year, you will be managing to still driving profitability on a non-GAAP basis? And just very quickly, you're cutting $35 million of R&D.

Any specific programs that were cut? Or is that just a little bit across the board?.

Hi Mark, this is Todd. I'll take the first part on payer interactions. As I said in my prepared remarks, thus far, we've had interactions with payers in the U.S. that represent approximately 50% of the covered lives within the oral antipsychotic category. I would say the interactions have been expected.

The payers, number one, their first question, their number one priority is understanding the clinical value of the product of any product coming into the category. They also believe that, in general, the class has somewhat settled, meaning that 90% of the class of the market right now is generic and about 10% is branded.

And so it's a very common occurrence within branded agents to have some type of step-through generic products. As you know, ALKS 3831 is a new molecular entity. It is a branded product.

Our expectation is that it's going to be treated such as a branded product and that there will be situations where there will be step-through therapy as well, too, and we are prepared for that..

Yes. Mark, I'll touch on the financial questions. As for the commitment to profitability in 2021, we're obviously not guiding yet for 2021 and a lot can happen in the world between now and February. But we've demonstrated our commitment to working to non-GAAP profitability this year, and that will certainly be our intention.

But a lot will depend on, obviously, how the top line grows through 2021 for us. So stay tuned on that front. On the R&D side, it's been a real mix of prioritization, rephasing of some things and some COVID-related savings. So we've we work in each of those things across the board to bring R&D savings down.

So you're right, it's a little bit of everything as we talk and reprioritize things to focus on our key programs, particularly 4230..

Thanks..

Thank you. Our next question comes from the line of Vamil Divan with Mizuho Securities. Please proceed with your question..

Great, thanks for taking my question. Maybe one, if I can just follow up on the last question around 3831 and then have I have one separate question. On the payer interactions and maybe going to kind of bring in any kind of feedback from the physician side.

Just curious, obviously, it sounds like you would have to go through a generic supporting in 3831, which makes sense. Curious about sort of generic olanzapine specifically, if that's come up in the discussions.

Do you see the payers as so of course, patients will be using generic olanzapine and only come on to 3831 if they've shown weight gain on olanzapine or how that dynamic would work? And then, my other question is really more around sort of funding at the state level or at the federal level around opioid addiction.

Obviously, that's been a big driver of VIVITROL uptake with all the focus here. It does seem like the pandemic has worsened. The opioid crisis in some way, but also not clear to me yet if there's any real push for much greater funding to help you with this crisis, just given all the other needs that now exist because of the pandemic.

So maybe you can just talk about what you're sensing from the government level in terms of support for more timing around the opioid epidemic. Thanks..

Hi Vamil, this is Todd. Let me start with that last question first and spend just a few minutes on that. At this point right now, we're not seeing any type of decline in funding that's available for opioid for the opioid epidemic. There's primary and secondary sources of funding. The primary sources of funding are at the federal level.

An example of that is the state opioid response grants, which is north of $1.4 billion that's currently available. We, most recently as well, and I said this in my prepared remarks, I'm working very closely with certified community behavioral health centers. This is a program that was introduced this year.

There's going to be up to 172 awardees of $450 million that's available over a two-year period. We've mapped that to approximately 32 states in the U.S. to actually address this epidemic as well. So we're not seeing any changes at the federal level. Secondly, the primary source of funding for VIVITROL is really comes through state Medicaid.

VIVITROL is available and has wide access on state Medicaid plans with 50% of lives actually having access to a pharmacy benefit. So we're so we are in very good shape with that.

The areas that we're watching very closely with funding is really the secondary funding sources that happened at the state level that could impact recovery programs, that could impact providers, that it could impact local sites as well, too.

We haven't seen any major disruptions there at this point as well, but we're going to be watching that very closely. So the key message, the key takeaway is that funding is available for VIVITROL, and VIVITROL has wide broad accesses available to patients.

