SecProbe.io

CORRESP
1
filename1.htm

corresp

October 19, 2005

United States Securities and Exchange Commission

Division of Corporation Finance

100 F Street N.E.

Washington, D.C. 20549

    Attention:

    Jim B. Rosenberg, Senior Assistant Chief Accountant

    Re:

    Alkermes, Inc.

    Form 10-K for the Fiscal Year Ended March 31, 2005

    Form 10-Q for the Quarterly Period Ended June 30, 2005

    File No. 001-14131

Dear Mr. Rosenberg:

     This letter is being furnished in response to comments of the staff (the “Staff”) of the
Securities and Exchange Commission (the “Commission”) as set forth in your letter dated September
22, 2005 (the “Comment Letter”) to James M. Frates, Chief Financial Officer of Alkermes, Inc.
(“Alkermes” or the “Company”), with respect to the Company’s Annual Report on Form 10-K for the
fiscal year ended March 31, 2005 (the “2005 Form 10-K”) and Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 2005 (the “Form 10-Q”). The responses and supplementary information
set forth below have been organized in the same manner in which the Commission’s comments and
headings were organized in the Comment Letter.

Form 10-K for the Fiscal Year Ended March 31, 2005

Item 7. Management’s Discussion and Analysis of Financial Condition and ..... page 30

Critical Accounting Policies, page 32

Comment 1

    1.

    We note that (a) your accrual for amounts due to clinical research organizations are
among your most significant estimates and (b) your recognition of manufacturing revenues is
based on information supplied to you and may require you to make estimates. For each of
these and any other critical accounting estimates, please tell us how accurate they have
been in the past, how much they have changed in the past, whether they are reasonably likely to change in the future, and,
if so, whether any reasonably likely change in the assumptions underlying these estimates
would be material.

Securities and Exchange Commission

October 19, 2005

Page 2

Response 1

Research Accrual Estimates

The Company records accruals for its obligations under research contracts with its clinical
research service providers. Liabilities are estimated based on reviews of the contract terms and
are recorded in the period that providers perform services and when the Company has the obligation
to pay under the contracts. Accruals include retention obligations under the contracts. As
discussed within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations in the Company’s 2005 Form 10-K, the Company experiences changes in the amount of
external research expenses due to the level of clinical trials performed on product candidates.
Changes in the amounts of accruals recorded for the Company’s obligations to providers reflect this
changing activity.

The amount of the accruals for the Company’s obligations under research contracts may change
significantly in the future due to the level and nature of clinical trials and other related
activities. However, the assumptions underlying these estimates have not changed materially in the
past and are not expected to change materially in the future. Accruals recorded as of fiscal year
end and any subsequent adjustments are as follows:

    Fiscal Year Ending

    Original Accrual

    Accrual Adjustments

    March 31, 2003

    $
    477,289

    $
    900

    March 31, 2004

    $
    1,943,310

    $
    (32,452
    )

    March 31, 2005

    $
    749,847

    $
    3,634

Manufacturing Revenue Estimates

Regarding manufacturing revenue estimates that may be required, the Company has historically
derived manufacturing revenue from two products: Risperdal Consta® (“Consta”), which is
manufactured for Janssen-Cilag (“Janssen”), a division of Johnson & Johnson; and Nutropin
Depot® (“Depot”) which was manufactured for Genentech, Inc. (“Genentech”) until June
2004 when the Company and Genentech decided to cease commercialization.

Under the Company’s manufacturing and supply agreement with Janssen, the Company records
manufacturing revenue upon shipment of finished product to Janssen based on a percentage of
Janssen’s net selling price. This percentage is based on the volume of units shipped to Janssen in
any given calendar year, with a minimum manufacturing fee of 7.5%. At the beginning of each
calendar year, Janssen determines the number of vials it expects to order for the year and
calculates the manufacturing fee percentage according to the contract. In addition, at the
beginning of each calendar year, Janssen provides an estimate of the net selling prices of the products. The Company uses these estimates from Janssen
to calculate revenue.

Securities and Exchange Commission

October 19, 2005

Page 3

At the end of each quarter, Janssen compares the estimated net selling prices with the actual net
selling prices, and if the impact on the Company’s manufacturing revenue is greater than 3%, the
revenue is adjusted and a true-up payment is made, as appropriate. To date, no quarterly
differences have exceeded 3%.

At the end of each calendar year, Janssen and the Company compare the estimated manufacturing fee
percentage used during the calendar year with the actual units shipped to yield the actual
manufacturing fee percentage. In addition, Janssen and the Company perform a final comparison of
the estimated net selling prices used during the calendar year to the actual net selling prices
during the calendar year. The Company adjusts its revenue in the third fiscal quarter for any and
all differences determined, and appropriate settle-up payments are made between the two companies.

