<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-19267
ALKERMES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2472830
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
64 Sidney Street, Cambridge, MA 02139-4136
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (617) 494-0171
--------------
NOT APPLICABLE
----------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding as of February 8, 1999
- ---------------------------- -----------------------------------------
Common Stock, par value $.01 24,881,109
<PAGE> 2
ALKERMES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
- December 31, 1998 and March 31, 1998
Consolidated Statements of Operations 4
- Three months ended December 31, 1998 and 1997
- Nine months ended December 31, 1998 and 1997
Consolidated Statement of Shareholders' Equity 5
- Nine months ended December 31, 1998
Consolidated Statements of Cash Flows 6
- Nine months ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 16
EXHIBIT INDEX 17
</TABLE>
(2)
<PAGE> 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS:
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------- -------------
<S> <C> <C>
A S S E T S
Current Assets:
Cash and cash equivalents $ 16,115,748 $ 3,495,265
Short-term investments 154,875,378 190,556,898
Prepaid expenses and other current assets 7,137,025 8,555,368
------------- -------------
Total current assets 178,128,151 202,607,531
------------- -------------
Property, Plant and Equipment:
Land 235,000 235,000
Building 3,576,297 1,275,000
Furniture, fixtures and equipment 28,235,282 14,782,341
Leasehold improvements 11,685,363 2,507,973
Construction in progress -- 4,275,985
------------- -------------
43,731,942 23,076,299
Less accumulated depreciation and amortization (12,820,766) (9,578,571)
------------- -------------
30,911,176 13,497,728
------------- -------------
Investments 8,409,943 3,422,726
------------- -------------
Other Assets 2,971,990 466,712
------------- -------------
Other Investments 99,300 263,400
------------- -------------
$ 220,520,560 $ 220,258,097
============= =============
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
Current Liabilities:
Accounts payable and accrued expenses $ 5,320,320 $ 7,067,972
Deferred revenue 8,813,661 7,415,980
Long-term obligations--current portion 6,294,991 4,104,533
------------- -------------
Total current liabilities 20,428,972 18,588,485
------------- -------------
Long-Term Obligations 31,873,264 12,933,333
------------- -------------
Other Long-Term Liabilities 1,550,582 2,072,212
------------- -------------
Deferred Revenue -- 5,000,000
------------- -------------
Shareholders' Equity:
Capital stock, par value $.01 per share:
authorized, 2,700,000 shares; none issued
Convertible exchangeable preferred stock, par value $.01 per share:
authorized and issued, 2,300,000 shares at December 31, 1998 and
March 31, 1998 (liquidation preference of $115,000,000) 23,000 23,000
Common stock, par value $.01 per share:
authorized, 40,000,000 shares; issued 21,170,081 shares at
December 31, 1998 and 21,072,282 shares at March 31, 1998 211,701 210,723
Additional paid-in capital 311,726,147 311,213,755
Deferred compensation (176,918) (119,719)
Cumulative foreign currency translation adjustments (19,903) (10,638)
Unrealized loss on marketable securities -- (37,500)
Accumulated deficit (145,096,285) (129,615,554)
------------- -------------
Total shareholders' equity 166,667,742 181,664,067
------------- -------------
$ 220,520,560 $ 220,258,097
============= =============
</TABLE>
See notes to consolidated financial statements.
