10-Q 1 b41792aie10-q.txt ALKERMES, INC. U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission file number 0-19267 ALKERMES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2472830 ------------------------------------------ --------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 64 Sidney Street, Cambridge, MA 02139-4136 ------------------------------------------ --------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (617) 494-0171 ----------------------------- Not Applicable -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Shares Outstanding as of Class February 8, 2002 ----- ------------------------ Common Stock, par value $.01 64,140,108 Non-Voting Common Stock, par value $.01 382,632

ALKERMES, INC. AND SUBSIDIARIES INDEX

Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets 3 - December 31, 2001 and March 31, 2001 Consolidated Statements of Operations 4 - Three months ended December 31, 2001 and 2000 - Nine months ended December 31, 2001 and 2000 Consolidated Statements of Cash Flows 5 - Nine months ended December 31, 2001 and 2000 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 PART II - OTHER INFORMATION Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURES 16 EXHIBIT INDEX 17

(2) PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS: ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)

December 31, March 31, 2001 2001 ------------- ------------- A S S E T S Current Assets: Cash and cash equivalents $ 6,773,863 $ 5,923,282 Short-term investments 192,418,946 249,004,850 Receivables from collaborative arrangements 19,194,657 10,951,763 Prepaid expenses and other current assets 4,485,364 5,726,610 ------------- ------------- Total current assets 222,872,830 271,606,505 ------------- ------------- Property, Plant and Equipment: Land 235,000 235,000 Building 5,040,392 4,888,469 Furniture, fixtures and equipment 47,960,724 43,432,360 Leasehold improvements 14,901,948 14,401,828 Construction in progress 13,575,729 562,331 ------------- ------------- 81,713,793 63,519,988 Less accumulated depreciation and amortization (33,040,544) (27,200,590) ------------- ------------- 48,673,249 36,319,398 ------------- ------------- Investments 8,718,509 73,416,252 ------------- ------------- Investment in Reliant Pharmaceuticals, LLC 97,300,000 -- ------------- ------------- Other Assets 8,758,344 9,955,060 ------------- ------------- Total Assets $ 386,322,932 $ 391,297,215 ============= ============= L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y Current Liabilities: Accounts payable and accrued expenses $ 16,959,020 $ 9,414,327 Accrued interest 2,823,837 2,158,087 Deferred revenue 7,476,774 8,523,326 Long-term obligations - current portion 29,150,000 10,966,626 ------------- ------------- Total current liabilities 56,409,631 31,062,366 ------------- ------------- Long-Term Obligations 8,775,000 11,825,000 ------------- ------------- Convertible Subordinated Notes 200,000,000 200,000,000 ------------- ------------- Shareholders' Equity: Capital stock, par value $.01 per share: authorized, 4,550,000 shares; none issued Common stock, par value $.01 per share: authorized, 160,000,000 shares; issued, 64,011,727 and 63,124,248 shares at December 31, 2001 and March 31, 2001, respectively 640,118 631,243 Non-voting common stock, par value $.01 per share: authorized, 450,000 shares; issued, 382,632 at December 31, 2001 and March 31, 2001 3,826 3,826 Additional paid-in capital 442,727,578 427,129,226 Deferred compensation (3,719,727) (1,024,303) Accumulated other comprehensive income 2,852,264 4,179,938 Accumulated deficit (321,365,758) (282,510,081) ------------- ------------- Total shareholders' equity 121,138,301 148,409,849 ------------- ------------- Total Liabilities and Shareholders' Equity $ 386,322,932 $ 391,297,215 ============= =============