The annual settle-up payments made each calendar year since the product was launched in August 2002
are as follows:

Calendar Year Ending:

December 31, 2002: $1,774,282.91 in favor of the Company (1)

December 31, 2003: $35,313.34 in favor of the Company

December 31, 2004: $8,309.00 in favor of the Company

    (1)

    settle-up was high in calendar year 2002 due to factors surrounding the launch of the
product. Janssen underestimated the net selling prices, and actual volumes shipped during the
period were significantly lower than forecast following the delay in approval of the product
in the United States.

The Company has now reached the minimum manufacturing fee percentage of 7.5% for calendar year
2005, therefore, the only remaining estimates are related to the net selling prices of the product.

The Company has no basis for determining whether net selling price estimates made by Janssen are
reasonably likely to change in the future or if estimation methods used by Janssen are reasonably
likely to change. However, based on the Company’s experience during the last two years, and the
information currently available, the Company does not expect Janssen’s estimates to deviate
significantly from actual net selling prices in the short term. The Company has disclosed in its
revenue recognition policies that manufacturing revenues are recognized based on information
supplied by collaborative partners and may require estimates to be made. It should be noted that
the Company performs periodic audits of the information supplied by Janssen in support of Consta
sales. To date, the Company has found no material inaccuracies in the information supplied by
Janssen or departures from agreed-upon reporting methods.

Securities and Exchange Commission

October 19, 2005

Page 4

Under the manufacturing and supply agreement with Genentech, the Company earned a fixed 5%
manufacturing fee and a 5% royalty on end-market sales. At the start of each calendar year,
Genentech provided the Company with an estimate of the net selling prices of Depot. At the end of
the calendar year, the estimated net selling prices were compared to the actual net selling prices
and the Company’s manufacturing revenue was adjusted, as appropriate, and settle-up payments were
made. The annual settle-up payments in the reporting periods are as follows:

Calendar Year Ending:

December 31, 2002: $89,672.43 in favor of the Company

December 31, 2003: $21,989.85 in favor of the Company

December 31, 2004: $0, as the agreement was terminated in June 2004.

Other Estimates

Other significant estimates made by the Company related to the restructuring and bonus accruals. As
disclosed in the Note 4 to the financial statements for the fiscal year ended March 31, 2005, the
Company recorded restructuring accruals in fiscal years 2003, 2004 and 2005. Restructuring charges,
recoveries and payments that have been recorded in each of the last three fiscal years are as
follows:

    Fiscal 2003

    Fiscal 2004

    Fiscal 2005

    Balance

    Balance

    Non-Cash

    Balance

    ($ in thousands)

    March 31,

    March 31,

    Write-

    March 31,

    Type of Liability

    Charges

    Payments

    2003

    Recoveries

    Payments

    2004

    Charges

    Payments

    Downs(1)

    2005

    2004 Restructuring
Employee separation

    $
    —

    $
    —

    $
    —

    $
    —

    $
    —

    $
    —

    $
    146

    (137
    )

    $
    —

    $
    9

    Facility closure

    —

    —

    —

    —

    —

    —

    11,381

    (742
    )

    (7,674
    )

    2,965

    —

    —

    —

    —

    —

    —

    11,527

    (879
    )

    (7,674
    )

    2,974

    2002 Restructuring
Employee separation

    1,480

    (1,463
    )

    17

    —

    (17
    )

    —

    —

    —

    —

    —

    Facility closure

    5,017

    (1,497
    )

    3,520

    (208
    )

    (2,174
    )

    1,138

    —

    (749
    )

    —

    389

    6,497

    (2,960
    )

    3,537

    (208
    )

    (2,191
    )

    1,138

    —

    (749
    )

    —

    389

    Total

    $
    6,497

    $
    (2,960
    )

    $
    3,537

    $
    (208
    )

    $
    (2,191
    )

    $
    1,138

    $
    11,527

    $
    (1,628
    )

    $
    (7,674
    )

    $
    3,363

(1)      represents fixed-asset write-offs.

As indicated in the table, there have been no significant adjustments to the original accruals
for the 2002 restructuring. In addition, no adjustments have been made to the original accrual for
the 2004 restructuring. Based on the information currently available to the Company, the accruals
are not expected to change significantly in the future. The Company does not foresee changing its
assumptions underlying the restructuring cost estimates in any material way.