In terms of the patient interactions with 3831, in general, having a step through any generic, including olanzapine, is not ideal for all patients. But as I said just a few minutes ago, payers believe that the market is somewhat settled with 90% of the prescriptions being generic.

Branded agents are typically reserved for a second-, third- or fourth-line option after generic failure as well. Something that we watch very closely with the market opportunity is about 20% of patients at any given time, have already cycled through olanzapine, about 20% of patients.

Patients on schizophrenia, on average, in the cycle to about five different products, patients for bipolar I disorder cycle through about seven different products. So even in light, if there is a step through a product like olanzapine, there is a market opportunity for those patients that do not tolerate olanzapine to have an option like ALKS 3831..

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

Hi, good morning. Thanks for taking the questions.

Just in terms of VIVITROL, as we've seen a resurgence in terms of COVID-19 across many states, I was just curious if you've seen any sort of pullback in the sensitivity you've seen because even though we've seen a resurgence, we haven't seen quite as dramatic sort of statewide actions in terms of shelter-in-place orders being implemented.

And so have you sort of continued to see that growth into the early weeks of July? And also, how much sensitivity are you seeing on a state-by-state basis based on sort of the conditions in a particular state, if you see a state like, I know Massachusetts is an important state for you and for VIVITROL.

And that state seems to have had a lot of success recently in terms of controlling the virus and but there are other states that have obviously seen more significant outbreaks. Thank you..

Doug, thanks for asking that question. At this point, we haven't seen any pullback in terms of the trend, the gradual recovery with VIVITROL. We haven't seen that with any of the resurgence in certain states across the country. The real impact, as Jim said earlier, really happened towards the beginning to middle of Q2.

That was really in the April and May time frame. We haven't seen any pullback in terms of controlled settings. As Rich said earlier, we're actually starting to see, and we hear this qualitatively from our customers as well that the controlled settings of care are starting to loosen up and more patients are getting access to treatment.

So the main message is that we aren't seeing any pullback at this point..

Okay, great. Thank you very much..

Thank you. Our next question comes from the line of Akash Tewari with Wolfe Research. Please proceed with your question..

Hey, thanks so much. So two, mostly on just margins.

For ARISTADA, can you remind us what current margins are for that product given the increased gross-to-net and how we should think about profitability evolving over the next few years, particularly as ABILIFY MAINTENA goes off-patent? And then kind of in your outreach with shareholders, this is kind of an out-of-the-box idea, but have you ever thought about divesting the VIVITROL business and focusing solely on schizophrenia with 3831 and ARISTADA? It looks like scripts really haven't ticked up over the last few years, and there's kind of uncertainty with the Teva settlement on how three drugs will kind of evolve that market.

So is that something that is even in the realm of possibility? Thanks a lot..

Sure. On the margin side, the ARISTADA margins are in the gross margins are in the high 80% level. We're seeing those as top line grows, those margins can improve as we see some manufacturing efficiencies. At this stage as well, both of our commercial products, if you understand them, they're profitable, and our growth is profitable.

And so that's an important area where we're going to continue to invest to drive the top line growth because, obviously, we can get more leverage out of our infrastructure as the top line continues to grow.

In terms of outsourcing or divesting of VIVITROL, I think that we see the growth opportunities for VIVITROL being quite important and quite substantial as we look in the years ahead. It's a very unique product.

It's still, even after the years on the market, it's still, I think, the treatment paradigm hasn't really shifted to understand the value of a non-addictive treatment in opioid dependence or the value, frankly, of medication in the treatment of alcohol dependence.

And part of this crisis is, I think that there would be a highlight of treating addiction and serious mental illness, and VIVITROL can play an important role there. Yes. That said, we always look at strategic options, and we consider those sorts of things, but we feel like a growth opportunity for VIVITROL.

I'll just remind you back in the 2016, 2017 time frame, when some of the states were changing their policies, and we were seeing VIVITROL growth rates in the 60% or 70% overall. And the top five states now, while that's coming down, it used to be 50% of sales. The top five states are now 41% of sales.

