##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q  þ
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2004   ̈
    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 1-14131 ALKERMES, INC.    (Exact name of registrant as specified in its charter) PENNSYLVANIA
    
    23-2472830(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)88 Sidney Street, Cambridge, MA
    
    02139-4136(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number including area code: (617) 494-0171    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 þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o The number of shares outstanding of each of the issuers classes of common stock was: Class
    

As of February 7, 2005Common Stock, $.01 par value
    
    
    89,948,295Non-Voting Common Stock, $.01 par value
    
    
    382,632




---



ALKERMES, INC. AND SUBSIDIARIES INDEX Page No.PART I  FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets  December 31, 2004 and March 31, 2004
    
    
    3Condensed Consolidated Statements of Operations  For the Three and Nine Months
Ended December 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows  For the Nine Months Ended
December 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 6. Exhibits
    
    
    24Signatures
    
    
    26Exhibit Index
    
    
    27Ex-10.1 Promissory Note dated December 22, 2004Ex-10.2 Master Security Agreement dated December 22, 2004Ex-10.3 Addendum No. 001 to Master Security AgreementEx-10.4 4th Amend. to Development Agmnt. and 1st Amend. to Manufacturing and Supply Agmnt.Ex-10.5 3rd Amend. to Development Agmnt., 2nd Amend. to Manufacturing and Supply Agmnt.Ex-10.6 Agreement dated December 21, 2002Ex-10.7 Amendment to Agreement dated December 16, 2003Ex-10.8 Amendment to Manufacturing and Supply AgreementEx-10.9 Fourth Amendment to Manufacturing and Supply AgreementEx-31.1 Section 302 Certification of the C.E.O.Ex-31.2 Section 302 Certification of the C.F.O.Ex-32.1 Section 906 Certification of C.E.O. & C.F.O.
  2




---



##### Table of Contents



PART 1. FINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Financial Statements (Unaudited): ALKERMES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 December 31,
    
    
    March 31,(In thousands, except share and per share amounts)
    
    2004
    
    
    2004A S S E T SCurrent Assets:Cash and cash equivalents
    
    $
    35,716
    
    
    $
    9,899Investments - short term
    
    
    42,400
    
    
    
    134,037Receivables
    
    
    14,371
    
    
    
    11,526Inventory
    
    
    3,128
    
    
    
    2,605Prepaid expenses and other current assets
    
    
    1,772
    
    
    
    2,156Total current assets
    
    
    97,387
    
    
    
    160,223Property, Plant and Equipment:Land
    
    
    235
    
    
    
    235Building
    
    
    16,250
    
    
    
    15,718Furniture, fixtures and equipment
    
    
    64,762
    
    
    
    69,016Equipment under capital lease
    
    
    464
    
    
    
    464Leasehold improvements
    
    
    45,995
    
    
    
    56,809Construction in progress
    
    
    11,097
    
    
    
    3,489138,803
    
    
    
    145,731Less accumulated depreciation and amortization
    
    
    (46,420
    )
    
    
    (49,988
    )92,383
    
    
    
    95,743Restricted Investments - Long Term
    
    
    4,906
    
    
    
    5,012Other Assets
    
    
    7,135
    
    
    
    9,052Total Assets
    
    $
    201,811
    
    
    $
    270,030L 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 YCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    19,100
    
    
    $
    18,209Accrued interest
    
    
    1,052
    
    
    
    264Accrued restructuring costs
    
    
    1,311
    
    
    
    1,138Deferred revenue
    
    
    
    
    
    
    17,173Derivative liability related to convertible subordinated notes
    
    
    2,307
    
    
    
    4,650Term loan
    
    
    1,123
    
    
    
    Obligation under capital lease
    
    
    87
    
    
    
    82Total current liabilities
    
    
    24,980
    
    
    
    41,516Accrued Restructuring Costs
    
    
    2,338
    
    
    
    Obligation Under Capital Lease
    
    
    272
    
    
    
    338Term loan
    
    
    2,553
    
    
    
    2 1/2% Convertible Subordinated Notes
    
    
    122,152
    
    
    
    121,5703.75% Convertible Subordinated Notes
    
    
    676
    
    
    
    676Convertible Preferred Stock, par value $.01 per share: authorized and issued, 3,000
shares at December 31, 2004 and March 31, 2004 (at liquidation preference)
    
    
    30,000
    
    
    
    30,000Shareholders Equity:Capital stock, par value, $.01 per share; authorized, 4,550,000 shares
(includes 2,997,000 shares of preferred stock); issued, none
    
    
    
    
    

    
    Common stock, par value $.01 per share; authorized, 160,000,000 shares;
issued and outstanding, 89,941,890 and 89,305,261 shares at December 31, 2004 and
March 31, 2004, respectively
    
    
    899
    
    
    
    893Non-voting common stock, par value $.01 per share; authorized, 450,000 shares; issued and
outstanding, 382,632 shares at December 31, 2004 and March 31, 2004
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    630,154
    
    
    
    627,446Deferred compensation
    
    
    
    
    
    
    (276
    )Accumulated other comprehensive income
    
    
    342
    
    
    
    1,010Accumulated deficit
    
    
    (612,559
    )
    
    
    (553,147
    )Total Shareholders Equity
    
    
    18,840
    
    
    
    75,930Total Liabilities and Shareholders Equity
    
    $
    201,811
    
    
    $
    270,030
 See Notes to Condensed Consolidated Financial Statements. 3




---



##### Table of Contents



ALKERMES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 Three Months Ended December 31,
    
    
    Nine Months Ended December 31,(In thousands, except share and per share amounts)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Revenues:Manufacturing and royalty revenues
    
    $
    16,574
    
    
    $
    8,636
    
    
    $
    34,476
    
    
    $
    15,491Research and development revenue under collaborative arrangements
    
    
    7,011
    
    
    
    2,585
    
    
    
    18,617
    
    
    
    7,482Total revenues
    
    
    23,585
    
    
    
    11,221
    
    
    
    53,093
    
    
    
    22,973Expenses:Cost of goods manufactured
    
    
    4,930
    
    
    
    4,069
    
    
    
    12,561
    
    
    
    11,197Research and development
    
    
    20,058
    
    
    
    21,148
    
    
    
    66,780
    
    
    
    66,226Sales, general and administrative
    
    
    6,868
    
    
    
    6,538
    
    
    
    21,286
    
    
    
    18,236Restructuring
    
    
    
    
    
    
    
    
    
    
    11,896
    
    
    
    Total expenses
    
    
    31,856
    
    
    
    31,755
    
    
    
    112,523
    
    
    
    95,659Net operating loss
    
    
    (8,271
    )
    
    
    (20,534
    )
    
    
    (59,430
    )
    
    
    (72,686
    )Other income (expense):Interest income
    
    
    646
    
    
    
    957
    
    
    
    1,936
    
    
    
    2,600Other income (expense), net
    
    
    131
    
    
    
    (746
    )
    
    
    (729
    )
    
    
    1,762Derivative (losses) income related to convertible subordinated notes
    
    
    (347
    )
    
    
    650
    
    
    
    2,343
    
    
    
    (4,014
    )Interest expense
    
    
    (1,158
    )
    
    
    (1,190
    )
    
