Pipeline Issues Keep ALKS a Hold

We are optimistic about a number of mid-to late-stage candidates of Alkermes, Inc. (ALKS - Analyst Report), despite the termination of the AIR Insulin program being a major blow to its clinical pipeline. However, the latest we expect to see one of these candidates on the market is in 2010.

Termination of the AIR Insulin program by Eli Lilly (LLY - Analyst Report) will see revenues of Alkermes declining by over 11 percent in fiscal 2009. We believe the company will need to cut down on its research and development funding while simultaneously engaging in share repurchases of at least 5 million shares annually after fiscal 2010, if it aims to achieve its goal of an EPS of $2.00 - $3.00 in 2013.

We believe that while the company may have plenty of catalysts lined up in the coming 12 months, the company’s financial performance could well dampen investors spirits. While Alkermes has a deep and exciting pipeline, we believe it is subject to heightened risks of additional pipeline failures that may hamper the company’s progress towards its stated goals.

We maintain our Hold rating on Alkermes based on the negative fallout from pipeline failures, shrinking top-line growth and declining profitability. Our $14 target price corresponds to a P/S ratio of 6.2x our estimated 2011 sales of $318.0 million, discounted at 25 percent for two years.

Varun Parwal contributed to this report.

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