Investors have been tripping all over themselves in buying-up shares of drug maker Alkermes PLC (NASDAQ: ALK). Where trading volume has averaged half a million shares per day for the past nine months, it suddenly exploded for a total of 12.8 million shares from Tuesday through Thursday of this week, lifting the stock more than 9.6% in the process.
Why the sudden interest? The company’s anti-schizophrenia drug ALKS 3831 successfully achieved the top two endpoints of its phase 2 study. Investors and analysts alike are giving the stock a lot of interest, with CNBC’s Jim Cramer declaring the stock can go “much higher” from here.
Looking at the company’s pipeline of new drugs under development lends a great deal of credence to that optimism. Yet looking at its rather disappointing financials paints a different picture. Is Alkermes really as hot as everyone thinks it is? Or can its poor financials to-date in combination with its recent breakthrough actually strengthen the case to buy, not sell?
Alkermes’ Latest Breakthrough
Wednesday morning’s press release on the successful completion of ALKS 3831’s phase 2 study is a breakthrough in the treatment of mental disorders such as schizophrenia.
Until now, the drug “olanzapine” had been one of the most effective antipsychotic drugs in the treatment of schizophrenia. Yet it has the very consequential side-effect of spurring weight gain, which has severely limited its use. One of the best drugs for combating mental disorder had been practically sidelined because it causes weight gain.
In an effort to minimize olanzapine’s weight-gain side-effect, Alkermes has combined olanzapine with another drug “samidorphan”, calling its new blend ALKS 3831 for now. The drug’s phase 2 study thus had two endpoints that needed to be proven:
• the primary endpoint being that it needed to be as effective as olanzapine in treating schizophrenia,
• the secondary endpoint being that it needed to eliminate or reduce olanzapine’s weight-gain side-effect.
And it worked:
“Data from the 300-patient study showed that ALKS 3831 achieved the study’s primary efficacy endpoint, demonstrating equivalence to olanzapine in reduction from baseline in Positive and Negative Syndrome Scale (PANSS) total scores at Week 12,” reported Business Wire.
“ALKS 3831 also met the principal pre-specified secondary endpoint of the study, demonstrating a 37% lower mean weight gain compared to olanzapine at Week 12 in the full study population (p=0.006), and a 51% lower mean weight gain compared to olanzapine at Week 12 in a pre-specified subset of patients who gained weight in the one-week olanzapine lead-in (p<0.001).”
Peter Weiden, Professor of Psychiatry at the University of Illinois Medical Center, noted the significance of the successful phase 2 trial:
“This study showed very promising results for ALKS 3831 in addressing the major drawback of weight gain in patients treated with olanzapine, and it offers the potential for widening the therapeutic use of an olanzapine agent to meet the needs of patients.”
It also offers Alkermes the potential to ring-up as much as $5 billion in annual sales, Jim Cramer anticipates. With just over half a billion dollars worth of revenues over the past 12 months, this one drug could potentially multiply Alkermes’ revenues by 10 times.
But there is more where ALKS 3831 came from. Much more.
An Enviable Pipeline of Medicines
As impressive as the potential that ALKS 3831 could bring to Alkermes’ coffers, the company could be increasing its revenues much, much sooner, as it has five other drugs currently in later stages of development than ALKS 3831, as per the company’s graphic below.
With at least 10 drugs under development, the recent excitement surrounding ALKS 3831 could soon be overshadowed by the drug Aripiprazole Lauroxil which has filed for FDA approval, Invega Sustenna which is about to file for approval, and three other drugs already on their way to phase 3 studies.
As each drug passes its upcoming hurdles, investors can expect Alkermes’ stock to jump up the charts one landing at a time. For this reason, of the 13 stock analysts rating the stock, 3 rate it a strong buy (23.1%), 4 rate it a buy (30.8%), 4 rate it a hold (30.8%), while only 2 rate it an underperformer (15.4%).
But looking at its financials seems to leave a sour taste in investors’ mouths. In fact, the company’s numbers are downright ugly. This, however, may work to investors’ advantage.
Taking the Market by Surprise
With a market cap of $9.54 billion, Alkermes’ revenues for the trailing 12 months were an abysmal $578.99 million, or just 6.07% of its capitalization. In most other sectors, a healthy level of revenue versus market cap is somewhere between 20% and 50%.
But investors need to appreciate that the drug development space is extremely cost intensive, given the high expense of research and testing. Though Alkermes has 20 drugs already on the market generating sales, the high cost of developing new drugs can seriously burn up those profits. Just one failed drug can result in hundreds of millions of dollars wasted.
As such, Alkermes’ profit and operating margins were both negative at -6.84% and -15.18% respectively, its net income available to shareholders over the past 12 months was -$39.61 million, and its diluted earnings per share was -28 cents – indicating the company’s operations are losing shareholder equity. Even its earnings per share are expected to shrink in 2015 by some 33.3%.
But that may actually work to investors’ advantage over the longer run. With such sour numbers today, any upcoming breakthrough in its long pipeline of drugs could send Alkermes’ stock on an unexpected tear upwards.
For instance, leading up to this week’s news of its ALKS 3831, all investors had were some pretty poor numbers on which to base their expectations. Hence, the mean price target of its 12 analysts was for $53.25 per share, which is where the stock was a month ago. Yet on the back of the recent study’s results, the stock closed yesterday at $65.23, some 22.5% above analysts’ projections. This is the power of buying something that has potential when the market doesn’t quite see it.
Yet it is a bit of a gamble, and such “Hail Mary” plays as this should be limited to just a very small percentage of one’s portfolio. Even so, if you can find a stock that has upward potential when the market still believes the stock is going down, it can be a very potent medicine for any portfolio suffering from schizophrenic returns.