    
    (3,532
    )
    
    
    (5,317
    )Total other income (expense)
    
    
    (728
    )
    
    
    (329
    )
    
    
    18
    
    
    
    (4,969
    )Net loss
    
    $
    (8,999
    )
    
    $
    (20,863
    )
    
    $
    (59,412
    )
    
    $
    (77,655
    )Net loss per common share, basic and diluted
    
    $
    (0.10
    )
    
    $
    (0.23
    )
    
    $
    (0.66
    )
    
    $
    (0.97
    )Weighted average number of common shares outstanding, basic and diluted
    
    
    90,176,261
    
    
    
    89,013,535
    
    
    
    90,010,880
    
    
    
    79,719,932
 See Notes to Condensed Consolidated Financial Statements. 4




---



##### Table of Contents



ALKERMES, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended December 31,(In thousands)
    
    2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (59,412
    )
    
    $
    (77,655
    )Adjustments to reconcile net loss to net cash used by operating activities:Depreciation and amortization
    
    
    8,006
    
    
    
    8,235Gain on sale of equipment
    
    
    (40
    )
    
    
    (96
    )Restructuring charges
    
    
    11,896
    
    
    
    Other non cash charges
    
    
    3,046
    
    
    
    2,802Loss (gain) on warrants held
    
    
    729
    
    
    
    (1,762
    )Derivative (income) losses related to convertible subordinated notes
    
    
    (2,343
    )
    
    
    4,014Changes in assets and liabilities:Receivables
    
    
    (2,845
    )
    
    
    (1,912
    )Inventory, prepaid expenses and other current assets
    
    
    (1,513
    )
    
    
    (3,815
    )Accounts payable, accrued expenses and accrued interest
    
    
    1,678
    
    
    
    (762
    )Accrued restructuring costs
    
    
    (1,235
    )
    
    
    (1,843
    )Deferred revenue
    
    
    (17,173
    )
    
    
    (1,553
    )Net cash used by operating activities
    
    
    (59,206
    )
    
    
    (74,347
    )Cash flows from investing activities:Additions to property, plant and equipment
    
    
    (12,696
    )
    
    
    (12,704
    )Proceeds from sale of fixed assets
    
    
    66
    
    
    
    784Purchases of available-for-sale investments
    
    
    (19,101
    )
    
    
    (194,388
    )Sales of available-for-sale investments
    
    
    110,513
    
    
    
    105,119Increase in other assets
    
    
    (130
    )
    
    
    (98
    )Net cash provided by (used by) investing activities
    
    
    78,652
    
    
    
    (101,287
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2,756
    
    
    
    1,955Borrowings under term loan
    
    
    3,676
    
    
    
    Proceeds from issuance of 2 1/2% Convertible Subordinated Notes
    
    
    
    
    
    
    125,000Payment of long-term obligations
    
    
    (61
    )
    
    
    (7,825
    )Payment of financing costs in connection with the 2 1/2% Convertible Subordinated Notes
    
    
    
    
    
    
    (3,962
    )Net cash provided by financing activities
    
    
    6,371
    
    
    
    115,168Effect of exchange rate changes on cash
    
    
    
    
    
    
    (64
    )Net increase (decrease) in cash and cash equivalents
    
    
    25,817
    
    
    
    (60,530
    )Cash and cash equivalents, beginning of period
    
    
    9,899
    
    
    
    72,479Cash and cash equivalents, end of period
    
    $
    35,716
    
    
    $
    11,949Supplementary information:Cash paid for interest
    
    $
    1,600
    
    
    $
    7,894Cash paid for income taxes
    
    
    
    
    
    
    84Conversion of 6.52% Convertible Senior Subordinated Notes and interest into common stock
    
    
    
    
    
    
    177,264Equipment acquired under capital leases
    
    
    
    
    
    
    464
 See Notes to Condensed Consolidated Financial Statements. 5




---



##### Table of Contents



ALKERMES, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed consolidated financial statements of Alkermes, Inc. (the Company) are
unaudited and have been prepared on a basis substantially consistent with the audited financial
statements. The condensed consolidated financial statements, in the opinion of management, include
all adjustments which are necessary to present fairly the results of operations for the reported
periods. The Companys condensed consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America (GAAP) and follow the
requirements of the Securities and Exchange Commission (SEC) for interim reporting. These financial statements should be read in conjunction with the Companys audited consolidated
financial statements and notes thereto which are contained in the Companys Annual Report on Form
10-K for the year ended March 31, 2004, filed with the SEC. 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. Principles of Consolidation The condensed consolidated financial statements include the accounts of Alkermes Controlled
Therapeutics, Inc., Alkermes Controlled Therapeutics Inc. II (ACT II), Advanced Inhalation
Research, Inc. (AIR®), Alkermes Investments, Inc., Alkermes Europe, Ltd., Alkermes
Development Corporation II (ADCII) and RC Royalty Sub LLC (Royalty Sub), wholly owned
subsidiaries of the Company. Intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with GAAP necessarily requires management to
make estimates and assumptions that affect the following: (1) reported amounts of assets and
liabilities; (2) disclosure of contingent assets and liabilities at the date of the consolidated
financial statements; and (3) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. New Accounting Pronouncements In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123
(revised 2004), Share-Based Payment (SFAS 123R), which requires companies to measure and
recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective
for all interim periods beginning after June 15, 2005 and, thus, will be effective for the Company
beginning with the second quarter of fiscal 2006 (i.e. the quarter ending September 30, 2005).
Early adoption is encouraged and retroactive application of the provisions of SFAS 123R to the
beginning of the fiscal year that includes the effective date is permitted, but not required. The
Company is currently evaluating the impact of SFAS 123R on its results of operations. See Note 4
for information related to the pro forma effects on the reported net loss and net loss per share of
applying the fair value recognition provisions of the previous Statement of Financial Accounting
Standards (SFAS) 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. 6




---



##### Table of Contents



In November 2004, FASB issued SFAS No. 151, Inventory Costs, which amends Accounting Research
Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for idle
facility expense, freight, handling costs and waste (spoilage). This Statement is effective for
inventory costs incurred during fiscal 2007 and earlier application is permitted. The Company
believes our current accounting policies closely align to the new rules. Accordingly, the Company
does not believe this new standard will have a material impact on our financial statements. 2. COMPREHENSIVE LOSS Comprehensive loss for the three and nine months ended December 31, 2004 and 2003 is as follows: Three Months Ended December 31,
    
    
    Nine Months Ended December 31,(In thousands)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net loss
    
    $
    (8,999
    )
    
    $
    (20,863
    )
    
    $
    (59,412
    )
    
    $
    (77,655
    )Foreign currency translation adjustments
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (31
    )Unrealized (losses) gains on marketable
securities
    
    
    (85
    )
    
    
    (425
    )
    
    
    (668
    )
    
    
    1,033Comprehensive loss
    
    $
    (9,084
    )
    
    $
    (21,298
    )
    
    $
    (60,080
    )
    