(3)
<PAGE> 4
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative arrangements $ 11,217,171 $ 6,437,761 $ 28,417,706 $ 18,550,227
Interest income 2,335,863 1,367,319 7,558,282 3,619,436
------------ ------------ ------------ ------------
13,553,034 7,805,080 35,975,988 22,169,663
------------ ------------ ------------ ------------
Expenses:
Research and development 11,977,715 8,154,705 32,426,631 22,857,229
General and administrative 3,114,178 2,266,691 8,690,949 6,066,354
Interest expense 653,795 392,424 1,532,336 1,242,106
Acquisition of in-process research and development -- -- 3,221,253 --
------------ ------------ ------------ ------------
15,745,688 10,813,820 45,871,169 30,165,689
------------ ------------ ------------ ------------
Net loss (2,192,654) (3,008,740) (9,895,181) (7,996,026)
Preferred stock dividends (1,868,750) -- (5,585,550) --
------------ ------------ ------------ ------------
Net loss attributable to common shareholders ($ 4,061,404) ($ 3,008,740) ($15,480,731) ($ 7,996,026)
============ ============ ============ ============
Basic and diluted loss per common share ($0.19) ($0.14) ($0.73) ($0.38)
============ ============ ============ ============
Weighted average number of common shares outstanding 21,157,227 20,831,339 21,120,494 20,792,230
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
(4)
<PAGE> 5
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Convertible Exchangeable Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1998 2,300,000 $23,000 21,072,282 $210,723 $311,213,755
Issuance of common stock 4/98 through 6/98 -- -- 23,594 236 134,495
Compensation relating to options granted -- -- -- -- 217,500
Amortization of compensation relating to
stock options granted and awards made -- -- -- -- --
Unrealized gain on marketable securities -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- --
Net loss for period -- -- -- -- --
Preferred stock dividends -- -- -- -- --
----------------------------------------------------------------
Balance, June 30, 1998 2,300,000 23,000 21,095,876 210,959 311,565,750
Issuance of common stock 7/98 through 9/98 -- -- 30,294 303 141,381
Compensation relating to options canceled -- -- -- -- (217,500)
Amortization of compensation relating to
stock options granted and awards made -- -- -- -- --
Unrealized loss on marketable securities -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- --
Net loss for period -- -- -- -- --
Preferred stock dividends -- -- -- -- --
----------------------------------------------------------------
Balance, September 30, 1998 2,300,000 23,000 21,126,170 211,262 311,489,631
Issuance of common stock 10/98 through 12/98 -- -- 43,911 439 86,599
Compensation relating to options granted -- -- -- -- 180,250
Compensation relating to options canceled -- -- -- -- (30,333)
Amortization of compensation relating to
stock options granted and awards made -- -- -- -- --
Carrying value adjustments -- -- -- -- --
Cumulative foreign currency translation
adjustments -- -- -- -- --
Net loss for period -- -- -- -- --
Preferred stock dividends -- -- -- -- --
----------------------------------------------------------------
Balance, December 31, 1998 2,300,000 $23,000 21,170,081 $211,701 $311,726,147
================================================================
</TABLE>
<TABLE>
<CAPTION>
Cumulative Unrealized
Foreign Currency (Loss) Gain
Deferred Translation on Marketable Accumulated
Compensation Adjustments Securities Deficit Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 1, 1998 ($119,719) ($10,638) ($37,500) ($129,615,554) $181,664,067
Issuance of common stock 4/98 through 6/98 -- -- -- -- 134,731
Compensation relating to options granted (217,500) -- -- -- --
Amortization of compensation relating to
stock options granted and awards made 40,954 -- -- -- 40,954
Unrealized gain on marketable securities -- -- 18,750 -- 18,750
Cumulative foreign currency translation
adjustments -- 1,908 -- -- 1,908
Net loss for period -- -- -- (5,076,558) (5,076,558)
Preferred stock dividends -- -- -- (1,848,050) (1,848,050)
-------------------------------------------------------------------------------
Balance, June 30, 1998 (296,265) (8,730) (18,750) (136,540,162) 174,935,802
Issuance of common stock 7/98 through 9/98 -- -- -- -- 141,684
Compensation relating to options canceled 217,500 -- -- -- --
Amortization of compensation relating to
stock options granted and awards made 22,828 -- -- -- 22,828
Unrealized loss on marketable securities -- -- (84,300) -- (84,300)
Cumulative foreign currency translation
adjustments -- 12,912 -- -- 12,912
Net loss for period -- -- -- (2,625,969) (2,625,969)
Preferred stock dividends -- -- -- (1,868,750) (1,868,750)
-------------------------------------------------------------------------------
Balance, September 30, 1998 (55,937) 4,182 (103,050) (141,034,881) 170,534,207
Issuance of common stock 10/98 through 12/98 -- -- -- -- 87,038
Compensation relating to options granted (180,250) -- -- -- --
Compensation relating to options canceled 30,333 -- -- -- --
Amortization of compensation relating to
stock options granted and awards made 28,936 -- -- -- 28,936
Carrying value adjustments -- -- 103,050 -- 103,050
Cumulative foreign currency translation
adjustments -- (24,085) -- -- (24,085)
Net loss for period -- -- -- (2,192,654) (2,192,654)
Preferred stock dividends -- -- -- (1,868,750) (1,868,750)
-------------------------------------------------------------------------------
Balance, December 31, 1998 ($176,918) ($19,903) $ -- ($145,096,285) $166,667,742
===============================================================================
</TABLE>
See notes to consolidated financial statements.