See notes to consolidated financial statements. (3) ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended December 31, December 31, December 31, December 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Revenues: Research and development and other revenue under collaborative arrangements $ 11,451,330 $ 9,689,267 $ 41,483,008 $ 46,170,537 ------------ ------------ ------------ ------------ Expenses: Research and development 23,040,406 15,219,191 66,343,134 47,015,921 General and administrative 5,902,600 4,968,541 17,687,732 14,730,013 ------------ ------------ ------------ ------------ Total expenses 28,943,006 20,187,732 84,030,866 61,745,934 ------------ ------------ ------------ ------------ Net operating loss (17,471,676) (10,498,465) (42,547,858) (15,575,397) ------------ ------------ ------------ ------------ Other income (expense): Interest income 4,427,945 5,506,031 13,169,597 16,765,426 Interest expense (2,136,628) (2,365,148) (6,777,416) (7,068,804) ------------ ------------ ------------ ------------ 2,291,317 3,140,883 6,392,181 9,696,622 ------------ ------------ ------------ ------------ Equity in losses of Reliant Pharmaceuticals, LLC (2,700,000) -- (2,700,000) -- ------------ ------------ ------------ ------------ Net loss (17,900,359) (7,357,582) (38,855,677) (5,878,775) Preferred stock dividends -- 2,095,044 -- 5,830,635 ------------ ------------ ------------ ------------ Net loss attributable to common shareholders ($17,900,359) ($ 9,452,626) ($38,855,677) ($11,709,410) ============ ============ ============ ============ Basic and diluted loss per common share ($ 0.28) ($ 0.17) ($ 0.61) ($ 0.21) ============ ============ ============ ============ Weighted average number of common shares outstanding 63,895,510 55,670,025 63,511,558 54,762,414 ============ ============ ============ ============

See notes to consolidated financial statements. (4) ALKERMES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Nine Months Ended Ended December 31, December 31, 2001 2000 ------------- ------------- Cash flows from operating activities: Net loss ($ 38,855,677) ($ 5,878,775) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation, amortization and other noncash expenses 7,497,385 4,945,376 Equity in losses of Reliant Pharmaceuticals, LLC 2,700,000 -- Noncash interest expense 328,626 372,023 Adjustments to other assets 767,467 365,686 Changes in assets and liabilities: Receivables from collaborative arrangements (7,881,893) (29,040,877) Prepaid expenses and other current assets 879,477 (3,527,606) Accounts payable and accrued expenses 9,407,574 988,179 Deferred revenue (1,046,552) (800,964) Other long-term liabilities -- (29,846) ------------- ------------- Net cash used by operating activities (26,203,593) (32,606,804) ------------- ------------- Cash flows from investing activities: Investment in Reliant Pharmaceuticals, LLC (100,000,000) -- Additions to property, plant and equipment (18,744,045) (6,039,695) Proceeds from the sale of equipment 371,385 -- Purchases of available-for-sale short-term investments (157,891,229) (90,025,111) Sales of available-for-sale short-term investments 253,209,397 37,146,104 (Purchases) maturities of held-to-maturity short-term investments, net (39,407,177) 86,849,107 Maturities of long-term investments, net 64,697,743 4,460,909 Increase in other assets (310,000) (221,456) ------------- ------------- Net cash provided by investing activities 1,926,074 32,169,858 ------------- ------------- Cash flows from financing activities: Proceeds from issuance of common stock 4,017,333 3,754,429 Proceeds from loan 25,000,000 -- Payment of long-term obligations (3,883,333) (4,275,000) Payment of preferred stock dividends -- (5,830,635) Proceeds from issuance of common stock to collaborative partner -- 4,999,978 ------------- ------------- Net cash provided by (used by) financing activities 25,134,000 (1,351,228) ------------- ------------- Effect of exchange rate changes on cash (5,900) (38,586) ------------- ------------- Net increase (decrease) in cash and cash equivalents 850,581 (1,826,760) Cash and cash equivalents, beginning of period 5,923,282 6,100,643 ------------- ------------- Cash and cash equivalents, end of period $ 6,773,863 $ 4,273,883 ============= ============= Supplementary information: Cash paid for interest $ 4,583,997 $ 4,829,786 ============= ============= Note payable and accrued interest converted to common stock $ 7,506,331 $ -- ============= =============

See notes to consolidated financial statements. (5) ALKERMES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The consolidated financial statements of Alkermes, Inc. (the "Company") for the three and nine months ended December 31, 2001 and 2000 are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the results of operations for the periods then ended. All such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended March 31, 2001, which includes consolidated financial statements and notes thereto for the years ended March 31, 2001, 2000 and 1999. In addition, the financial statements include the accounts of Alkermes Controlled Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II, Advanced Inhalation Research, Inc. ("AIR"), Alkermes Investments, Inc., Alkermes Europe, Ltd. and Alkermes Development Corporation II ("ADC II"), wholly owned subsidiaries of the Company. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full fiscal year. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. COMPREHENSIVE INCOME (LOSS) Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in the shareholders' equity of the Company that are excluded from net income (loss). Specifically, other comprehensive income includes unrealized holding gains and losses on the Company's "available-for-sale" securities and changes in cumulative foreign currency translation adjustments. Comprehensive income (loss) for the three and nine months ended December 31, 2001 and 2000 is as follows:

Three Months Three Months Ended Ended December 31, 2001 December 31, 2000 ----------------- ----------------- Net loss ($17,900,359) ($ 7,357,582) Cumulative foreign currency translation adjustments (11,499) 9,885 Unrealized gain (loss) on marketable securities 557,328 (1,585,374) ------------ ------------ Comprehensive loss ($17,354,530) ($ 8,933,071) ============ ============

(6)

Nine Months Nine Months Ended Ended December 31, 2001 December 31, 2000 ------------------ ----------------- Net loss ($38,855,677) ($ 5,878,775) Cumulative foreign currency translation adjustments (7,261) (29,312) Unrealized loss on marketable securities (1,320,413) (2,829,124) ------------ ------------ Comprehensive loss ($40,183,351) ($ 8,737,211) ============ ============

3. NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities," on April 1, 2001. The adoption did not have any impact on the financial position or results of operations of the Company. In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is effective for any business combinations initiated after June 30, 2001. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other identifiable intangible assets will continue to be amortized over their useful lives should they be determinable, otherwise they will be subject to the same annual impairment test. The Company, as described in Note 5, did apply SFAS No. 141 to its equity method investment since such investment occurred subsequent to June 30, 2001. Its impact is discussed in Note 5. The adoption of SFAS No. 142 is not expected to have a significant impact on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement will supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets or for Long-Lived Assets to Be Disposed Of," in its entirety, and Accounting Principles Board, or APB Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," only for segments to be disposed of. The provisions of this statement are effective for financial statements issued for fiscal years beginning (7) after December 15, 2001. The Company has not determined the effect, if any, that adoption of this statement will have on its financial position or results of operations. 4. EARNINGS PER SHARE Basic net loss per share is based on the weighted average number of common shares outstanding. For the three and nine months ended December 31, 2001, diluted net loss per common share was the same as basic net loss per common share because the inclusion of the weighted average number of shares of common stock issuable upon the exercise of stock options, which total 11,645,964, and shares of common stock issuable upon conversion of the 3 -3/4% Convertible Subordinated Notes due 2007 (the "3 -3/4% Notes"), which total 2,952,030, would have been antidilutive. For the three and nine months ended December 31, 2000, diluted net loss per common share was the same as basic net loss per common share because the inclusion of the weighted average number of shares of common stock issuable upon the exercise of stock options, which total 9,625,410 shares, and 2,952,030 shares of common stock issuable upon conversion of the 3 -3/4% Notes, would have been antidilutive. 5. INVESTMENT IN RELIANT PHARMACEUTICALS, LLC In December 2001, the Company announced a strategic alliance with Reliant Pharmaceuticals, LLC, a privately held pharmaceutical company marketing branded pharmaceutical products to U.S.-based primary care and targeted specialty physicians. As part of the alliance, in December 2001, Alkermes purchased approximately 63% of an offering by Reliant of its Series C Convertible Preferred Units, representing approximately 19% of the equity interest in Reliant, for a purchase price of $100 million. The investment is being accounted for under the equity method of accounting because Reliant is organized as a limited liability company which is treated in a manner similar to a partnership. Because, at the time of Alkermes' investment, Reliant had an accumulated deficit from operations and a deficit in members capital, under applicable accounting rules, Alkermes' share of Reliant's losses from the date of the investment will be recognized in proportion to the Company's percentage participation in the Series C financing, and not in proportion to its percentage ownership interest in Reliant. Alkermes will record its equity in the income or losses of Reliant three months in arrears. Alkermes anticipates that Reliant will have substantial net losses in at least calendar years 2001 and 2002 and will accordingly record its 63% share of such losses in its consolidated financial statements beginning in the quarter ended March 31, 2002. In connection with the Company's $100 million equity investment in Reliant, the Company is in the process of allocating its proportionate share of the assets acquired and liabilities assumed in accordance with the guidance set forth in SFAS No. 141. The Company has taken a $2.7 million noncash charge for in-process research and development through the income statement under the caption "Equity in losses of Reliant Pharmaceuticals, LLC." The $2.7 million noncash charge is related to management's current estimate of the amount of the purchase price to be allocated to in-process research and development. This analysis of the purchase price allocation is preliminary and the amount of in-process research and development is subject to future adjustment. 6. LONG-TERM OBLIGATIONS - CURRENT PORTION In connection with the Company's investment in Reliant, in December 2001, Alkermes borrowed $25 million from one of its investment managers under a loan agreement that is collateralized by a portion of its investments. The balance of the loan was $25 million at December 31, 2001 and was included in long-term obligations - current portion. Interest is at the Federal Funds Rate plus 75 basis points (2.625% at December 31, 2001). 