    $
    (76,653
    )
 3. NET LOSS PER COMMON SHARE Net loss per common share is computed using the weighted-average number of common shares
outstanding during the period. For the three and nine months ended December 31, 2004 and 2003, the
Company was in a net loss position and, therefore, common equivalent shares are not included in the
per share calculation because their effect would be anti-dilutive. As such, diluted net loss per
common share is the same amount as basic net loss per common share. The following table sets forth common stock equivalents which were excluded from the computation of
diluted net loss per common share for the three and nine months ended December 31, 2004 and 2003 as
they would have had an anti-dilutive effect due to net losses for such periods: (In thousands)
    
    2004
    
    
    2003Stock options and awards
    
    
    18,123
    
    
    
    16,013Shares issuable on conversion of 2 1/2% Convertible Subordinated Notes
    
    
    9,025
    
    
    
    9,025Shares issuable on conversion of 3.75% Convertible Subordinated Notes
    
    
    10
    
    
    
    10Shares issuable on conversion of Convertible Preferred Stock
    
    
    2,064
    
    
    
    2,305Total
    
    
    29,222
    
    
    
    27,353
 4. STOCK-BASED COMPENSATION The Company grants stock options for a fixed number of shares to employees with an exercise price
equal to the fair market value of the shares at the date of grant. The Company accounts for stock
option and award grants to employees using the intrinsic value method. The Company accounts for
stock options and awards to non-employees using the fair-value method. The following table illustrates the effect on net loss and net loss per common share, basic and
diluted, as if the fair-value based method had been applied to all outstanding and stock options
and awards in each period. Pro forma information for the three and nine months ended December 31,
2004 and 2003 is as follows: 7




---



##### Table of Contents



Three Months Ended December 31,
    
    
    Nine Months Ended December 31,(In thousands, except per share amounts)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Net lossas reported
    
    $
    (8,999
    )
    
    $
    (20,863
    )
    
    $
    (59,412
    )
    
    $
    (77,655
    )Add: Stock-based employee compensation
expense as reported in the condensed
consolidated statements of operations
    
    
    74
    
    
    
    167
    
    
    
    235
    
    
    
    1,303Deduct: Total stock-based employee
compensation expense determined under
the fair-value method for all stock options
and awards
    
    
    (5,023
    )
    
    
    (5,482
    )
    
    
    (14,226
    )
    
    
    (16,393
    )Pro forma net loss
    
    $
    (13,948
    )
    
    $
    (26,178
    )
    
    $
    (73,403
    )
    
    $
    (92,745
    )Net loss per common share:Basic and diluted as reported
    
    $
    (0.10
    )
    
    $
    (0.23
    )
    
    $
    (0.66
    )
    
    $
    (0.97
    )Basic and diluted pro forma
    
    
    (0.15
    )
    
    
    (0.29
    )
    
    
    (0.82
    )
    
    
    (1.16
    )
 The fair value of stock options was estimated at the date of grant using the Black-Scholes
option-pricing model, assuming no dividends, and with the following weighted average assumptions
and the resulting weighted average fair value per share of option granted during the period: Three Months Ended December 31,
    
    
    Nine Months Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Expected life (years)
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Risk-free interest rate
    
    
    3.63
    %
    
    
    3.17
    %
    
    
    3.60
    %
    
    
    2.91
    %Expected stock price volatility
    
    
    71
    %
    
    
    74
    %
    
    
    71
    %
    
    
    73
    %Weighted average fair value per share of
options granted during the period
    
    $
    8.11
    
    
    $
    7.31
    
    

    $
    7.65
    
    
    $
    6.43
 5. RESTRUCTURINGS In August 2002, the Company announced a restructuring program to reduce the Companys cost
structure as a result of the financial impact of a delay in the U.S. launch of Risperdal Consta by
the Companys collaborative partner, Janssen (the 2002 Restructuring). The restructuring program
reduced our workforce by 122 employees, representing 23% of the Companys total workforce at that
time, and included consolidation and closure of certain leased facilities in Cambridge,
Massachusetts, closure of the Companys medical affairs office in Cambridge, England, write-off of
leasehold improvements at leased facilities being vacated and reductions of other expenses. As of
December 31, 2004, the Company had paid in cash or written off an aggregate of approximately $1.6
million in employee separation costs and approximately $4.2 million in facility closure costs in
connection with the 2002 Restructuring. The amounts remaining in the 2002 Restructuring accrual at
December 31, 2004 related to facility lease costs and are expected to be paid through fiscal 2006. In June 2004, the Company announced a restructuring program in connection with the decision by
Alkermes and Genentech to discontinue commercialization of Nutropin Depot (the 2004
Restructuring). The decision was based on the significant resources required by both companies to
continue manufacturing and commercializing the product. In connection with this decision, the
Company ceased commercial manufacturing of Nutropin Depot in June 2004, reduced the Companys workforce by 17 employees, representing approximately 3% of the
Companys total workforce, and recorded restructuring charges in the quarter ended June 30, 2004 of
approximately $11.9 million under the caption Restructuring in the consolidated statements of
operations. The restructuring charges 8




---



##### Table of Contents



consisted of approximately $0.2 million in employee separation costs, including severance and related benefits, and approximately $11.7 million in
facility closure costs, including fixed asset write-offs and estimates of future lease costs
relating to the Companys ability to sublease the exited facility through the end of its lease
term, August 2008. In addition to the restructuring charges recorded in the quarter ended June 30,
2004, the Company also recorded a one-time write-off of Nutropin Depot inventory of approximately
$1.3 million, which was recorded under the caption Cost of goods manufactured in the consolidated
statements of operations. As of December 31, 2004, the Company had paid in cash or written off an aggregate of approximately
$8.6 million in facility closure costs and $0.1 million in employee separation costs in connection
with the 2004 Restructuring. The amounts remaining in the 2004 Restructuring accrual at December
31, 2004 are expected to be paid out through fiscal 2009 and relate primarily to estimates of lease
costs associated with the exited facility. The following table displays the restructuring activities and liability balances included in
accrued restructuring costs: Balance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance(In thousands)
    
    March 31,
    
    
    
    
    
    
    
    
    
    
    Non-cash
    
    
    December 31,Type of Liability
    
    2004
    
    
    Charges
    
    
    Payments
    
    
    Write-downs
    
    
    20042002 RestructuringEmployee separation costs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Facility closure costs
    
    
    1,138
    
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    4831,138
    
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    4832004 RestructuringEmployee separation costs
    
    
    
    
    
    
    146
    
    
    
    (137
    )
    
    
    
    
    
    
    9Facility closure costs
    
    
    
    
    
    
    11,750
    
    
    
    (443
    )
    
    
    (8,150
    )
    
    
    3,157
    
    
    
    11,896
    
    
    
    (580
    )
    
    
    (8,150
    )
    
    
    3,166Total
    
    $
    1,138
    
    
    $
    11,896
    
    
    $
    (1,235
    )
    
    $
    (8,150
    )
    
    $
    3,649
 6. INVENTORY Inventory is stated at the lower of cost or market. Cost is determined in a manner that
approximates the first-in, first-out method. The components of inventory consist of the following: December 31,
    
    
    March 31,(In thousands)
    
    2004
    
    
    2004Raw materials
    
    $
    1,796
    
    
    $
    1,147Work-in-process
    
    
    761
    
    
    
    1,037Finished goods
    
    
    571
    
    
    