(5)
<PAGE> 6
ALKERMES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 9,895,181) ($7,996,026)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 3,343,946 2,178,093
Amortization of compensation relating to stock
options granted and awards made 92,718 55,047
Loss on sale of equipment -- 8,527
Adjustments to other investments 201,600 60,026
Changes in assets and liabilities:
Prepaid expenses and other current assets 1,418,791 (1,268,648)
Accounts payable and accrued expenses (1,747,911) (648,903)
Deferred revenue 1,397,681 7,699,416
Other long-term liabilities 461,662 490,668
------------ -----------
Net cash (used by) provided by operating activities (4,726,694) 578,200
------------ -----------
Cash flows from investing activities:
Additions to property, plant and equipment, net (20,651,555) (5,262,914)
Maturities of short-term investments, net 35,681,520 7,017,243
Purchases of long-term investments, net (4,987,217) (1,032,406)
Increase in other assets (2,609,448) (17,320)
------------ -----------
Net cash provided by investing activities 7,433,300 704,603
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 363,453 835,029
Proceeds from issuance of long-term debt 18,026,630 2,500,000
Payment of preferred stock dividends (5,585,550) --
Payment of long-term obligations (2,879,532) (3,094,433)
------------ -----------
Net cash provided by financing activities 9,925,001 240,596
------------ -----------
Effect of exchange rate changes on cash (11,124) 3,471
------------ -----------
Net increase in cash and cash equivalents 12,620,483 1,526,870
Cash and cash equivalents, beginning of period 3,495,265 2,799,012
------------ -----------
Cash and cash equivalents, end of period $ 16,115,748 $ 4,325,882
============ ===========
Supplementary information:
Interest paid $ 1,017,469 $ 702,600
============ ===========
Deferred revenue and accrued interest converted to long-term obligations $ 5,983,292 --
============ ===========
</TABLE>
See notes to consolidated financial statements.
(6)
<PAGE> 7
ALKERMES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the three and nine month periods ended
December 31, 1998 and 1997 are unaudited and include all adjustments which, in
the opinion of management, are necessary to present fairly the results of
operations for the periods then ended. All such adjustments are of a normal
recurring nature. These financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended March 31, 1998,
which includes consolidated financial statements and notes thereto for the years
ended March 31, 1998, 1997 and 1996. In addition, the financial statements
include the accounts of Alkermes Controlled Therapeutics, Inc., Alkermes
Controlled Therapeutics Inc. II, Alkermes Investments, Inc., Alkermes Europe,
Ltd. and Alkermes Development Corporation II ("ADC II"), wholly owned
subsidiaries of the Company.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for any other
interim period or for a full fiscal year.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
2. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which the Company adopted on April 1, 1998. SFAS No. 130
requires companies to display comprehensive income and its components as part of
the Company's full set of consolidated financial statements. Comprehensive
income is comprised of net income and other comprehensive income. The
measurement and presentation of net loss will not change. Other comprehensive
income includes certain changes in equity of the Company that are excluded from
the net loss. Specifically, SFAS No. 130 requires unrealized holding gains and
losses on the Company's available-for-sale securities and cumulative foreign
currency translation adjustments, which are currently reported separately in
shareholders' equity, to be included in other comprehensive income.
Comprehensive income (loss) for the three and nine months ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss ($2,192,654) ($3,008,740)
Cumulative foreign currency translation adjustments (24,085) 10,904
Carrying value adjustments 103,050 --
Unrealized loss on marketable securities -- (160,313)
----------- -----------
Comprehensive loss ($2,113,689) ($3,158,149)
=========== ===========
</TABLE>
(7)
<PAGE> 8
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss ($9,895,181) ($7,996,026)
Cumulative foreign currency translation adjustments (9,265) 2,392
Carrying value adjustments 103,050 --
Unrealized loss on marketable securities (65,550) (146,250)
----------- -----------
Comprehensive loss ($9,866,946) ($8,139,884)
=========== ===========
The accumulated other comprehensive income
(loss) is as follows:
Balance March 31, 1998 ($48,138)
Change for the three months ended June 30, 1998 20,658
-----------
Balance June 30, 1998 (27,480)
Change for the three months ended September 30, 1998 (71,388)
-----------
Balance September 30, 1998 (98,868)
Change for the three months ended December 31, 1998 78,965
-----------
Balance December 31, 1998 ($19,903)
===========
</TABLE>
SFAS No. 131 requires that the Company report financial and descriptive
information about its reportable operating segments. The Company is evaluating
the impact on its disclosures, if any.
3. ACQUISITION OF CERTAIN ASSETS AND TECHNOLOGY
During the quarter ended June 30, 1998, Alkermes entered into an exclusive
license agreement with ALZA Corporation ("ALZA"), a pharmaceutical and drug
delivery company, for two of ALZA's oral drug delivery technologies: RingCap(TM)
and Dose Sipping Technology ("DST"). The assets acquired included equipment to
be used in the development of the technologies. A nonrecurring charge of
approximately $3.2 million for technology licensed but not yet commercially
viable was recorded by the Company at the acquisition date. This charge
represents that portion of the acquisition price of the acquired technology that
was allocated to research and development in-process.
