Biopharma company faces pressure to trim costs and maximize value for shareholders

Business: Alkermes is a biopharmaceutical company that researches, develops, and commercializes pharmaceutical products to address unmet medical needs of patients in various therapeutic areas in the United States, Ireland, and internationally. Its marketed products include ARISTADA (aripiprazole lauroxil), an extended-release intramuscular injectable suspension for the treatment of schizophrenia; VIVITROL (naltrexone for extended-release injectable suspension) for the treatment of alcohol and opioid dependence; RISPERDAL CONSTA for the treatment of schizophrenia and bipolar I disorder; INVEGA SUSTENNA for the treatment of schizophrenia and schizoaffective disorder; XEPLION, INVEGA TRINZA, and TREVICTA to treat schizophrenia; and VUMERITY (diroximel fumarate) for the treatment of relapsing forms of multiple sclerosis in adults, including clinically isolated syndrome, relapsing-remitting and active secondary progressive diseases. The company is also developing LYBALVI (olanzapine/samidorphan), an oral atypical antipsychotic drug candidate for the treatment of adults with schizophrenia and bipolar I disorder; and nemvaleukin alfa, an engineered fusion protein to expand tumor-killing immune cells and to avoid the activation of immunosuppressive cells.

Stock Market Value: $3.6B ($22.19 per share)

Percentage Ownership:  5.90%

Average Cost: $19.09

Activist Commentary: Sarissa Capital Management is an activist investor focused on the health care sector. It was founded in May 2013 by Alex Denner, former senior managing director of Icahn Capital. Denner was the lead in Icahn’s investments in companies like Biogen, Amylin, Genzyme, MedImmune and ImClone and sat on the boards of ImClone, Amylin, Biogen, Enzon and Adventrx Pharmaceuticals. Denner has a PhD in biotech and a rare combination of analytical skills in this sector and activist skills and experience.

On April 29, 2021, Sarissa and the company entered into an agreement, pursuant to which Sarissa has the right to designate a director to the company’s board between Oct. 30, 2021 and Feb. 28, 2022. In connection with the agreement, Sarissa agreed to withdraw its Dec. 4, 2020 nomination of a director candidate for election to the board at the company’s 2021 annual meeting.   

Alkermes is a biopharmaceutical company with $1 billion of revenue, $500 million of which is pure royalty revenue. The other $500 million are drugs that are profitable, but not necessarily blockbusters. A company like this, with $500 million of royalties that fall directly to the bottom line, should have very strong EBITDA margins, yet the company has not been profitable for many years. This is due to a bloated cost structure and oversized infrastructure that is not aligned with the size of its platform.

Additionally, the company has assets, like its royalty stream, manufacturing footprint and IL-2 oncology drug, which could be monetized for far greater than the value attributed to them as part of Alkermes. Sanofi recently spent $2.5 billion to acquire a similar IL-2 drug and there is no evidence that Alkermes’s IL-2 drug is being attributed any value by the markets. So, there is an opportunity to clean up the cost structure without cutting R&D and make the company run much more efficiently with high EBITDA margins while optimizing the portfolio through strategic transactions.

Another activist is doing just that. In December 2020, Alkermes entered into an agreement with another activist, Elliott Management, as part of a value enhancement plan designed to drive growth, improve operational and financial performance and enhance shareholder value. Pursuant to this plan, the company announced (i) its commitment to achieving FY 2023 non-GAAP net income equal to 25% of the company’s total revenues and EBITDA margin of 20% of total revenues and FY 2024 non-GAAP net income equal to 30% of the company’s total revenues and EBITDA margin of 25% of total revenues; (ii) a newly set-up committee of the board to evaluate a broad range of potential strategic options related to Alkermes’ non-core assets, including monetization and divestiture opportunities and the company’s commitment to exploring a strategic collaboration for its IL-2 drug; (iii) the appointment of two new independent directors to replace two long-serving directors; and (iv) that the board intends to recommend that the company’s shareholders approve, at the company’s 2021 annual general meeting of shareholders, an amendment to the company’s articles of association to declassify the board.

This company has had a poor track record of management and governance with long tenured executives. For the first time in a long time, they now have a fresh, shareholder friendly board with the expertise to hold management accountable. On March 21, 2021, it was reported that Sarissa released an investor letter in which they announced that they have been speaking with Alkermes PLC’s management and other interested parties for some time and plan to continue to apply pressure on the company to maximize shareholder value. Sarissa reportedly questioned whether the plan was sufficient. They now have negotiated for the option for one board seat. This is a reasonable settlement that highlights what seems to be obvious – that after the recent settlement with Elliott, there is not that much more Sarissa can do until the company has had some time to implement its plan. Sarissa is putting the company and shareholders on notice that if the plan does not proceed to its satisfaction, it will be able to take a board seat to try to push things along.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Alkermes is owned in the fund.