    421Total
    
    $
    3,128
    
    
    $
    2,605
 In connection with the 2004 Restructuring, the Company recorded a one-time write-off of Nutropin
Depot inventory of approximately $1.3 million in the quarter ended June 30, 2004, which was
recorded under the caption Cost of goods manufactured in the condensed consolidated statements of
operations. See Note 5 for discussion on restructuring charges. 7. DERIVATIVES 2 1/2% Subordinated Notes -In the event that an automatic conversion of the 2 1/2% Subordinated Notes
due 2023 (the 2 1/2% Subordinated Notes) occurs on or prior to September 1, 2006, the Company would
be required to pay 9




---



##### Table of Contents



additional interest in cash or, at the Companys option in common stock, equal
to three full years of interest on the converted notes (the Three Year Interest Make-Whole), less
any interest actually paid or provided for on the notes prior to automatic conversion. This
Three-Year Interest Make-Whole provision represents an embedded derivative that is required to be
accounted for apart from the underlying 2 1/2% Subordinated Notes. When the 2 1/2% Subordinated Notes
were issued, the Three-Year Interest Make-Whole had an estimated initial aggregate fair value of
$3.9 million, which reduced the amount of the outstanding debt and was recorded as a derivative
liability in the condensed consolidated balance sheets. The $3.9 million initially allocated to the
Three-Year Interest Make-Whole feature has been treated as a discount on the 2 1/2% Subordinated Notes
and is being accreted to interest expense over five years through September 1, 2008, the first date
on which holders of the 2 1/2% Subordinated Notes have the right to require the Company to repurchase
the 2 1/2% Subordinated Notes. The estimated fair value of the Three-Year Interest Make-Whole feature
is carried in the condensed consolidated balance sheets under Derivative liability related to
convertible subordinated notes and is being adjusted to its fair value on a quarterly basis until
it expires or is paid. Quarterly adjustments to the fair value of the Three-Year Interest
Make-Whole are charged to Derivative (losses) income related to convertible subordinated notes in
the condensed consolidated statements of operations. During the three and nine months ended December 31, 2004, the Company recorded losses of
approximately $0.3 million and income of $2.3 million, respectively, in the condensed consolidated
statements of operations for changes in the estimated value of the feature after issuance. The
recorded value of the derivative liability related to the 2 1/2% Subordinated Notes (approximately
$2.3 million at December 31, 2004) can fluctuate significantly based on fluctuations in the market
value of the Companys common stock. Warrants The Company recorded net gains of approximately $0.1 million and net charges of
approximately $0.7 million in the three and nine months ended December 31, 2004, respectively, and
net charges of $0.7 million and net gains of $1.8 million in the three and nine months ended
December 31, 2003, respectively, in Other income (expense), net in the condensed consolidated
statements of operations in connection with the changes in the fair value of warrants held by the
Company which were granted in connection with licensing arrangements. The recorded value of such
warrants can fluctuate significantly based on fluctuations in the market value of the underlying
securities of the issuer of the warrants. At December 31, 2004, the warrants had a fair value of
approximately $2.2 million and were recorded under the caption Other assets in the condensed
consolidated balance sheets. 8. LITIGATION Beginning in October 2003, the Company and certain of its current and former officers and directors
were named as defendants in six purported securities class action lawsuits filed in the United
States District Court for the District of Massachusetts. The cases were captioned: Bennett v.
Alkermes, Inc., et. al., 1:03-CV-12091 (D. Mass.); Ragosta v. Alkermes, Inc., et. al.,
1:03-CV-12184 (D. Mass.); Barry Family LP v. Alkermes, Inc., et. al., 1:03-CV-12243 (D. Mass.);
Waltzer v. Alkermes, Inc., et. al., 1:03-CV-12277 (D. Mass.); Folkerts v. Alkermes, Inc., et. al.,
1:03-CV-12386 (D. Mass.); and Slavas v. Alkermes, Inc., et. al., 1:03-CV-12471 (D. Mass.). On May
14, 2004, the six actions were consolidated into a single action captioned: In re Alkermes
Securities Litigation, Civil Action No. 03-CV-12091-RCL (D. Mass.). On July 12, 2004, a single
consolidated amended complaint was filed on behalf of purchasers of the Companys common stock
during the period April 22, 1999 to July 1, 2002. The consolidated amended complaint generally
alleges, among other things, that, during such period, the defendants made misstatements to the
investing public relating to the manufacture and FDA approval of the Companys Risperdal Consta
product. The consolidated amended complaint seeks unspecified damages. On September 10, 2004, the
Company and the individual defendants filed a motion to dismiss all claims asserted against them in
the consolidated amended complaint in their entirety. The Court heard oral argument on the motion
on January 12, 2005, and the Company is awaiting a decision on the motion. Although the Company
believes these allegations are without merit and intends to vigorously defend against them, the litigation process is inherently uncertain and
there can be no guarantee as to the ultimate outcome of these matters. 10




---



##### Table of Contents



From time to time, we may be subject to other legal proceedings and claims in the ordinary course
of business. We are not currently aware of any such proceedings or claims that we believe will
have, individually or in the aggregate, a material adverse effect on our business, financial
condition or results of operations. 9. TERM LOAN AND COMMITMENT FOR EQUIPMENT FINANCING On December 22, 2004, the Company entered into a term loan in the principal amount of $3.7 million
with General Electric Capital Corporation (GE). The term loan is secured by certain of the
Companys equipment pursuant to a security agreement and is subject to an ongoing financial
covenant. The loan is payable in 36 monthly installments with the final installment due on
December 27, 2007 and bears a floating interest rate equal to the one-month London Interbank
Offered Rate (LIBOR), which is determined monthly, plus a certain fixed interest rate. The
Company may prepay the term loan without any penalty, contingent on GEs approval, and further use
the $3.7 million of available credit to finance new equipment purchases with the same terms and
conditions as noted below. If the Company fails to pay any amounts when due, or is in default
under or fails to perform any term or condition of the security agreement, then GE may elect to
accelerate the entire outstanding principal amount of the loan with accrued interest such that the
amounts are immediately due and payable from the Company to GE. In addition, all amounts
accelerated shall bear interest at 18% until such amounts are paid in full. As of December 31,
2004, $3.7 million was outstanding under the term loan. In addition, on December 22, 2004, the Company entered into a commitment for equipment financing
with GE. The equipment financing will further require an amendment to an existing Master Lease
Agreement dated as of October 16, 2002, as amended by an amendment dated November 7, 2002, by and
between the Company and GE. The equipment financing, in the form of an equipment lease line,
provides the Company the ability to finance up to $18.3 million in new equipment purchases through
December 31, 2005. The equipment financing would be secured by the purchased equipment and will be
subject to a financial covenant. The lease terms would provide the Company with the option at the
end of the lease to (a) purchase the equipment from GE at the then prevailing market value, (b)
renew the lease at a fair market rental value, subject to remaining economic useful life
requirements, or (c) return of the equipment to GE, subject to certain conditions. As of December
31, 2004, there were no amounts outstanding under this commitment. 10. SUBSEQUENT EVENT On February 1, 2005, ACT II, pursuant to the terms of a purchase and
sale agreement, sold, assigned and contributed to Royalty Sub the rights of ACT II to collect
certain royalty payments and manufacturing fees (the Royalty Payments) payable to ACT II under
the Janssen Agreements (defined below) and certain agreements that may arise in the future, in
exchange for approximately $145 million in cash. The Royalty
Payments arise under (i) the license
agreements dated February 13, 1996 for the United States and its territories and February 21, 1996
for all countries other than the United States and its territories, by and between ACT II and
Janssen Pharmaceutica Inc. and certain of its affiliated entities (JP) and (ii) the Manufacturing
and Supply Agreement dated August 6, 1997 by and between JPI Pharmaceutica International (JPI and
together with JP, Janssen), JP and ACT II (collectively,
the Janssen Agreements). The assets of Royalty Sub will
not be available to satisfy other obligations of Alkermes. Also on February 1,
2005, Royalty Sub issued an aggregate principal amount of
$170 million of its
Risperdal Consta® PhaRMA SM Secured 7% Notes due 2018 (the 7% Notes) to
certain institutional investors in a private placement and at a discount for net proceeds after
transaction expenses of approximately $145 million. The Royalty Payments are the sole source of
payment for the 7% Notes. Alkermes will receive all of the Risperdal Consta revenues in excess of
interest, premium, if any, and principal payments. Principal on the 7% Notes must be paid in full
by the final legal maturity date of January 1, 2018, unless redeemed earlier. Non-payment of
principal will not be an event of default prior to January 1, 2018. The annual cash coupon rate is 7% and is payable quarterly,
beginning on April 1, 2005, however portions of the 11