4. LONG-TERM DEBT
In September 1998, the Company amended its loan agreement with a bank to
increase the principal amount available thereunder up to a total of $20,000,000
and to grant a security interest in certain building, equipment and leasehold
improvements as security for the entire principal of, and interest on, the loan.
The additional principal amount of $9,000,000 made available under the first
tranche ("Tranche A") of the loan is payable over five years in equal quarterly
installments of $500,000, which will commence June 30, 1999. The additional
principal amount of $11,000,000 made available under the second tranche
("Tranche B") of the loan is payable over five years in equal quarterly
installments of $275,000 and a balloon payment of $6,325,000 due on September
30, 2003. The principal payments of Tranche B will commence June 30, 1999. The
loans bear interest at the one month LIBOR plus 1.25% (ranging from
6.825%-6.87438% at December 31, 1998).
In September 1998, the Company drew down approximately $6.9 million under
Tranche A and approximately $8.2 million under Tranche B. In December 1998, the
Company drew down approximately $0.9 million under Tranche A and approximately
$1.9 million under Tranche B. The Company can make monthly drawdowns through
March 31, 1999.
(8)
<PAGE> 9
5. SUBSEQUENT EVENT
On February 1, 1999, the Company acquired Advanced Inhalation Research, Inc.
("AIR"), a private company focused on the development of pharmaceutical products
based on proprietary pulmonary drug delivery technologies. The acquisition was
accomplished by merging AIR with and into a newly formed wholly owned subsidiary
of the Company. Pursuant to the merger agreement, the Company issued
approximately 3,680,500 shares of its common stock to the stockholders of AIR in
a transaction intended to qualify as a tax-free pooling of interests. The
Company has agreed to register all of such shares for resale under the
Securities Act of 1933, as amended. An additional 119,474 shares of common stock
were reserved for issuance upon the exercise of currently unvested stock options
granted to employees and consultants of AIR which were assumed by the Company.
(9)
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
Alkermes is developing innovative pharmaceutical products based on several
proprietary drug delivery systems: ProLease(R), Cereport(TM) (formerly known as
RMP-7(TM)), Medisorb(R), RingCap(TM) and Dose Sipping Technology ("DST"). Since
its inception in 1987, the Company has devoted substantially all of its
resources to its research and development programs. Alkermes has not received
any revenue from the sale of products. The Company has been unprofitable since
its inception and expects to incur substantial additional operating losses over
the next few years. At December 31, 1998, the Company had an accumulated deficit
of approximately $145.1 million.
On February 1, 1999, the Company acquired Advanced Inhalation Research, Inc.
("AIR"), a private company focused on the development of pharmaceutical products
based on proprietary drug delivery technologies.
The Company has funded its operations primarily through public offerings and
private placements of equity securities, bank loans and payments under research
and development agreements with collaborators, including Alkermes Clinical
Partners, L.P. ("Clinical Partners"), a research and development limited
partnership whose operations commenced in April 1992. The Company is developing
its product candidates in collaboration with others on whom the Company will
rely for funding, development, manufacturing and/or marketing.
FORWARD-LOOKING STATEMENTS
Any statements set forth below or otherwise made in writing or orally by the
Company with regard to its expectations as to financial results and other
aspects of its business may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, the Company's
business is subject to significant risks and there can be no assurance that
actual results of the Company's development activities and its results of
operations will not differ materially from its expectations. Factors which could
cause actual results to differ from expectations include, among others: (i) the
Company and its collaborators could not be permitted by regulatory authorities
to undertake clinical trials for RingCap or DST or to undertake additional
clinical trials for ProLease, Cereport, Medisorb or AIR product candidates or
clinical trials could be delayed; (ii) product candidates could be ineffective
or unsafe during clinical trials; (iii) the Company's collaborators could elect
to terminate or delay development programs; (iv) the Company could incur
difficulties or set-backs in obtaining the substantial additional funding
required to continue research and development programs and clinical trials; (v)
even if product candidates appear promising at an early stage of development,
product candidates could fail to receive necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical, fail to achieve
market acceptance, be precluded from commercialization by proprietary rights of
third parties or experience substantial competition in the marketplace; (vi)
even if clinical trials are completed and the data is submitted to the Food and
Drug Administration ("FDA") as a New Drug Application ("NDA") for marketing
approval and to other health authorities as a marketing authorization
application, the NDA or marketing authorization application could fail to be
accepted, or upon acceptance, could fail to receive approval on a timely basis,
if at all; (vii) technological change in the biotechnology or pharmaceutical
industries could render the Company's product candidates obsolete or
noncompetitive; (viii) disputes with collaborators, termination of
collaborations or failure to negotiate acceptable new collaborative arrangements
for ProLease, Medisorb, AIR, RingCap and DST technologies, which are not
independently commercializable, or for Cereport, could occur; (ix) disputes with
Clinical Partners over rights to Cereport and related technology could occur, or
the Company could fail to purchase this technology from Clinical Partners
pursuant to the purchase option (the "Purchase Option"), or, if the Company did
purchase RMP(TM) technology from Clinical Partners (a) in shares of the
Company's common stock, the Company's shareholders would be substantially
diluted or (b) in cash,
(10)
<PAGE> 11
the Company's capital resources would be significantly depleted; and (x)
difficulties or set-backs in obtaining and enforcing Alkermes' patents and
difficulties with the patent rights of others could occur.