We really have nice opportunities in places like California and Texas as they shift and understand the opportunities to treat addiction where we can see VIVITROL growth accelerating. Hard to make predictions on a state-by-state basis, but the market there is real. We have the infrastructure. It's profitable for us.

And so at this stage, we see upside potentials from here for VIVITROL..

Thanks so much..

You're welcome..

Thank you. Your next question comes from the line of Terence Flynn with Goldman Sachs. Please proceed with your question..

Hi, thanks for taking the question. Maybe just two for me. On 3831, I was wondering if you had any more clarity yet from FDA on if a virtual inspection will be sufficient. And you mentioned you'll be targeting a larger prescriber base with 3831.

Can you just quantify that for us? And then for 4230 at ESMO, just what are you hoping to see here to continue investing in the program? Thank you..

Can you sort of....

Got it. This is Rich.

Sandy, can you guys hear me?.

Yes, we can hear you..

Okay, good. I lost my phone connection before. So Terence, on the 31 3831, interesting, the FDA has said publicly that inspection issues may be the only things that can slow down their PDUFA obligations or here then and there.

In the case of 3831 because it's manufactured at Wilmington, we have the advantage that it's in a site that in a facility the FDA has inspected. They've pointed out their concerns with brand-new facilities or facilities with existing inspectional issues. So we've gotten CMC questions from FDA.

We expect and hope that the inspection will be able to be done remotely or virtually in that case. 4230 ESMO, we're excited that the ARTISTRY-1 data has been accepted for oral presentation. Recall that ARTISTRY-1 has three components.

The first component we presented data at SITC last year, which was the dose escalation, which led to our determination of the recommended Phase II dose. When we had that recommended Phase II dose, then we moved into two expansion cohorts. One is in monotherapy in renal cell carcinoma and in melanoma.

And what we call Part C, which is the combinations with pembro [ph]. So you'll see data from Parts B and Part C at ESMO. And then data from ARTISTRY-2, which is the subcutaneous protocol we expect to share with you later in the quarter..

Terence, this is Todd. I'm going to address the question on the target HCP audience. And we've given that a lot of thought, and we will continue to do so. This is actually something we're really excited about. As you know, we're not new to serious mental illness.

And this is the an excellent opportunity as a company that we're going to be leveraging the full power of our commercial capabilities and our commercial infrastructure. Our current thinking right now is that the target audience would be somewhere in the neighborhood of around 20,000 HCPs.

Currently, we cover about 60% of that, a little bit north of 12,000. So our launch preparation will fully be able will allow us to maximize our current infrastructure, and we won't be starting fresh or new with the majority of those CPs..

Great. We have time for one more question, please, Melissa..

Thank you. Our final question this morning will come from the line of Jeet Mukherjee with Jefferies. Please proceed with your question..

Hey guys, thanks for managing to get my question. I'm on for Biren today. Just two quick questions. Just could you remind us on VIVITROL in a percentage terms, how much did new patients start to decline? And on ARISTADA, clearly, its growth seems to be exceeding that of the LAI class.

Is this basically conversion from other LAIs compared to newly diagnosed patients? Thanks..

This is Todd. Yes. I'll take both of those. So in terms first with VIVITROL, the overall market for new patients starts declined quarter-over-quarter. VIVITROL saw approximately a 28% decline in new patient starts. In terms of ARISTADA, the conversion, I think the key point, the key question is really the source of business for ARISTADA.

Approximately 30% of the source of business actually comes from other LAIs, and the remaining actually comes from orals. And so, yes, ARISTADA and LAIs are typically not products that naive patients use. So there is a conversion from other products, including shorter-acting LAIs and also orals as well..

Great, thank you..

Great. All right. Thanks, everyone for joining us on the call today. I appreciate your time. If you have any follow-up questions, please don't hesitate to reach out to the company. Thank you..

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