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After an extraordinary downshift in the outlook for specialty pharma player Alkermes ( ALKS - Get Report), the stock is beginning to look more attractive now that a bit of reality has set in.

Earlier in the year, the company had been riding high on the prospects for its new alcoholism treatment, Vivitrol, and a generous co-promotion deal with Cephalon . This product reached the U.S. market in June, and in its first full quarter on the market, it missed just about all of the market's forecasts with only $1.1 million in sales. This prompted management to bring down its Vivitrol sales forecasts for the full year to a range of $5 million to $10 million, from $35 million to $40 million, previously. This performance also brought at least one high-profile analyst downgrade and more cautious investor sentiment overall.

Alkermes still faces an uncertain market outlook for Vivitrol based on its modest ramp-up and the difficulties of other treatments in this space. I'm now more comfortable with the stock, though, as there is a more balanced market perspective on Vivitrol going forward. In fact, the shares are off nearly 40% from their peak earlier this year and are down 16% year to date.

I suspect that Vivitrol may still cause further volatility for shareholders, but the main appeal of Alkermes rests in its differentiated drug-delivery technologies and solid late-stage diabetes pipeline. With Vivitrol expectations now deflated, I believe the shares will be better able to move forward on the strength of their core delivery capabilities and pipeline opportunities.

It's All in the Delivery

Alkermes' roots are in its three core drug-delivery technologies that provide extended release activity or the pulmonary administration of drugs. I believe these technologies are valuable for the enhancement of many currently marketed medications. In fact, the company's main cash cow is Risperdal Consta, which is the extended two-week injectible version of Johnson & Johnson's ( JNJ - Get Report) schizophrenia treatment, Risperdal. This extended-release version has an important compliance advantage in the treatment of this severe patient population.

I believe the company's efforts in the diabetes segment with Eli Lilly ( LLY - Get Report) hold similar potential to greatly enhance therapeutic options for patients. The most immediate opportunity is in the development of Exanatide LAR, which is the extended version of Lilly and Amylin's popular diabetes treatment, Byetta. Since Byetta is currently dosed as a twice-a-day injection for type II diabetics, the extended once-a-week version of Exanatide LAR is a major drug-delivery enhancement.

The next key catalyst in the progression of this product line will be the mid '07 release of head-to-head phase 2 data of Exanatide LAR in comparison to Byetta. Favorable efficacy and tolerability observations from this trial should greatly improve visibility for the long-term prospects of Exanatide LAR.

The other major product opportunity in the diabetes space is also with Eli Lilly for AIR Insulin, which is an inhalable version of insulin for type I diabetics. This product will compete with Pfizer ( PFE - Get Report) and Nektar's ( NKTR - Get Report) Exubera, as well as two or three others, by the time it reaches the market around 2009.

At this time, the key differentiating feature is the delivery mechanism. Both Alkermes' AIR Insulin and Mannkind's Technosphere system are believe to be more efficient and easier to use than Nektar's first-generation product. Importantly, I believe Pfizer is doing much of the heavy lifting to develop the inhaled-insulin space through its early launch efforts with Exubera. Although the inhaled-insulin landscape is likely to remain highly competitive, I believe the company's partnership with a dominant diabetes firm, like Lilly, assures it a seat at the table.

In addition, Alkermes has other earlier-stage pipeline opportunities from which to develop its value-added delivery technology. The company recently entered into a small-molecule collaboration with Rensselaer Polytechnic Institute for several pain treatment compounds. I expect that additional collaboration opportunities will further improve sentiment toward Alkermes' lowly share price.

Of course, near-term Vivitrol sales trends have the potential to cause further volatility for the stock, but I believe the risk/reward for this franchise looks much more favorable going forward. Importantly, the company's investment in Vivitrol is not a black hole, as start-up expenses for Alkermes are capped at the $120 million level through the end of '07.

Cephalon will reimburse Alkermes with all near-term expenses beyond that level, and the companies will equally share in the P&L in 2008 and beyond. The initial deal with Cephalon was very favorable for Alkermes, as the company has already received $270 million in milestones on Vivitrol, which eases near-term funding demands. In addition, Alkermes has already reached profitability and boasts a $321 million cash balance.

I'm glad to see management's optimistic expectations for the unproven Vivitrol franchise revert to more reasonable levels. Although there are no major near-term catalysts for Alkermes shares, I believe the disruption from the Vivitrol launch is likely to provide a good long-term opportunity for investors to gain exposure to both their attractive pipeline and their drug-delivery technologies.

At the time of publication, Michael Latwis had no holdings, although positions may change at any time.

Michael Latwis has directed health care content at Professional Products. He also has worked at Barclays Wealth management division and was previously associated with Lazard Freres and Fiduciary Trust. Latwis covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, healthcare services, retail and media stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Latwis appreciates your feedback; click here to send him an email.