RESULTS OF OPERATIONS
The Company's research and development revenue under collaborative arrangements
for the three and nine months ended December 31, 1998 was $11,217,171 and
$28,417,706 compared to $6,437,761 and $18,550,227 for the corresponding periods
of the prior year. The increase in such revenue for the three and nine months
ended December 31, 1998 as compared to the corresponding periods of the prior
year was mainly a result of the increased funding and milestones earned under
collaborative agreements related to the Company's ProLease and Medisorb
technologies.
Interest income for the three and nine months ended December 31, 1998 was
$2,335,863 and $7,558,282 compared to $1,367,319 and $3,619,436 for the
corresponding periods of the prior year. The increase in such income for the
three and nine months ended December 31, 1998 as compared to the corresponding
periods of the prior year was primarily a result of the interest income earned
on the net proceeds of $110.5 million from the sale of 2,300,000 shares of the
Company's $3.25 convertible exchangeable preferred stock (the "Preferred Stock")
in March 1998.
The Company's total operating expenses were $15,745,688 and $42,649,916 for the
three and nine months ended December 31, 1998 as compared to $10,813,820 and
$30,165,689 for the three and nine months ended December 31, 1997. The Company
separately recorded a $3,221,253 nonrecurring charge in the three months ended
June 30, 1998 for DST and RingCap technologies licensed from ALZA Corporation
("ALZA") which are not yet commercially viable. Research and development
expenses for the three and nine months ended December 31, 1998 were $11,977,715
and $32,426,631 compared to $8,154,705 and $22,857,229 for the corresponding
periods of the prior year. The increase in research and development expenses for
the three and nine months ended December 31, 1998 as compared to the three and
nine months ended December 31, 1997 was mainly the result of an increase in
salary and related benefits and other costs associated with an increase in
personnel as the Company advances its product candidates through development and
clinical trials and prepares for commercial scale manufacturing. In addition,
the Company had an increase in occupancy costs and depreciation and amortization
expense related to the expansion of its Medisorb manufacturing facility in
Wilmington, Ohio and its new ProLease manufacturing facility in Cambridge,
Massachusetts (see Liquidity and Capital Resources below).
General and administrative expenses for the three and nine months ended December
31, 1998 were $3,114,178 and $8,690,949 compared to $2,266,691 and $6,066,354
for the corresponding periods of the prior year. The increase in the three and
nine months ended December 31, 1998 as compared to the three and nine months
ended December 31, 1997 was mainly the result of an increase in salary and
related benefits and other costs relating primarily to an increase in personnel,
as well as an increase in professional fees and consulting costs.
The Company does not believe that inflation and changing prices have had a
material impact on its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments were approximately $171.0
million at December 31, 1998 as compared to $194.1 million at March 31, 1998.
The primary uses of cash and investments were to finance the Company's
operations, capital expenditures, the payment for the license from ALZA for the
RingCap and DST technologies and the payment of the dividends on the Company's
Preferred Stock. In addition, Investments include $7.0 million principal amount
of high grade corporate notes with maturities ranging from 13 to 19 months. The
Company invests in cash equivalents, U.S. Government obligations, high grade
corporate notes and commercial paper.
(11)
<PAGE> 12
The Company's investment objectives taken as a whole are, first, to assure
conservation of capital and liquidity, and second, to obtain investment income.
The Company's research and development costs to date have been financed
primarily by sales of equity securities and payments under research and
development collaborative arrangements. The Company expects to incur significant
research and development and other costs, including costs related to preclinical
studies, clinical trials and facilities expansion. Therefore, the Company
expects that its costs, including research and development costs for all of its
product candidates, will exceed revenues significantly for the next few years,
which will result in continuing losses from operations.
