Risk-Reward Balanced at Alkermes

We are maintaining a Neutral rating on Alkermes (ALKS - Analyst Report) with a target price of $18.00.

Last month, Alkermes released its third quarter fiscal 2012 (ended December 31, 2011) financial results. This was the first full quarter for Alkermes plc, formed in September 2011, following the merger of Waltham, Massachusetts based Alkermes, Inc. and Elan Drug Technologies (EDT), the drug delivery unit of Elan Corporation (ELN - Snapshot Report). The merger has expanded the portfolio significantly resulting in a 185.7% increase in revenues during the quarter. (Read our full coverage of the earnings report at: Revenues Skyrocket at Merged Alkermes ).

The expanded portfolio caused management to increase the 2012 revenue projection. Revenues are projected in the range of $370-$400 million, up from the previous guidance of $350-$380 million. Given the expanded product portfolio, we expect the company to achieve/beat the increased guidance. Consequently, the Zacks Consensus Estimate of $385 million is above the company’s guidance range.

The pipeline too has expanded significantly following the merger. The successful development and commercialization of these candidates should boost the company’s top line.

Apart from the merger, we are also encouraged by the FDA approval and launch of diabetes drug, Bydureon, co-developed with Amylin Pharmaceuticals (AMLN). The drug offers significant commercial potential. Going forward, we expect investor focus to remain on its performance in the US.

We note that even though the purchase of Elan’s EDT unit has diversified Alkermes’ product portfolio and pipeline and is expected to broaden the company’s reach, any merger has integration risks attached to it. If the merged entity fails to perform according to expectations then it would be a huge setback for Alkermes.

Moreover, even though impressed by the US launch of Bydureon, we note that the drug will face intense competition in the market. It will compete among others with Novo Nordisk’s (NVO - Analyst Report) Victoza, a once-daily injection that was launched in 2010. Competition will intensify further as several companies are working to bring their type II diabetes treatments to market.

Consequently, we believe that Alkermes is fairly valued at current levels with limited scope for upside. This leads us to retain our Neutral stance on the stock.