7. RECLASSIFICATIONS Certain reclassifications have been made to the prior year periods to conform to the presentation used in the current year periods. (8) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Alkermes, Inc. (together with our subsidiaries, "we" or "us") is a leader in the development of products based on sophisticated drug delivery technologies. We have several areas of focus, including: (i) controlled, sustained-release of injectable drugs lasting several days to several weeks, utilizing our ProLease(R) and Medisorb(R) technologies and (ii) the development of pharmaceutical products based on our proprietary Advanced Inhalation Research, Inc. ("AIR(TM)") pulmonary technology. Our first product, Nutropin Depot(R), was launched in the United States by our partner, Genentech, Inc. ("Genentech"), in June 2000. Nutropin Depot is a long-acting form of Genentech's recombinant human growth hormone using our ProLease technology. Since our inception in 1987, we have devoted substantially all of our resources to research and development programs. We expect to incur substantial additional operating losses over the next few years. At December 31, 2001, we had an accumulated deficit of $321.4 million. We have funded our operations primarily through public offerings and private placements of debt and equity securities, bank loans and payments under research and development agreements with collaborators. We historically have developed our product candidates in collaboration with others on whom we relied for funding, development and/or marketing. While we continue to develop product candidates in collaboration with others, we have begun to expand the development of our proprietary product candidates which we fund on our own. FORWARD-LOOKING STATEMENTS Any statements herein or otherwise made in writing or orally by us with regard to our expectations as to financial results and other aspects of our business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations and intentions and may be identified by words like "believe," "expect," "may," "will," "should," "seek," or "anticipate," and similar expressions. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, our business is subject to significant risks and there can be no assurance that actual results of our development and manufacturing activities and our results of operations will not differ materially from our expectations. Factors which could cause actual results to differ from expectations include, among others: (i) we may be unable to continue to manufacture our first product, Nutropin Depot, or to manufacture future products on a commercial scale or economically; (ii) Nutropin Depot and our product candidates, if approved for marketing, may not produce significant revenues and, in commercial use, may have unintended side effects, adverse reactions or incidents of misuse; (iii) even if clinical trials are completed and the data is submitted to the United States Food and Drug Administration ("FDA") as a New Drug Application ("NDA") for marketing approval and to other health authorities as a marketing authorization application, the NDA or marketing authorization application could fail to be accepted, or could fail to receive approval on a timely basis, if at all; (iv) our collaborators could elect to terminate or delay programs at any time; (v) we and our collaborators may not be permitted by regulatory authorities to undertake new or additional clinical trials for product candidates incorporating our technologies, or (9) clinical trials could be delayed; (vi) our product candidates could be ineffective or unsafe during clinical trials; (vii) we could lose our entire investment in Reliant Pharmaceuticals, LLC; (viii) we depend on others to market and sell our products and product candidates; (ix) disputes with collaborators or failure to negotiate acceptable new collaborative arrangements for our technologies could occur; (x) even if our product candidates appear promising at an early stage of development, product candidates could fail to receive necessary regulatory approvals, be difficult to manufacture on a large scale, be uneconomical, fail to achieve market acceptance, be precluded from commercialization by proprietary rights of third parties or experience substantial competition in the marketplace; (xi) technological change in the biotechnology or pharmaceutical industries could render our product candidates obsolete or noncompetitive; (xii) difficulties or set-backs in obtaining and enforcing our patents and difficulties with the patent rights of others could occur; and (xiii) we could incur difficulties or set-backs in obtaining the substantial additional funding required to continue research and development programs and clinical trials. RESULTS OF OPERATIONS Our research and development revenue under collaborative arrangements for the three and nine months ended December 31, 2001 was $11.5 and $41.5 million compared to $9.7 and $46.2 million for the corresponding periods of the prior year. The increase for the three months ended December 31, 2001 as compared to the three months ended December 31, 2000 was the result of an increase in funding earned under collaborative agreements. The decrease for the nine months ended December 31, 2001 compared to the nine months ended December 31, 2000 was primarily the result of a significant non-recurring milestone earned in the nine months ended December 31, 2000, partially offset by an increase in funding earned under other collaborative agreements during the current fiscal year. Total operating expenses increased to $28.9 and $84.0 million for the three and nine months ended December 31, 2001 from $20.2 and $61.7 million for the three and nine months ended December 31, 2000. The increase was due to increases in research and development expenses and general and administrative expenses, which are discussed below. Research and development expenses for the three and nine months ended December 31, 2001 were $23.0 and $66.3 million as compared to $15.2 and $47.0 million for the corresponding periods of the prior year. The increase in research and development expenses for the three and nine months ended December 31, 2001 as compared to the three and nine months ended December 31, 2000 was mainly the result of increases in personnel, external research expenses and lab supplies as we advance our proprietary product candidates and our collaborators' product candidates through development and clinical trials and prepare for commercialization. There was also an increase in occupancy costs and depreciation expense as we continue to expand our facilities in both Massachusetts and Ohio. We expect an increase in research and development expenses during fiscal 2002 resulting from the continuing