Since the research and development revenue from Clinical Partners ended during
the quarter ended June 30, 1996, Alkermes has been using its own resources to
continue to develop Cereport. The Company is required to fund the development of
Cereport to maintain its option to purchase the limited partnership interests in
Clinical Partners. Effective September 30, 1997, the Company entered into an
agreement with ALZA relating to the development and commercialization of
Cereport. ALZA made a $10.0 million upfront payment to Alkermes to fund clinical
development of Cereport, of which $6.1 million has been recorded as deferred
revenue at December 31, 1998. In return, ALZA will have the option to acquire
exclusive worldwide commercialization rights to Cereport. If ALZA exercises its
option, ALZA will make additional payments to cover costs associated with
advanced clinical development. If Cereport is commercialized successfully by
ALZA, ALZA will make certain milestone payments to the Company. Alkermes would
be responsible for the manufacturing of Cereport, and the two companies would
share approximately equally in profits from sales of products.
Capital expenditures were approximately $20.7 million for the nine months ended
December 31, 1998, principally reflecting the building addition and equipment
purchases for the expansion of the Wilmington, Ohio facility and for
construction costs relating to the new commercial scale ProLease manufacturing
facility in Cambridge, Massachusetts. The Company completed the expansion of its
Medisorb manufacturing facility in Wilmington during the quarter ended June 30,
1998. The Company completed construction of the new commercial scale ProLease
manufacturing facility in Cambridge during the quarter ended December 31, 1998.
The Company's capital expenditures for equipment, facilities and building
improvements have been financed to date primarily with proceeds from bank loans
and the sales of equity securities.
The Company will continue to pursue opportunities to obtain additional financing
in the future. Such financing may be sought through various sources, including
equity offerings, bank borrowings, lease arrangements relating to fixed assets
or other financing methods. The source, timing and availability of any
financings will depend on market conditions, interest rates and other factors.
The Company's future capital requirements will depend on many factors, including
continued scientific progress in its research and development programs, the
magnitude of these programs, progress with preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the establishment of additional
collaborative arrangements, the cost of manufacturing facilities and of
commercialization activities and arrangements and the cost of product
in-licensing and any possible acquisitions.
The Company may need to raise substantial additional funds for longer-term
product development, regulatory approvals and manufacturing or marketing
activities that it might undertake in the future. There can be no assurance that
additional funds will be available on favorable terms, if at all. If adequate
funds are not available, the Company may be required to curtail significantly
one or more of its research and development programs and/or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
future products.
The Company and the companies with which it does business use information and
embedded systems in the conduct of their operations. Many information systems
and embedded systems used to
(12)
<PAGE> 13
control or operate machinery, equipment and infrastructure in use today are
unable to distinguish between the year 2000 and the year 1900 because they use a
two-digit shorthand for calendar dates, or to correctly recognize the year 2000
as a leap year. If the Company does not identify and correct or replace any such
information or embedded systems prior to January 1, 2000, its operations could
be disrupted. The Company's operations could also be disrupted if the companies
with which the Company does business similarly are not year 2000 compliant, and
such failure adversely affects their ability to do business with the Company.
To address these issues, the Company has undertaken a three-step comprehensive
project. The first step is to identify the Company's mission critical
information and embedded systems. The second step is to determine whether any of
the Company's information and embedded systems are not year 2000 compliant and
to determine whether the companies with which it does significant business will
be year 2000 compliant. The third step is to correct or replace all such
information and embedded systems of the Company and then to test the corrected
or replacement information and embedded systems. The Company has completed the
first step of the project and continues to work on the second step. The Company
has identified the Company's internal information and embedded systems which
uses the two-digit shorthand. The Company has requested compliance information
from companies with which it does significant business and continues to follow
up on such compliance requests. For those information and embedded systems with
known compliance issues, the Company has begun to correct or replace all such
information and embedded systems. The Company will continue to address the
compliance of companies with which it does significant business as compliance
questionnaires are received. On February 1, 1999, the Company acquired a private
company as a new wholly owned subsidiary. The Company has not yet determined
whether any of this new subsidiary's information and embedded systems are year
2000 compliant or what steps need to be taken to correct or replace any of its
information or embedded systems that are not year 2000 compliant. The Company
cannot estimate the most reasonably likely worst case scenario if the
information and embedded systems of its new subsidiary or the companies with
which it does significant business fail until the Company completes its
evaluation or receives the compliance questionnaires and can appropriately
evaluate such responses.
This project is being conducted by the Company primarily using internal
resources. The Company cannot estimate the cost of completion of the project or
complete its contingency plan until the Company completes the second step, and
there can be no assurance that the cost of completion of the project will not be
material, that the project will be completed on a timely basis, that any
contingency plans could be promptly completed and implemented or that the use of
the Company's internal resources to complete the project will not adversely
affect other aspects of the Company's business. In the event that any of the
companies with which the Company does significant business do not successfully
achieve year 2000 compliance on a timely basis, the Company's business could be
adversely affected.
