Alkermes (ALKS): Buyback boosts biotech bet

"Alkermes (NASDAQ: ALKS) recently produced a two-pronged positive surprise; an increase in the size of their already existing stock buyback program and a boost in their financial guidance," says John McCamant.

In his Medical Technology Stock Letter, the biotech sector expert looks at this firm which focuses on treatments for central nervous system disorders, alcohol depenence, and schizophrenia. Here is his review.

"Both of these moves were made possible by the announcement that ALKS has received a $40 million payment from Eli Lilly, their former partner for the now defunct AIR Insulin program.

"ALKS now has the authorization to buy back up to $215 million in common stock. To date, the company has bought back roughly eight million shares of common stock for a cost of about $106 million.

"Additionally, as noted, ALKS has upped their financial guidance for fiscal 2009. Operating income for the year is now expected to end up on the positive side of the ledger, with ALKS anticipating $10-$15 million for the full year.

"They had previously been guiding for an operating loss of $10-$15 million for the full year. And a similar increase in net income is also expected, and earnings per share (EPS) are anticipated to total $0.11-$0.16 (versus the original guidance of an EPS loss of $0.11-$0.16).

"Keep in mind, as well, that these EPS figures are based on outstanding shares which are expected to decrease as ALKS continues to execute their stock buyback. In other words, we would not be surprised to see ALKS' fiscal 2009 EPS figure come in even higher than this new guidance.

"We have believed that ALKS was a solid investment opportunity even after Lilly decided to leave the AIR Insulin development program. The other pieces of the company are just too compelling for this not to be the case, especially at current valuations.

"The stock traded down to just below current levels based on the irrational reaction to the AIR Insulin news, as well as the over-reaction/misinterpretation of the company's fiscal 2008 year-end financials.

"We view this latest piece of news on the increase in size of the stock buyback as further testament to the notion that management, by and large, knows how to maximize shareholder value.

"The simple fact is, ALKS has plenty of cash, and a solid revenue stream which greatly eases the impact of the company spending this cash. As such, they are in a great position to immediately increase current shareholder value by continuing to buy back their own stock.

"Further, they can do all of this without negatively impacting the progress of their R&D efforts. We applaud ALKS for this latest maneuver-through which management is sending a strong message that they view their stock as currently undervalued. The increase in guidance for the current fiscal year is also a nice bonus."