The biopharmaceutical company is under pressure to cut costs and maximize value for shareholders

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Company: Alkermes Plc (ALKS)

Companies: Alkermes is a biopharmaceutical company that researches, develops, and markets pharmaceutical products to meet the unmet medical needs of patients in a variety of therapeutic areas in the United States, Ireland and internationally. Products marketed include ARISTADA (Aripiprazole Lauroxil), an intramuscular, injectable, extended-release suspension used to treat schizophrenia; VIVITROL (naltrexone for prolonged-release injectable suspension), used to treat alcohol and opioid addiction; 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 for the treatment of schizophrenia; and VUMERITY (diroxime fumarate), used to treat relapsed forms of multiple sclerosis in adults, including clinically isolated syndrome, relapsing-remitting, and active secondary progressive disease. The company is also developing LYBALVI (olanzapine / samidorphan), an oral atypical antipsychotic 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 avoid activation of immunosuppressive cells.

Market value: $ 3.6 billion ($ 22.19 per share)

Activist: Sarissa Capital Management

Percentage ownership: 5.90%

Average cost: $ 19.09

Activist Comment: Sarissa Capital Management is an activist investor focused on the healthcare sector. It was founded in May 2013 by Alex Denner, former Senior Managing Director of Icahn Capital. Denner led Icahn’s investments in companies such as Biogen, Amylin, Genzyme, MedImmune and ImClone and has served on the boards of ImClone, Amylin, Biogen, Enzon and Adventrx Pharmaceuticals. Denner holds a PhD in biotechnology and has a rare combination of analytical skills in the sector and activist skills and experience.

What’s happening:

On April 29, 2021, Sarissa and the Company entered into an agreement whereby Sarissa has the right to appoint a director of the Company between October 30, 2021 and February 28, 2022. In connection with the agreement, Sarissa has agreed to withdraw the nomination of a director candidate for election to the Board of Directors on December 4, 2020 at the company’s 2021 annual meeting.

Backstage:

Alkermes is a $ 1 billion biopharmaceutical company, of which $ 500 million is royalty-free. The other $ 500 million are drugs that are profitable, but not necessarily blockbusters. A company like this with $ 500 million in royalties directly on the bottom line should have very strong EBITDA margins, but the company has not been profitable for many years. This is due to an inflated cost structure and an oversized infrastructure that is not tailored to the size of the platform.

Additionally, the company has assets such as royalty, manufacturing facility, and IL-2 oncology drug that could be monetized far more than the value attributed to them under Alkermes. Sanofi recently spent $ 2.5 billion to purchase a similar IL-2 drug, and there is no evidence that Alkermes’ IL-2 drug is getting any value from the markets. It is therefore possible to adjust the cost structure without cutting R&D and to operate the company more efficiently with high EBITDA margins and at the same time optimize 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 creation plan designed to drive growth, improve operational and financial performance, and increase shareholder value. Under the plan, the company announced that it (i) has committed to fiscal 2023 non-GAAP net income of 25% of total sales for the company and an EBITDA margin of 20% of total sales and non-GAAP -Net profit for the financial year 2024 in the amount of 25% of total sales to achieve 30% of total sales of the company and an EBITDA margin of 25% of total sales; (ii) a newly established committee of the Board of Directors to evaluate a wide range of potential strategic options related to Alkermes’ non-core assets, including monetization and divestment opportunities and the Company’s commitment to strategic collaboration for its IL-2 Drug to consider ;; (iii) the appointment of two new Independent Directors to replace two longstanding Directors; and (iv) that the Board of Directors intends to recommend that the Company’s shareholders approve an amendment to the Company’s Articles of Association at the Company’s 2021 Annual General Meeting to approve the Board of Directors.

This company has a poor management and governance track record with longstanding 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 published an investor letter announcing that they have been speaking with the management of Alkermes PLC and other interested parties for some time and want to continue to put pressure on the company for shareholder value maximize. Sarissa is said to have asked if the plan was sufficient. You have now negotiated the option for a seat on the board. This is a sensible deal that makes it clear what seems obvious: After the recent deal with Elliott, there is not much that Sarissa can do until the company has had some time to execute on its plan. Sarissa is alerting the company and shareholders that if the plan does not go to its satisfaction, it can take a seat on the board to help move things forward.

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

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