(13)
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Number Exhibit
------ -------
3.1(a) Second Amended and Restated Articles of Incorporation of
Alkermes, Inc., effective July 23, 1991. (Incorporated by
reference to Exhibit 4.1(a) to the Company's Report on
Form 10-Q for the quarter ended June 30, 1991).
3.1(b) Statement of Change of Registered Office of Alkermes,
Inc. effective July 23, 1991. (Incorporated by reference
to Exhibit 4.1(b) to the Company's Report on Form 10-Q
for the quarter ended June 30, 1991).
3.1(c) Amendment to the Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary
of State on November 1, 1991. (Incorporated by reference
to Exhibit 4.1(c) to the Company's Report on Form 10-Q
for the quarter ended September 30, 1991).
3.1(d) Amendment to the Second Amended and Restated Articles of
Incorporation, as amended, as filed with the Pennsylvania
Secretary of State on February 12, 1993. (Incorporated by
reference to Exhibit 4.1(d) to the Company's Report on
Form 10-Q for the quarter ended December 31, 1992).
3.1(e) Amendment to the Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary
of State on February 26, 1998. (Incorporated by reference
to Exhibit 4.6 to the Company's Registration Statement on
Form S-3, as amended (File No. 333-50157)).
3.2 Amended and Restated By-Laws of Alkermes, Inc., effective
as of July 1, 1994. (Incorporated by reference to Exhibit
4.2 to the Company's Report on Form 10-Q for the quarter
ended June 30, 1994).
4.1 Specimen of Common Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4 to the Company's
Registration Statement on Form S-1, as amended (File No.
33-40250)).
4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3, as amended
(File No. 333-50157)).
4.3 Form of 1992 Warrant to purchase 2,800 shares of the
Company's Common Stock. (Incorporated by reference to
Exhibit 4.2 to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1992).
(14)
<PAGE> 15
4.4 Form of 1995 Warrant to purchase 300 shares of the
Company's Common Stock. (Incorporated by reference to
Exhibit 4.3 to the Company's Report on Form 10-K for the
fiscal year ended March 31, 1992).
4.5 Form of Global Warrant Certificate for 1994 Class A
Warrants. (Incorporated by reference to Exhibit 4.6 to
the Company's Report on Form 10-Q for the quarter ended
December 31, 1994).
4.6 Form of Global Warrant Certificate for 1994 Class B
Warrants. (Incorporated by reference to Exhibit 4.7 to
the Company's Report on Form 10-Q for the quarter ended
December 31, 1994).
4.7 Form of Global Warrant Certificate for 1994 Affiliate
Warrants. (Incorporated by reference to Exhibit 4.8 to
the Company's Report on Form 10-Q for the quarter ended
December 31, 1994).
4.8 Form of Global Warrant Certificate for 1994 Incentive
Warrants. (Incorporated by reference to Exhibit 4.9 to
the Company's Report on Form 10-Q for the quarter ended
December 31, 1994).
4.9 Warrant Agreement, dated as of November 18, 1994, by and
between the Company and The First National Bank of
Boston. (Incorporated by reference to Exhibit 4.10 to the
Company's Report on Form 10-Q for the quarter ended
December 31, 1994).
4.10 Stock Purchase Agreement, dated as of February 13, 1997,
between the Company and ALZA Corporation. (Incorporated
by reference to Exhibit 4.5 to the Company's Registration
Statement on Form S-3, as amended (File No. 333-19955)).
4.11 Indenture, dated as of March 1, 1998, between Alkermes,
Inc. and State Street Bank and Trust Company, as Trustee.
(Incorporated by reference to Exhibit 4.7 to the
Company's Registration Statement on Form S-3, as amended
(File No. 333-50157)).
4.12 Registration Rights Agreement, dated as of March 4, 1998,
among the Company and the Initial Purchasers.
(Incorporated by reference to Exhibit 4.12 to the
Company's Report on Form 10-K for the fiscal year ended
March 31, 1998).
4.13 Form of Agreement with the Company's Stockholders by and
among Alkermes, Inc., Advanced Inhalation Research, Inc.
and the stockholders of Advanced Inhalation Research,
Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's Report on Form 8-K dated February 1, 1999).
27 Financial Data Schedule.
(b) The Registrant has filed no Reports on Form 8-K during the quarter ended
December 31, 1998. The Registrant filed a Report on Form 8-K on
February 12, 1999.
(15)
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALKERMES, INC.