---



##### Table of Contents



principal amount that are not paid off in accordance with the expected principal repayment profile will accrue interest at 9.75%. The yield
to maturity on the 7% Notes is 9.75%. Through January 1, 2009, the 7% Note holders will receive
only the quarterly cash interest payments. In addition, beginning on April 1, 2009, principal payments will
be made to investors, subject to certain conditions. Timing of the principal repayment will be
based on the revenues received by Royalty Sub but will occur no earlier than equally over the
twelve quarters between April 1, 2009 and January 1, 2012, subject to certain conditions. The 7%
Notes, however, may be redeemed at Royalty Subs option, subject, in certain circumstances, to the
payment of a redemption premium. 12




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Alkermes, Inc. (as used in this section, together with our subsidiaries, us, we or our), a
Pennsylvania corporation organized in 1987, is a pharmaceutical company that develops products
based on sophisticated drug delivery technologies to enhance therapeutic outcomes in major
diseases. Our lead commercial product, Risperdal Consta® [(risperidone) long-acting injection], is
the first and only long-acting atypical antipsychotic medication approved for use in schizophrenia,
and is marketed worldwide by Janssen-Cilag, a subsidiary of Johnson & Johnson, together with other
affiliates (Janssen). Our lead proprietary product candidate, Vivitrex® [(naltrexone)
long-acting injection], is a once-a-month injection for the treatment of alcohol dependence. We
have a pipeline of extended-release injectable products and pulmonary drug products based on our
proprietary technology and expertise, ProLease and Medisorb for extended-release of injectable drug
products, and AIR® for inhaled drug products. Our product development strategy is
twofold: we partner our proprietary technology systems and drug delivery expertise with several of
the worlds finest pharmaceutical companies and we also develop novel, proprietary drug candidates
for our own account. Our headquarters are in Cambridge, Massachusetts, and we operate research and
manufacturing facilities in Massachusetts and Ohio. Since our inception in 1987, we have devoted a
significant portion of our resources to research and development programs and the purchase of
property, plant and equipment. At December 31, 2004, we had an accumulated deficit of approximately
$612.6 million. We have funded our operations primarily through public offerings and private placements of debt and
equity securities, bank loans, term loans, equipment financing arrangements and payments under
research and development agreements with collaborators. We historically have developed our product
candidates in collaboration with others on whom we rely for funding, development, manufacturing
and/or marketing. While we continue to develop product candidates in collaboration with others, we
also develop proprietary product candidates for our own account that 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, including, but not
limited to, statements concerning future operating results, the achievement of certain business and
operating goals, manufacturing revenues, research and development spending, plans for clinical
trials and regulatory approvals, financial goals and projections of capital expenditures,
recognition of revenues, restructuring charges in connection with the discontinuation of Nutropin
Depot and future financings. 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, the forward-looking statements are neither promises
nor guarantees and our business is subject to significant risk and uncertainties and there can be
no assurance that our actual results will not differ materially from our expectations. Factors
which could cause actual results to differ materially from our expectations set forth in our
forward-looking statements include, among others: (i) Risperdal Consta and our product candidates
(including our proprietary product candidate, Vivitrex), if approved for marketing, may not be
launched successfully in one or all indications for which marketing is approved, and, if launched,
may not produce significant revenues; (ii) we rely on our partners to determine the regulatory and
marketing strategies for Risperdal Consta and our other partnered programs; (iii) after the
completion of clinical trials for our product candidates (including our proprietary product
candidate, Vivitrex) and the submission for marketing approval, the FDA or other health authorities
could refuse to accept such filings or could request additional preclinical or clinical studies be
conducted, each of which could result in significant delays, or such authorities could refuse to
approve the product at all; (iv) we may be unable to manufacture Risperdal Consta or to scale-up or
manufacture future products, including our proprietary product candidate, Vivitrex, on a commercial
scale or economically and in addition, we may be unable to add additional production capacity for
Risperdal Consta or unexpected events could interrupt manufacturing operations 13




---



##### Table of Contents



at our Risperdal Consta facility, which is the sole source of supply for that product; (v) whether
additional regulatory approvals will be received or whether commercial launches of Risperdal Consta
in countries where it has been or may be approved occur in a timely or successful manner; (vi)
Risperdal Consta and our product candidates (including our proprietary product candidate,
Vivitrex), in commercial use, may have unintended side effects, adverse reactions or incidents of
misuse and the FDA or other health authorities could require post approval studies or require
removal of our products from the market; (vii) we may enter into a collaboration with a third party
to market or fund a proprietary product candidate, including our proprietary product candidate,
Vivitrex, and the terms of such a collaboration may not meet our expectations or the expectations
of the financial markets; (viii) our delivery technologies or product development efforts may not
produce safe, efficacious or commercially viable products; (ix) our collaborators could elect to
terminate or delay programs at any time and disputes with collaborators or failure to negotiate
acceptable new collaborative arrangements for our technologies could occur; (x) clinical trials may
take more time or consume more resources than initially envisioned; (xi) the risk that results of
earlier clinical trials are not necessarily predictive of the safety and efficacy results in larger
clinical trials; (xii) our product candidates could be ineffective or unsafe during preclinical
studies and clinical trials and 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 clinical trials could be delayed; (xiii) we may not recoup any of our $100 million
investment in Reliant Pharmaceuticals, LLC (Reliant); (xiv) the securities litigation brought
against us may result in financial losses or require the dedication of significant management
resources; (xv) 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; (xvi) technological change in the biotechnology or pharmaceutical industries could
render our product candidates obsolete or noncompetitive; (xvii) difficulties or set-backs in
obtaining and enforcing our patents and difficulties with the patent rights of others could occur;
(xviii) we may not become profitable and could continue to incur losses for the foreseeable future;
and (xix) we may need to raise substantial additional funding to continue research and development
programs and clinical trials and could incur difficulties or setbacks in raising such funds. Critical Accounting Policies As fully described in the Management Discussion and Analysis section of the Companys Annual
Report on Form 10-K for the year ended March 31, 2004, we consider our critical accounting policies
to be:  
    Revenue recognition;
    Equity method investment in Reliant Pharmaceuticals, Inc.;
    Derivatives embedded in certain debt securities;
    Warrant valuations;
    Cost of goods manufactured;
    Research and development expenses; and
    Restructuring. We recorded restructuring charges in the consolidated statements of operations during the quarter
ended June 30, 2004. As discussed below, we now consider our accounting policy on restructuring to
be a critical accounting policy. Restructuring We recorded restructuring charges in our consolidated statements of operations in
August 2002 in connection with a restructuring program to reduce our cost structure as a result of
the financial impact of a delay in 14