development of our proprietary product candidates and collaborators' product candidates. General and administrative expenses for the three and nine months ended December 31, 2001 were $5.9 and $17.7 million as compared to $5.0 and $14.7 million for the corresponding periods of the prior year. The increase in the three and nine months ended December 31, 2001 as compared to the (10) three and nine months ended December 31, 2000 was primarily a result of an increase in personnel as well as increased professional fees and consulting costs. Interest income for the three and nine months ended December 31, 2001 was $4.4 and $13.2 million compared to $5.5 and $16.8 million for the corresponding periods of the prior year. The decrease in such income for the three and nine months ended December 31, 2001 as compared to the three and nine months ended December 31, 2000 was primarily the result of a lower average cash and investment balance as compared to the prior year periods. Interest income also decreased as a result of a decline in interest rates as compared to the same periods in the prior year. Interest expense for the three and nine months ended December 31, 2001 was $2.1 and $6.8 million as compared to $2.4 and $7.1 million for the corresponding periods of the prior year. The decrease in interest expense for the three and nine months ended December 31, 2001 as compared to the three and nine months ended December 31, 2000 was primarily the result of a decrease in the average outstanding debt balance as compared to the prior year periods. In December 2001, we announced a strategic alliance with Reliant Pharmaceuticals, LLC. As part of the alliance, in December 2001, we purchased approximately 63% of an offering by Reliant of its Series C Convertible Preferred Units, representing approximately 19% of the equity interest in Reliant, for a purchase price of $100 million. The investment is being accounted for under the equity method of accounting because Reliant is organized as a limited liability company which is treated in a manner similar to a partnership. As a result of Reliant's accumulated deficit from operations and deficit in members capital, our share of Reliant's losses from the date of our investment will be recognized in proportion to our percentage participation in the Series C financing, and not in proportion to our percentage ownership interest in Reliant. Alkermes will record its equity in the income or losses of Reliant three months in arrears. We anticipate that Reliant will have substantial net losses in at least calendar years 2001 and 2002 and we will accordingly record our 63% share of such losses in our consolidated financial statements beginning in the quarter ended March 31, 2002. In connection with our $100 million equity investment in Reliant, we are in the process of allocating our proportionate share of the assets acquired and liabilities assumed in accordance with the guidance set forth in SFAS No. 141. We have taken a $2.7 million noncash charge for in-process research and development through the income statement under the caption "Equity in losses of Reliant Pharmaceuticals, LLC." The $2.7 million noncash charge is related to management's current estimate of the amount of the purchase price to be allocated to in-process research and development. This analysis of the purchase price allocation is preliminary and the amount of in-process research and development is subject to future adjustment. We do not believe that inflation and changing prices have had a material impact on our results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents and short-term investments were approximately $199.2 million at December 31, 2001 as compared to $254.9 million at March 31, 2001. The decrease in cash and cash equivalents and short-term investments was primarily the result of the $100 million equity investment in Reliant Pharmaceuticals, LLC in December 2001, as discussed above. The decrease in cash and short-term investments was also a result of cash used to fund our operations, to acquire fixed assets and to make principal payments on our indebtedness. The decrease in cash and short-term investments was partially offset by investments classified as long-term at March 31, 2001 now having a maturity period of less than 12 months which, as a result, are classified as short-term investments at December 31, 2001. In connection with our investment in Reliant, in December 2001 we received $25 million in proceeds under a loan agreement with one of our investment managers. The balance of the loan was $25 million at December 31, 2001. We invest in cash equivalents, U.S. Government obligations, high-grade corporate notes and commercial paper, with the exception of our recent $100 million investment in Reliant. Our investment objectives for such investments taken as a whole are, first, to assure liquidity and conservation of capital, and second, to obtain investment income. Investments (11) classified as long-term at December 31, 2001 consist of U.S. Government obligations held as collateral under certain letters of credit, lease and loan agreements. During the quarter ended December 31, 2001, the portion of the investment portfolio that was classified as "held-to-maturity" was changed to "available-for-sale" to provide more flexibility with our investment portfolio. All of our investments in debt securities are now classified as "available-for- sale" and are recorded at fair value. Fair value was determined based on quoted market prices. In August 2001, Janssen Pharmaceutica Products, LP submitted an NDA with the FDA for a long-acting injectable formulation of Risperdal(R) (risperidone) based on our proprietary Medisorb technology. Similar filings continue to be submitted with health authorities worldwide. If approved, it would be the first atypical antipsychotic medication available in a formulation suitable for long-term use that requires administration just once every two weeks, instead of daily doses. We have funded our operations primarily through public offerings and private placements of debt and equity securities, bank loans and payments under research and development agreements with collaborators. We expect to incur significant additional research and development and other costs in connection with collaborative arrangements and