(Registrant)
Date: February 16, 1999 By: /s/ Richard F. Pops
------------------------------------
Richard F. Pops
Chief Executive Officer and Director
(Principal Executive Officer)
Date: February 16, 1999 By: /s/ James M. Frates
------------------------------------
James M. Frates
Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
(16)
<PAGE> 17
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1(a) Second Amended and Restated Articles of Incorporation of Alkermes,
Inc., effective July 23, 1991. (Incorporated by reference to
Exhibit 4.1(a) to the Company's Report on Form 10-Q for the quarter
ended June 30, 1991).
3.1(b) Statement of Change of Registered Office of Alkermes, Inc. effective
July 23, 1991. (Incorporated by reference to Exhibit 4.1(b) to the
Company's Report on Form 10-Q for the quarter ended June 30, 1991).
3.1(c) Amendment to the Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of State on
November 1, 1991. (Incorporated by reference to Exhibit 4.1(c) to the
Company's Report on Form 10-Q for the quarter ended September 30,
1991).
3.1(d) Amendment to the Second Amended and Restated Articles of
Incorporation, as amended, as filed with the Pennsylvania Secretary
of State on February 12, 1993. (Incorporated by reference to
Exhibit 4.1(d) to the Company's Report on Form 10-Q for the quarter
ended December 31, 1992).
3.1(e) Amendment to the Second Amended and Restated Articles of
Incorporation, as filed with the Pennsylvania Secretary of State on
February 26, 1998. (Incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-3, as amended (File
No. 333-50157)).
3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of
July 1, 1994. (Incorporated by reference to Exhibit 4.2 to the
Company's Report on Form 10-Q for the quarter ended June 30, 1994).
4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated
by reference to Exhibit 4 to the Company's Registration Statement on
Form S-1, as amended (File No. 33-40250)).
4.2 Specimen of Preferred Stock Certificate of Alkermes, Inc.
(Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-3, as amended (File No. 333-50157)).
4.3 Form of 1992 Warrant to purchase 2,800 shares of the Company's Common
Stock. (Incorporated by reference to Exhibit 4.2 to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1992).
(17)
<PAGE> 18
4.4 Form of 1995 Warrant to purchase 300 shares of the Company's Common
Stock. (Incorporated by reference to Exhibit 4.3 to the Company's
Report on Form 10-K for the fiscal year ended March 31, 1992).
4.5 Form of Global Warrant Certificate for 1994 Class A Warrants.
(Incorporated by reference to Exhibit 4.6 to the Company's Report on
Form 10-Q for the quarter ended December 31, 1994).
4.6 Form of Global Warrant Certificate for 1994 Class B Warrants.
(Incorporated by reference to Exhibit 4.7 to the Company's Report on
Form 10-Q for the quarter ended December 31, 1994).
4.7 Form of Global Warrant Certificate for 1994 Affiliate Warrants.
(Incorporated by reference to Exhibit 4.8 to the Company's Report on
Form 10-Q for the quarter ended December 31, 1994).
4.8 Form of Global Warrant Certificate for 1994 Incentive Warrants.
(Incorporated by reference to Exhibit 4.9 to the Company's Report on
Form 10-Q for the quarter ended December 31, 1994).
4.9 Warrant Agreement, dated as of November 18, 1994, by and between the
Company and The First National Bank of Boston. (Incorporated by
reference to Exhibit 4.10 to the Company's Report on Form 10-Q for
the quarter ended December 31, 1994).
4.10 Stock Purchase Agreement, dated as of February 13, 1997, between the
Company and ALZA Corporation. (Incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-3, as amended
(File No. 333-19955)).
4.11 Indenture, dated as of March 1, 1998, between Alkermes, Inc. and
State Street Bank and Trust Company, as Trustee. (Incorporated by
reference to Exhibit 4.7 to the Company's Registration Statement on
Form S-3, as amended (File No. 333-50157)).
4.12 Registration Rights Agreement, dated as of March 4, 1998, among the
Company and the Initial Purchasers. (Incorporated by reference to
Exhibit 4.12 to the Company's Report on Form 10-K for the fiscal year
ended March 31, 1998).
4.13 Form of Agreement with the Company's Stockholders by and among
Alkermes, Inc., Advanced Inhalation Research, Inc. and the
stockholders of Advanced Inhalation Research, Inc. (Incorporated by
reference to Exhibit 4.1 to the Company's Report on Form 8-K dated
February 1, 1999).
27 Financial Data Schedule.
(18)
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q FOR
THE NINE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
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<COMMON> 212
<OTHER-SE> 166,433
<TOTAL-LIABILITY-AND-EQUITY> 220,521
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<TOTAL-COSTS> 32,427
<OTHER-EXPENSES> 3,221
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<INCOME-PRETAX> (9,895)
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