Employee bonuses are paid annually based on established performance criteria. The Company’s
Compensation Committee of the Board of Directors establishes the annual performance goals of the
Company. Bonuses are estimated during the annual budgeting process based on anticipated performance
to the goals and are accrued monthly on a straight-line basis.

Securities and Exchange Commission

October 19, 2005

Page 5

Based on the information currently available to the Company, the accruals are expected to change in
the future approximately in relation to the level of change in total employment. The assumptions
underlying the estimates have not changed materially in the past and are not expected to change
materially in the future. Accruals recorded as of fiscal year end and the actual payments made
against them are as follows:

    Fiscal Year Ending

    Accrual Amount

    Payments

    Difference

    March 31, 2003

    $
    799,358

    $
    680,154

    $
    119,204
    (1)

    March 31, 2004

    $
    816,000

    $
    776,707

    $
    39,293

    March 31, 2005

    $
    945,600

    $
    945,545

    $
    55

(1)     Actual bonus payments were less than estimates due to the impact of headcount reductions
made during the 2002 restructuring. Subsequent to this event, actual employee attrition exceeded
estimates and new employee hiring was below estimates, causing bonus payments to be below accrued
amounts.

Consolidated Financial Statements, page F-1

Consolidated Statements of Operations and Comprehensive Loss, page F-3

Comment 2

    2.

    Please tell us how combining manufacturing and royalty revenues is consistent with Rule
5-03(b)(1) of Regulation S-X. In your response, provide us the amount of royalty revenues
and, if applicable, the cost of royalty revenues for each period presented.

Response 2

The Company derives manufacturing fees and royalty revenues from two products — Risperdal
Consta® (“Consta”), which it manufactures for Janssen-Cilag (“Janssen”), a division of
Johnson & Johnson, and Nutropin Depot® (“Depot”), which it manufactured for Genentech,
Inc. (“Genentech”), prior to June 2004 when the Company and Genentech decided to cease
commercialization.

Under the Company’s manufacturing and supply agreement with Janssen, the Company records
manufacturing revenue upon shipment of finished product to Janssen based on a percentage of
Janssen’s net selling price. This percentage is based on the volume of units shipped to Janssen in
any given calendar year, with a minimum manufacturing fee of 7.5%. Under the Company’s license
agreements with Janssen, the Company also records royalty revenues equal to 2.5% of Janssen’s net
sales of Consta in the quarter when the product is sold by Janssen.

In accordance with the manufacturing and supply agreement with Genentech, the Company recorded
manufacturing revenue upon shipment of finished product to Genentech based on 5% of Genentech’s net
selling price. Under the Company’s license agreements with Genentech, the Company also recorded royalty revenues equal to 5% of Genentech’s
net sales of Depot in the quarter when the product was sold by Genentech.

Securities and Exchange Commission

October 19, 2005

Page 6

The Company has historically considered the substance of the agreements related to both Consta and
Depot to be arrangements in which the Company earns 10% of the net product selling price, with the
split between manufacturing fee percentage and royalty revenue percentage negotiated specifically
with each of its partners. The Company regards the combined manufacturing and royalty fees received
from a partner as a more appropriate measure of the economic reality of the revenue. Consequently,
manufacturing and royalty revenues have historically been presented in the aggregate on the face of
the consolidated statement of operations. The Company has historically provided additional
disclosure with respect to the breakout of manufacturing fees and royalty revenues, by product,
within press releases and in the text of Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations in periodic filings. The Company believes that this
presentation reflects the substance of the agreements and complies with Rule 5-03(b)(1) of
Regulation S-X which does not explicitly separate disclosure of manufacturing and royalty revenue
earned under agreements of this nature.

As requested, the following table provides the amount of royalty revenues for each period
presented. For a more complete picture, the Company is also providing the manufacturing revenues
for each respective period.

There were no costs associated with the royalty revenue from either Consta or Depot for the periods
presented.

    Year Ended

    Year Ended

    Year Ended

    March 31, 2005

    % of total

    March 31, 2004

    % of total

    March 31, 2003

    % of total

    Mfg. Fee

    Consta

    $
    40,488,097

    80.8
    %

    $
    25,004,961

    84.7
    %

    $
    13,002,702

    84.0
    %

    Depot

    0

    0
    %

    731,442

    2.5
    %

    1,314,309

    8.5
    %

    Total Mfg. Fee

    40,488,097

    80.8
    %

    25,736,403

    87.2
    %

    14,317,011

    92.5
    %

    Royalty

    Consta

    9,461,082

    18.9
    %

    3,119,974

    10.6
    %

    389,574

    2.5
    %

    Depot

    175,301

    0.3
    %

    669,941

    2.3
    %

    775,486

    5.0
    %

    Total Royal