as we expand the development of our proprietary product candidates, including costs related to preclinical studies, clinical trials and facilities expansion. Therefore, we expect that our costs will exceed revenues significantly for the next few years, which will result in continuing losses from operations. Capital expenditures were approximately $18.7 million for the nine months ended December 31, 2001, principally reflecting equipment purchases and building expansion and improvements. We expect our capital expenditures to increase significantly during fiscal years 2002 and 2003 as we expand our facilities in both Massachusetts and Ohio. Our capital expenditures for equipment, facilities and building improvements have been financed to date primarily with proceeds from bank loans and the sales of debt and equity securities. Under the provisions of our existing loans, Fleet National Bank has a security interest in certain of our assets. We will continue to pursue opportunities to obtain additional financing in the future. Such financing may be sought through various sources, including debt and equity offerings, corporate collaborations, bank borrowings, lease arrangements relating to fixed assets or other financing methods. The source, timing and availability of any financings will depend on market conditions, interest rates and other factors. Our future capital requirements will also depend on many factors, including continued scientific progress in our research and development programs (including our proprietary product candidates), the magnitude of these programs, progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, the establishment of additional collaborative arrangements, the cost of manufacturing facilities and of commercialization activities and arrangements and the cost of product in-licensing and any possible acquisitions. We may need to raise substantial additional funds for longer-term product development, including development of our proprietary product candidates, regulatory approvals and (12) manufacturing and marketing activities that we might undertake in the future. There can be no assurance that additional funds will be available on favorable terms, if at all. If adequate funds are not available, we may be required to curtail significantly one or more of our research and development programs and/or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or future products. ACCOUNTING PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities," on April 1, 2001. The adoption did not have any impact on our financial position or results of operations. In June 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 is effective for any business combinations initiated after June 30, 2001. SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other identifiable intangible assets will continue to be amortized over their useful lives should they be determinable, otherwise they will be subject to the same annual impairment test. We, as described in Note 5, did apply SFAS No. 141 to our equity method investment since such investment occurred subsequent to June 30, 2001. The impact is discussed in Note 5. The adoption of SFAS No. 142 is not expected to have a significant impact on our financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement will supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets or for Long-Lived Assets to Be Disposed Of," in its entirety, and Accounting Principles Board, or APB, Opinion No. 30, "Reporting the Results of Operations- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," only for segments to be disposed of. The provisions of this statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has not determined the effect, if any, that adoption of this statement will have on our financial position or results of operations. (13) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As part of our investment portfolio we own financial instruments that are sensitive to market risks. The investment portfolio, excluding our recent $100 million investment in Reliant, is used to preserve our capital until it is required to fund operations, including our research and development activities. Our short-term investments and investments consist of U.S. Government obligations, high-grade corporate notes and commercial paper. During the quarter ended December 31, 2001, the portion of the investment portfolio that was classified as "held-to-maturity" was changed to "available-for-sale" to provide more flexibility with our investment portfolio. All of our investments in debt securities are now classified as "available-for- sale" and are recorded at fair value. Our investments, excluding our investment in Reliant, are subject to interest rate risk, and could decline in value if interest rates increase. Due to the conservative nature of our short-term investments and investments we do not believe that we have a material exposure to interest rate risk. Although our investments are subject to credit risk (excluding our investment in Reliant), our investment policies specify credit quality standards for our investments and limit the amount of credit exposure from any single issue, issuer or type of investment. Our "available-for-sale" marketable securities are sensitive to changes in interest rates. Interest rate changes would result in a change in the fair value of these financial instruments due to the difference between the market interest rate and the rate at the date of purchase of the financial instrument. A 10% decrease in quarter-end market interest rates would result in no material impact on the net fair value of such interest-sensitive financial instruments. The interest rates on our 3-3/4% Notes are fixed and, therefore, are not subject to interest rate risk. (14) PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION In December 2001, we announced a strategic alliance with Reliant Pharmaceuticals, LLC, a privately held pharmaceutical company marketing branded pharmaceutical products to U.S.-based primary care and targeted specialty physicians. As part of the alliance, in December 2001, we purchased Series C Preferred Units of Reliant, representing approximately 19% of the equity interest in Reliant, for a purchase price of $100 million. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:

Number Exhibit ------ ------- 3.1 Third Amended and Restated Articles of Incorporation as filed with the Pennsylvania Secretary of State on June 7, 2001. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended March 31, 2001). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of February 11, 2001. (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal year ended March 31, 2001). 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, as amended (File No. 33-40250)). 4.2 Specimen of Non-Voting Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.4 to the Company's Report on Form 10-K for the fiscal year ended March 31, 1999). 4.3 Indenture, dated as of February 18, 2000, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-3, as amended (File No. 333-31354)). 10.1 Series C Preferred Unit Subscription Agreement, dated as of December 17, 2001, among Reliant Pharmaceuticals, LLC, Alkermes, Inc., Bay City Capital Fund III, L.P. and Pharmbay Investors, L.L.C.

(b) During the quarter ended December 31, 2001, the Company filed no Reports on Form 8-K. (15) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALKERMES, INC. (Registrant) Date: February 14, 2002 By: /s/ Richard F. Pops -------------------------------- Richard F. Pops Chief Executive Officer and Director (Principal Executive Officer) Date: February 14, 2002 By: /s/ James M. Frates --------------------------------- James M. Frates Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) (16) EXHIBIT INDEX

Exhibit Number Description ------- ----------- 3.1 Third Amended and Restated Articles of Incorporation as filed with the Pennsylvania Secretary of State on June 7, 2001. (Incorporated by reference to Exhibit 3.1 to the Company's Report on Form 10-K for the fiscal year ended March 31, 2001). 3.2 Amended and Restated By-Laws of Alkermes, Inc., effective as of February 11, 2001. (Incorporated by reference to Exhibit 3.2 to the Company's Report on Form 10-K for the fiscal year ended March 31, 2001). 4.1 Specimen of Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, as amended (File No. 33-40250)). 4.2 Specimen of Non-Voting Common Stock Certificate of Alkermes, Inc. (Incorporated by reference to Exhibit 4.4 to the Company's Report on Form 10-K for the fiscal year ended March 31, 1999). 4.3 Indenture, dated as of February 18, 2000, between Alkermes, Inc. and State Street Bank and Trust Company, as Trustee. (Incorporated by reference to Exhibit 4.6 to the Company's Registration Statement on Form S-3, as amended (File No. 333-31354)). 10.1 Series C Preferred Unit Subscription Agreement, dated as of December 17, 2001, among Reliant Pharmaceuticals, LLC, Alkermes, Inc., Bay City Capital Fund III, L.P. and Pharmbay Investors, L.L.C.

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