---



##### Table of Contents



the U.S. launch of Risperdal Consta by our collaborative partner, Janssen (the 2002
Restructuring). We also recorded restructuring charges in June 2004 in connection with the
decision by Alkermes and Genentech to stop commercialization of Nutropin Depot (the 2004
Restructuring). Charges recorded in the condensed consolidated statements of operations in connection with the 2002
Restructuring and the 2004 Restructuring required that management make estimates related to our
ability to sublease exited facilities, the rates at which we may be able to sublease exited
facilities and the net realizable value of certain fixed assets. See Results of Operations
below for additional information related to the 2002 Restructuring and the 2004 Restructuring. Results of Operations The net loss for the three months ended December 31, 2004 was $9.0 million or $0.10 per basic and
diluted share as compared to a net loss of $20.9 million or $0.23 per basic and diluted share for
the three months ended December 31, 2003. The net loss for the nine months ended December 31, 2004 was $59.4 million or $0.66 per basic and
diluted share as compared to a net loss of $77.7 million or $0.97 per basic and diluted share for
the nine months ended December 30, 2003. Total revenues were $23.6 million and $53.1 million for the three and nine months ended December
31, 2004, respectively, as compared to $11.2 million and $23.0 million for the three and nine
months ended December 31, 2003, respectively. Total manufacturing and royalty revenues were $16.6 million and $34.5 million for the three months
and nine months ended December 31, 2004, respectively, as compared to $8.6 million and $15.5
million for the three and nine months ended December 31, 2003, respectively. Total manufacturing revenues were $13.9 million and $27.8 million for the three and nine months
ended December 31, 2004, respectively, all related to manufacturing of Risperdal Consta. This is
compared to $7.5 million and $13.1 million for the three and nine months ended December 31, 2003,
respectively, including $7.3 million and $12.5 million, respectively, of manufacturing revenues for
Risperdal Consta. The increase in manufacturing revenues for the three and nine months ended
December 31, 2004 as compared to the three months ended December 31, 2003 was due to increased
shipments of Risperdal Consta to Janssen. Risperdal Consta is marketed in more than 45 countries.
Under our manufacturing and supply agreement with Janssen, we earn manufacturing revenues upon
shipment of product by Alkermes to Janssen based on a percentage of Janssens net selling price.
These percentages are based on the volume of units shipped to Janssen in any given calendar year,
with a minimum manufacturing fee of 7.5%. We anticipate that we will earn manufacturing revenues
at an average of 8.2% of Janssens net sales price for Risperdal Consta in the fiscal year ending
March 31, 2005 as compared to 9.8% in the fiscal year ended March 31, 2004. As discussed below, in
the quarter ended June 30, 2004, we ceased commercial production of Nutropin Depot and there were
therefore no manufacturing revenues earned during the three and nine months ended December 31, 2004
related to Nutropin Depot. Total royalty revenues were $2.7 million and $6.7 million for the three and nine months ended
December 31, 2004, respectively, including $2.6 million and $6.5 million, respectively, of royalty
revenues for Risperdal Consta. This is compared to $1.1 million and $2.4 million for the three and
nine months ended December 31, 2003, respectively, including $0.9 million and $1.8 million,
respectively, of royalty revenues from Risperdal Consta. The increase in royalty revenues for the
three and nine months ended December 31, 2004 as compared to the same period in 2003 was due to an
increase in global sales of Risperdal Consta by Janssen. Under our license agreements with
Janssen, we record royalty revenues equal to 2.5% of Janssens net sales of Risperdal Consta in the
quarter when the product is sold by Janssen. 15




---



##### Table of Contents



Research and development revenue under collaborative arrangements was $7.0 million and $18.6
million for the three and nine months ended December 31, 2004, respectively. This compares to $2.6
million and $7.5 million for the three and nine months ended December 31, 2003, respectively. The
increase in research and development revenue for the three and nine months ended December 31, 2004
as compared to the same period in 2003 was primarily due to revenues earned related to work
performed on the Eli Lilly and Company (Lilly) AIR insulin and AIR human growth hormone (hGH)
programs and to work performed on several other collaborative programs. See discussion of the
funding of our Lilly development programs in Liquidity and Capital Resources below. Cost of goods manufactured was $4.9 million and $12.6 million for the three and nine months ended
December 31, 2004, consisting of approximately $4.9 million and $10.3 million, respectively, for
Risperdal Consta and $0 and $2.3 million for Nutropin Depot. Cost of goods manufactured was $4.1
million and $11.2 million for three and nine months ended December 31, 2003, consisting of
approximately $2.7 million and $7.5 million, respectively, for Risperdal Consta and $1.4 million
and $3.7 million, respectively, for Nutropin Depot. The increase in cost of goods manufactured in
the three months ended December 31, 2004 as compared to the same period in 2003 was primarily the
result of increased manufacturing volumes of Risperdal Consta as well as a one-time write-off of
Nutropin Depot inventory of $1.3 million recorded under the caption Cost of goods manufactured in
our condensed consolidated statement of operations in the quarter ended June 30, 2004. Research and development expenses were $20.1 million and $66.8 million for the three and nine
months ended December 31, 2004 as compared to $21.1 million and $66.2 million for the three and
nine months ended December 30, 2003. Research and development expenses were lower in the three
months ended December 30, 2004 as compared to the three months ended December 30, 2003 primarily
due to a decrease in external research costs related to the clinical trials of Vivitrex. The
increase in research and development expenses for the nine months ended December 30, 2004 as
compared to the nine months ended December 30, 2003 was primarily due to increases in personnel
costs related to our proprietary and collaborator product candidates and to increases in occupancy
costs, partially offset by a decrease in external research costs related to the clinical trials of
Vivitrex. A significant portion of our research and development expenses (including laboratory supplies,
travel, dues and subscriptions, recruiting costs, temporary help costs, consulting costs and
allocable costs such as occupancy and depreciation) are not tracked by project as they benefit
multiple projects or our drug delivery technologies in general. Expenses incurred to purchase
specific services from third parties to support our collaborative research and development
activities are tracked by project and are reimbursed to us by our partners. We generally bill our
partners under collaborative arrangements using a single full-time equivalent or hourly rate. This
rate has been established by us based on our annual budget of salaries, employee benefits and the
billable non-project-specific costs mentioned above and is generally increased annually based on
increases in the consumer price index. Each collaborative partner is billed using a full-time
equivalent or hourly rate for the hours worked by our employees on a particular project, plus any
direct external research costs. We account for our research and development expenses on a
departmental and functional basis in accordance with our budget and management practices. Below is a summary of our proprietary and collaborators commercial products and product candidates
and their respective stages of clinical development. Product
    
