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We are reverting to a Neutral recommendation on Alkermes plc (ALKS - Analyst Report) from Outperform as we believe that the stock is fairly valued at current levels. Our target price is $20.00. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

The purchase of Elan Corporation’s Elan Drug Delivery unit in September 2011 has strengthened Alkermes’ product portfolio as well as its pipeline. Alkermes’ revenues climbed 72% to $124 million in the second quarter of fiscal 2013 (ended September 30, 2012) due to the expanded product portfolio.

Alkermes’ pipeline has expanded significantly following the merger. Interesting candidates include Zohydro (under review by the US Food and Drug Administration: target date - March 1, 2013) for pain, ALKS 9070 (phase III: data expected by the end of calendar 2013) for treating schizophrenia, ALKS 5461 (a combination of ALKS 33 and buprenorphine) for major depressive disorder (phase II, data expected in the first half of calendar 2013). ALKS 5461 has also been evaluated for treating patients suffering from cocaine dependence. The successful development and commercialization of these candidates should boost the company’s top line.

Alkermes’ management increased their guidance for fiscal 2013 on the second quarter of fiscal 2013 conference call. The company now expects revenues in the range of $510 million to $540 million (previous guidance: $490-$530 million) for fiscal 2013. We expect Alkermes to achieve the guidance given its expanded product portfolio. Alkermes also upped its projection for adjusted earnings in fiscal 2013. Adjusted earnings are now expected in the range of 88 cents-$1.02 per share (previous guidance: 69 cents – 84 cents per share).

The US approval and subsequent launch of type II diabetes drug, Bydureon, co-developed with Amylin (now a wholly-owned subsidiary of Bristol-Myers Squibb Company (BMY - Analyst Report)), earlier this calendar year, is a major positive for Alkermes.

Despite being impressed by the event, we believe that Bydureon, a glucagon-like peptide-1 receptor agonist, might struggle for market share in the highly crowded diabetes market. The market already has big players, such as Merck (MRK - Analyst Report) and Novo Nordisk (NVO - Analyst Report). Competition will intensify further as several companies are working on bringing their type II diabetes treatments to market. Lower-than-expected sales of Bydureon would be a dampener for Alkermes.

Moreover, Alkermes is highly dependent on partners for most of the products in its portfolio. For example, Risperdal Consta is marketed by Johnson & Johnson (JNJ - Analyst Report), Ampyra/ Fampyra is marketed by Acorda Therapeutics, Inc.  (ACOR - Analyst Report) in the US and by Biogen Idec (BIIB - Analyst Report) in the ex-US markets. Partnership related setbacks would weigh heavily on Alkermes.

In view of the challenges facing Alkermes, we see limited upside from current levels.

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