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'Innovation is key to us joining the big leagues'

It's just coming up to 10 o'clock on a crisp Tuesday morning, and Richard Pops is running late for interview at Dublin's Merrion Hotel. It's hard to blame him.

He's been meeting Taoiseach Enda Kenny across the road at Government Buildings as the company he heads -- Alkermes -- has just completed its corporate shift to Dublin from Massachusetts.

The drug manufacturing and development company last week finalised its near-$1bn (€730m) acquisition of Elan's drug technology unit (EDT), in a deal that results in a cash payout of $500m for the Irish company and an additional $500m or so of stock in a new Nasdaq-listed Alkermes entity.

It's been a busy few months for Mr Pops, and the deal is a transformational one for the company (it will more than double turnover), where he was first appointed chief executive in 1991 at a youthful 28, after working at finance house Paine Webber.

The Elan unit had been up for sale -- on and off -- for three years before Alkermes stepped into the fray. The purchase includes Elan's former manufacturing facility in Athlone, where almost 450 people are employed, and another in Gainesville, Georgia.

A variety of drugs are made for clients by EDT, including multiple sclerosis treatment Ampyra for Acorda Therapeutics, and Invega Sustenna, a treatment for schizophrenia, for Janssen.

Others include treatments for chronic pain and cholesterol reduction. About five of the drugs it makes won't come off patent until some time in the next decade, while the unit also has proprietary drug delivery technology.

Just three months after Elan shelved its latest plan in August last year to sell the EDT business amid precarious market conditions, Richard Pops decided to give Elan chief executive Kelly Martin a call.

"I knew Kelly Martin well enough to be able to phone him. The biopharmaceutical world is quite a small one. We had a number of mutual friends and we first started talking around November," recalls Mr Pops.

"We had very clear expectations of our own organic growth, and we weren't going to be interested in the Elan drug technology business if it was simply going to be a stable series of cash flows," he explains.

"What we needed was scientific capability and growth in the form of new products and that's what we got."

Elan's EDT business turned over $274.1m in 2010, and operating income of $60.8m, down from $70.5m the year before.

Alkermes reported revenues of $186.6m in its latest financial year and a net loss of $45.5m. The company receives manufacturing and royalty revenue from drugs, with Risperdal Consta, a schizophrenia treatment owned by Janssen, being its biggest earner last year.

Negotiations in structuring the EDT deal were relatively uncomplicated, according to Mr Pops.

"They were remarkably straightforward. EDT has the advantage of being a business with true cash flows that one can model from a financial perspective in a fairly reliable way," he says, adding that there were particular "principles of negotiation" that both Alkermes and Elan were agreed on. "One was that a significant component of the consideration would be in our stock. That was for two reasons.

"We didn't want to leverage the company by borrowing an excessive amount and we could deliver more value to Elan shareholders by offering stock and letting it appreciate. So far that's proven to be true."

Alkermes currently has a market capitalisation of about $1.6bn and Elan owns 25pc of the business. Elan is expected to begin selling down that stake once its six-month lock-in period expires next year.

Mr Pops says that Alkermes was "quite interested" in taking advantage of capital markets to help fund the deal. It borrowed $450m from lenders HSBC and Morgan Stanley -- money which could conceivably be repaid within four to five years, perhaps sooner. Alkermes is also sitting on a $250m cash pile.

Mr Pops points out that there are a couple of important milestones coming up for the company over the next 12 months.

One of them is a long-awaited decision by the US Food and Drug Administration on possible approval for its Bydureon drug, which is used to treat type 2 diabetes, which Mr Pops describes as the "disease of our generation" that will have massive economic and medical implications in the developed world.

The Ampyra and Sustenna drugs will also be rolled out to more markets around the world, generating additional revenue.

"As we begin to have real confidence in how we can model cash flow, then we can decide how to tune the debt level," says Mr Pops. "But it's important to note that the transaction occurred at a moment in time when debt rates and availability of debt capital was at historic low levels, so we're quite comfortable with this $450m of financing that sits there. We feel no compelling need to reduce that debt level immediately."

Mr Pops doesn't see any potential perception problems with giving Alkermes a dual stock market listing in Dublin, saying such a move -- which would be some time down the track if it happens -- would simply improve stock liquidity.

Meanwhile, the old Elan logo in Athlone has been replaced by Alkermes, and Mr Pops, who was joined by a bevy of local bigwigs this week as the company took over the site, says he's hugely impressed with the facility. He's also been sounding out Enterprise Ireland regarding available supports for future expansion here.

But for now, the EDT acquisition has helped to transform the company that Mr Pops led until 2007 when he left, before re-taking the helm in 2009 as CEO and chairman.

"The R&D side of the business needed to be rejuvenated," he says of his return to the hotseat two years ago. "We had such great R&D capabilities and we had, by necessity, focused in on building a series of manufacturing plants and getting certain late stage products approved," he explains.

"You lose your focus on the innovation engine, and it's something I thought we could accelerate significantly."

That innovation engine is what Mr Pops is hoping will catapult Alkermes into the big league. Many big pharma companies are facing so-called patent cliffs, with products that are major revenue generators coming off patent, leaving them open to competition from cheaper generic versions.

"Big pharma has demonstrated that massively scaling up R&D didn't translate vastly to increased productivity," he maintains. "Smaller, more agile, focused, elite groups of scientists working in small groups -- that's where the innovation comes from."

He describes Alkermes as being in the "enviable position" following its EDT acquisition of being big enough, with recurring revenues, that it doesn't have to reply on capital markets to fund its operations.

"But we're small and agile enough that we still have that entrepreneurial biotech culture that leads to innovation."

Mr Pops adds that the biotech environment has become so much more advanced than in the past that it's not necessary to throw vast sums of money at scientists simply in the hope that they'll come up with something.

"Before it was really blind luck. Now we can rationally design really exciting medicines, but if society isn't prepared to pay for them, then the innovation will go away."

Still, he remains optimistic.

"We're in a moment of time right now where the understanding of the biology, coupled with our understanding of genomics and our expanding knowledge of physical chemistry, that we have the tools to develop medicines in a way that never existed before."

And that could all bode very well for Athlone's economic lifeblood.

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