    
    
    Phase of ClinicalCandidate
    
    Indication
    
    Development (1)Risperdal Consta
    
    Schizophrenia
    
    MarketedVivitrex
    
    Alcohol dependence
    
    Phase IIIVivitrex
    
    Opioid dependence
    
    Phase IIAIR Insulin
    
    Diabetes
    
    Phase IIExenatide LAR (AC2993)
    
    Diabetes
    
    Phase IIAIR hGH
    
    Growth hormone deficiency
    
    Phase IAIR Epinephrine
    
    Anaphylaxis
    
    Phase IOthers
    
    Various
    
    Preclinical
 16




---



##### Table of Contents



(1)
    
    Phase I clinical trials indicates that the compound is being tested in humans for safety
and preliminary indications of biological activity in a limited patient population. Phase II
clinical trials indicates that the trial is being conducted in patients to provide information
on dosing and is testing for safety and preliminary evidence of efficacy. Phase III clinical
trials indicates that the trial is being conducted in patients and is testing the safety and
efficacy of the compound. Preclinical indicates that we or our partners are conducting
formulation, efficacy, pharmacology and/or toxicology testing of a compound in animal models or
biochemical assays. In August 2004, we announced that Lilly made a positive product decision to proceed with
significant investment for the further development of an inhaled formulation of insulin. The
decision follows the successful execution of several critical steps: the completion and analysis
of data from a Phase II study; the achievement of commercial manufacturing powder production
scale-up; and the development and testing of the commercial pulmonary insulin inhaler system.
Development activities will include both clinical trials and additional manufacturing activities
for the inhaler system and the production facility. In October 2004, Alkermes and Serono discontinued development of the sustained-release version of
recombinant human follicle stimulating hormone (r-hFSH) for the treatment of infertility.
Despite positive early-stage clinical trial results, this decision was based on a shift of
priorities within Serono. In November 2004, we, along with partners Amylin Pharmaceuticals, Inc. and Lilly made the decision
to initiate a Phase II multi-dose study of exenatide LAR (long-acting release), in type 2 diabetes
patients using a once-a-week dosing regimen. Patient screening and enrollment for the Phase II
multi-dose study began in January 2005. The study is expected to be completed by early 2006. Data
from the ongoing Phase II single-dose study have demonstrated sustained release of exenatide with
no dose-limiting effects. In January 2005, we announced that we will expand production capacity for Risperdal Consta by
building a third production line. This expansion at Alkermes Wilmington, Ohio, facility is
designed to meet anticipated future demand for Risperdal Consta. Under the terms of the agreement
with Janssen, we will be responsible for managing the design, engineering, construction, validation
and all other aspects of the project based upon a mutually-agreed project plan, and Janssen will
reimburse us for such costs incurred in accordance with a mutually agreed upon budget. Upon
validation of such facility, Alkermes will be responsible for on-going operating costs. Sales, general and administrative expenses were $6.9 million and $21.3 million for the three and
nine months ended December 31, 2004 as compared to $6.5 million and $18.2 million for the three and
nine months ended December 31, 2003. Sales, general and administrative expenses for the three and
nine months ended December 31, 2004 were higher than in the three and nine months ended December
31, 2003 primarily as a result of an increase in sales and marketing costs as we prepare for the
potential future commercialization of Vivitrex. In August 2002, we announced a restructuring program to reduce our cost structure as a result of
the financial impact of a delay in the U.S. launch of Risperdal Consta by our collaborative
partner, Janssen (the 2002 Restructuring). The restructuring program reduced our workforce by
122 employees, representing 23% of our total workforce at that time, and included consolidation and
closure of certain leased facilities in Cambridge, Massachusetts, closure of our medical affairs
office in Cambridge, England, write-off of leasehold improvements at leased facilities being
vacated and reductions of other expenses. As of December 31, 2004, we had paid in cash or written
off an aggregate of approximately $1.6 million in employee separation costs and approximately $4.2
million in facility closure costs in connection with the 2002 Restructuring. The amounts remaining
in the 2002 Restructuring accrual at December 31, 2004 related to facility lease costs and are
expected to be paid through fiscal 2006. In June 2004, we announced a restructuring program in connection with the decision by Alkermes and
Genentech to discontinue commercialization of Nutropin Depot (the 2004 Restructuring). The
decision was based on the significant resources required by both companies to continue
manufacturing and commercializing the product. In connection with this decision, we ceased
commercial manufacturing of Nutropin Depot in June 2004, reduced our 17




---



##### Table of Contents



workforce by 17 employees, representing approximately 3% of our total workforce, and recorded
restructuring charges in the quarter ended June 30, 2004 of approximately $11.9 million under the
caption Restructuring in the consolidated statements of operations. The restructuring charges
consisted of approximately $0.2 million in employee separation costs, including severance and
related benefits, and approximately $11.7 million in facility closure costs, including fixed asset
write-offs and estimates of future lease costs relating to our ability to sublease the exited
facility through the end of its lease term, August 2008. In addition to the restructuring charges
recorded in the quarter ended June 30, 2004, we also recorded a one-time write-off of Nutropin
Depot inventory of approximately $1.3 million, which was recorded under the caption Cost of goods
manufactured in the consolidated statements of operations. As of December 31, 2004, we had paid in cash or written off an aggregate of approximately $8.6
million in facility closure costs and $0.1 million in employee separation costs in connection with
the 2004 Restructuring. The amounts remaining in the 2004 Restructuring accrual at December 31,
2004 are expected to be paid out through fiscal 2009 and relate primarily to estimates of lease
costs associated with the exited facility. The following table displays the restructuring activities and liability accounts included in
accrued restructuring costs: Balance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance(In thousands)
    
    March 31,
    
    
    
    
    
    
    
    
    
    
    Non-cash
    
    
    December 31,Type of Liability
    
    2004
    
    
    Charges
    
    
    Payments
    
    
    Write-downs
    
    
    20042002 RestructuringEmployee separation costs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Facility closure costs
    
    
    1,138
    
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    4831,138
    
    
    
    
    
    
    
    (655
    )
    
    
    
    
    
    
    4832004 RestructuringEmployee separation costs
    
    
    
    
    
    
    146
    
    
    
    (137
    )
    
    
    
    
    
    
    9Facility closure costs
    
    
    
    
    
    
    11,750
    
    
    
    (443
    )
    
    
    (8,150
    )
    
    
    3,157
    
    
    
    11,896
    
    
    
    (580
    )
    
    
    (8,150
    )
    
    
    3,166Total
    
    $
    1,138
    
    
    $
    11,896
    
    
    $
    (1,235
    )
    
    $
    (8,150
    )
    
