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Back to Neutral on Alkermes

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We are moving back to a Neutral recommendation on Alkermes plc (ALKS - Free Report) as we believe 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 jumped 146% to $152.2 million in the first quarter of fiscal 2013 (ended June 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 in mid-calendar 2013) for treating schizophrenia, three-month injectable version of schizophrenia drug Invega Sustenna (phase III), ALKS 5461 (a combination of ALKS 33 and buprenorphine) for cocaine dependence (phase Ib completed) and major depressive disorder (phase II, data expected in the first half of calendar 2013). The successful development and commercialization of these candidates should boost the company’s top line.

Management at Alkermes reiterated their guidance for fiscal 2013 on the first quarter fiscal 2013 conference call. Fiscal 2013 revenues are still expected in the range of $490-$530 million. Given the expanded product portfolio, we expect the company to achieve the revenue guidance.

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 - Free 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 - Free Report) and Novo Nordisk (NVO - Free 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 - Free Report) , Ampyra/ Fampyra is marketed by Acorda Therapeutics, Inc.  (ACOR - Free Report) in the US and by Biogen Idec (BIIB - Free Report) in 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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