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Delay Leaves Alkermes Staggering

Investors reassess the company after a regulatory setback for its alcoholism drug.

In the last six months,



has been on a roll.

The stock is up about 70%, and Cambridge, Mass.-based Alkermes has beaten Wall Street estimates for four consecutive quarters. The drug-delivery technology company has reported promising clinical-trials results for several experimental drugs, and it recently signed a deal with



to market an alcoholism treatment that many analysts say could be a major force for growth.

But Alkermes' march hit an obstacle late Tuesday when the Food and Drug Administration said it would delay by 90 days its review of the alcoholism drug Vivitrex. The agency had been scheduled to act by Sept. 30.

Even though Alkermes and Cephalon say the delay won't derail the drug's projected mid-2006 launch, shares of Alkermes fell 9% in heavy trading Wednesday. Cephalon lost 1.6%.

Now, the big question for investors is how big an obstacle the FDA's delay presents.

David H. Windley of Jefferies & Co. cut his rating to hold from buy, citing "uncertainty" in the timing of an FDA approval and the lack of detail in Alkermes' describing the FDA's decision. Alkermes and Cephalon said late Tuesday that their filing of additional data supporting the Vivitrex application means the FDA needed more time to assess the drug.

"We got no additional clarity after speaking with management," says Windley, who owns shares, in a Wednesday research report. His firm is a market maker in Alkermes and Cephalon.

"Our thinking is also influenced by the increasingly conservative stance at the FDA and a mounting set of recent examples where the products have stalled during the regulatory process, despite good safety and efficacy data," Windley adds. "Based on the published clinical data, we expect approval."

But Donald Ellis of Thomas Weisel Partners cautions clients against panic selling. Although the FDA delay was unexpected, "there are countless examples" of the FDA delaying review of experimental drugs "under similar circumstances," says Ellis in a Wednesday research report. These drugs "were later approved without issue." He has a peer-perform rating on Alkermes. He doesn't own shares. His firm is a market maker; it plans to receive or seek investment-banking compensation in the next three months.

"We do not believe there are any fundamental changes to Vivitrex approvability or our launch timeline," Thomas Wei of Piper Jaffray wrote in a Wednesday research note reaffirming his outperform rating. Wei notes that Vivitrex was granted an accelerated six-month review by the FDA. He says agency rules allow a 90-day extension if a drugmaker submits "substantial" additional data "beyond a certain time" during the review. Wei doesn't own shares, but his firm is a market maker in the stock.

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Alkermes specializes in making existing drugs more convenient to use. Vivitrex, for example, is an injectable version of naltrexone, a now generic pill designed to discourage alcoholics from resuming drinking.

Medical experts and Wall Street analysts point out that alcoholics don't always take their medication, including the once-a-day naltrexone. They believe the injectable Vivitrex, administered once a month, will improve patient compliance and expand the alcoholism-treatment market.

If Vivitrex is approved, Alkermes will have to do a balancing act between convenience and price, says Jon LeCroy of Natexis Bleichroeder in a recent research report. Vivitrex must compete against naltrexone and disulfram, the generic copy of the anti-alcoholism pill Antabuse. "These products are poorly efficacious, since daily dosing allows patients to skip doses and then relapse," says LeCroy, whose firm doesn't issue stock ratings.

LeCroy says 2.3 million Americans seek alcoholism treatment each year, including 1.2 million who try prescription medications. He figures Vivitrex could gain a market penetration similar to that of Antabuse and naltrexone.

Ellis of Thomas Weisel Partners is more optimistic. "We believe the target population could increase following the introduction of Vivitrex to the market," he said in a report issued just after Labor Day. There are 18 million alcoholics in the U.S.

Vivitrex will have limitations. If the FDA approves Vivitrex, LeCroy expects the drug's label to carry a black-box warning -- the toughest notice by the FDA -- because naltrexone has a black-box warning about possible liver damage.

Vivitrex also faces competition from Campral, a

Forest Laboratories


drug that reached the U.S. market in January. Forest licenses Campral from Germany's

Merck KGaA

. The standard Campral dose is two tablets taken three times daily for patients who have stopped drinking, giving a possible patient-compliance edge to Vivitrex.

Analysts believe Vivitrex could play the biggest role in Alkermes' push to achieve profitability, which the Wall Street consensus predicts for the fiscal year ending March 31, 2007. The Cephalon deal gives Alkermes an upfront payment of $160 million and an added $110 million if Vivtrex is approved by the FDA. Alkermes could receive up to an extra $220 million in milestone payments linked to certain sales levels of the drug.

The Cephalon deal is different than Alkermes' other arrangements, in which the company is asked by other drugmakers to improve their drugs in return for manufacturing fees and royalties. For example, Alkermes collaborates with

Johnson & Johnson


on Risperdal Consta, a longer-lasting version of J&J's schizophrenia drug Risperdal.

The Risperdal pill must be taken once a day; the Alkermes injectable product is administered every two weeks. Risperdal Consta has been available in the U.S. since December 2003. It is marketed in more than 50 countries, and it is Alkermes' biggest revenue source.

"Risperdal Consta ... has exceeded expectations and is the key catalyst" for the fiscal year ending March 31, 2006, says Mara Goldstein of CIBC World Markets in a Wednesday report to clients. Goldstein, who doesn't own shares, has a sector outperform rating on Alkermes. Her firm is a market maker, and it expects to receive or seek investment-banking compensation in the next three months.

Alkermes also is using its technology to improve patient compliance for a pair of diabetes drugs.

It is working with

Eli Lilly


to create a inhaled form of insulin, and it is collaborating with

Amylin Pharmaceuticals


and Lilly to create a once-a-week injectable version of Byetta, their diabetes drug that now must be injected twice daily. Both experimental drugs are still in midstage clinical trials. They are several years away from being commercial candidates.