    $
    3,649
 Interest income was $0.6 million and $1.9 million for the three and nine months ended December 31,
2004 as compared to $1.0 million and $2.6 million for the three and nine months ended December 31,
2003. The decrease for the nine month periods was primarily the result of lower average cash and
investment balances held during the nine months ended December 31, 2004 as compared to the nine
months ended December 31, 2003. Other income (expense), net was income of $0.1 million and expense of $ 0.7 million in the three
and nine months ended December 31, 2004 as compared to expense of $0.7 million and income of $1.8
million for the three and nine months ended December 31, 2003. Other income (expense), net
represents income or expense recognized on the net changes in the fair value of warrants of public
companies held by us in connection with collaboration and licensing arrangements, which are
recorded as derivatives under the caption Other assets in the condensed consolidated balance
sheets. The recorded value of such warrants can fluctuate significantly based on fluctuations in
the market value of the underlying securities of the issuer of the warrants. During the three and nine months ended December 31, 2004, we recorded derivative losses of $0.3
million and derivative income of $2.3 million for changes in the estimated value of the Three-Year
Interest Make-Whole feature of the 2 1/2% Convertible Subordinated Notes due 2023 (the 2 1/2%
Subordinated Notes). The estimated value of the Three-Year Interest Make-Whole feature is carried
in the consolidated balance sheets under the caption Derivative liability related to convertible
notes and will be adjusted to its fair value on a quarterly basis until it
expires or is paid. Quarterly adjustments to the fair value of the Three-Year Interest Make-Whole
will be charged to Derivative income (losses) related to convertible subordinated notes in the
condensed consolidated statements of 18




---



##### Table of Contents



operations until it is paid out or expires. The recorded value of the derivative liability related to the 2 1/2% Subordinated Notes, approximately $2.3
million, at December 31, 2004, can fluctuate significantly based on fluctuations in the market
value of our common stock. During the three months and nine months ended December 31, 2003, we recorded derivative income of
$0.7 million and derivative losses of $4.0 million in the condensed consolidated statements of
operations. In June 2003, we announced that we had exercised our automatic conversion right for
the 6.52% Senior Notes. In July 2003, upon conversion of the then outstanding 6.52% Senior Notes
and payment of the Two-Year Interest Make-Whole, the embedded derivative was settled in full and
the balance was reduced to zero. Interest expense was $1.2 million and $3.5 million for the three and nine months ended December 31,
2004, respectively, as compared to $1.2 million and $5.3 million for the three and nine months
ended December 31, 2003. The decrease for the nine months ended December 31, 2004 as compared to
the nine months ended December 31, 2004 was primarily the result of a lower interest rate payable
on the convertible debt outstanding during the respective periods. 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 $78.1 million at December
31, 2004 as compared to $143.9 million at March 31, 2004. The decrease in cash and cash
equivalents and short-term investments during the nine months ended December 31, 2004 was primarily
a result of cash outflows to fund our operations and to acquire fixed assets. We invest in cash equivalents, U.S. Government obligations, high-grade corporate notes and
commercial paper, with the exception of our $100 million investment in Reliant. Our investment
objectives for our investments, other than our investment in Reliant, are, first, to assure
liquidity and conservation of capital and, second, to obtain investment income. Investments
classified as long-term at December 31, 2004 consist of U.S. Government obligations held as
collateral under certain irrevocable standby letters of credit required under certain lease
agreements, including the lease for our corporate headquarters. In August and September 2003, we issued an aggregate of $125.0 million principal amount of 2 1/2%
Subordinated Notes. The 2 1/2% Subordinated Notes are convertible into shares of our common stock at
a conversion price of $13.85 per share, subject to adjustment in certain events. The 2 1/2%
Subordinated Notes bear interest at 2 1/2% per year, payable semiannually on March 1 and September 1,
commencing on March 1, 2004 and are subordinated to existing and future senior indebtedness of
Alkermes. We may elect to automatically convert the notes anytime the closing price of our common stock has
exceeded 150% of the conversion price ($20.78), for at least 20 trading days during any 30-day
trading period. We may redeem some or all of the notes on or after September 6, 2006. Holders of
the notes have the right to require us to repurchase some or all of their notes on September 1,
2008, 2013, and 2018 and upon certain events, including a change in control. If an automatic conversion occurs on or prior to September 1, 2006, we will pay additional interest
in cash or, at our option, in common stock, equal to three full years of interest on the converted
notes, Three-Year Interest Make-Whole, less any interest actually paid or provided for on the
notes prior to automatic conversion. If we elect to pay the additional interest in common stock,
the shares of common stock will be valued at 97.5% of the average closing price of our common stock
for the five trading days immediately preceding the second trading day prior to the conversion
date. In December 2002, we and Lilly expanded the collaboration for the development of inhaled
formulations of insulin and hGH based on our AIR pulmonary drug delivery technology. At that time,
Lilly purchased $30.0 million of our 19




---



##### Table of Contents



Convertible Preferred Stock, the proceeds from which represented $25.0 million and $5.0 million in funding for the Lilly insulin and Lilly hGH
development programs, respectively, for the period starting January 1, 2003 and into calendar 2004.
As a result of this transaction, we did not recognize research and development revenue related to
work performed on the Lilly development programs while the proceeds from the sale of the
Convertible Preferred Stock were being spent. In addition, the royalty rate payable to us based on
revenues of potential inhaled insulin products was increased. Lilly has the right to return the
Convertible Preferred Stock to us in exchange for a reduction in this royalty rate back to its
original rate. The Convertible Preferred Stock is convertible into our common stock at the market
price at the time of conversion at our option or automatically upon the filing of a new drug
application with the FDA for a pulmonary insulin product. The collaboration cannot terminate
without cause until January 2005. We will register for resale all of our shares of common stock
issued upon conversion of the Convertible Preferred Stock. In December 2003, Lilly made additional payments to us totaling approximately $7.0 million in order
to fund an increase in the scope of our joint development programs, $3.0 million of which
represented funding for the Lilly insulin development program and the remaining $4.0 million
represented funding for the Lilly hGH development program. The $7.0 million payment was recorded
as deferred revenue in the consolidated balance sheets in the quarter ended December 31, 2003. When
the funding for a program provided for by the proceeds from the sale of Convertible Preferred Stock
has been spent, we will begin to recognize revenue on that program as work is performed. As of
June 30, 2004, the entire $5.0 million of funding from the Convertible Preferred Stock related to
the Lilly hGH program had been spent. As of September 30, 2004, the entire $25.0 million of
funding from the Convertible Preferred Stock related to the Lilly insulin program had been spent.
Therefore, beginning in the quarter ended June 30, 2004 for the Lilly hGH program and beginning in
the quarter ended September 30, 2004 for the Lilly insulin program, we recorded revenue for work
performed on the Lilly hGH and Lilly insulin programs in our condensed consolidated statements of
operations. As of December 31, 2004, all of the funding was fully earned and there are no amounts
recorded as a current liability under the caption of Deferred revenue in the condensed
consolidated balance sheets. Under an addendum to our manufacture and supply agreement with Janssen, Janssen is required to pay
us certain minimum amounts of manufacturing revenues relating to our sales of Risperdal Consta to
Janssen beginning in 2003. The actual amount of such minimum manufacturing revenues will be
determined by a formula and is currently estimated to aggregate approximately $150.0 million. As
of December 31, 2004, we had recognized approximately $65 million of cumulative manufacturing
revenues against the estimated $150.0 million minimum. Janssens minimum revenue obligation will
be satisfied when Alkermes reaches approximately $150.0 million in cumulative manufacturing
revenues earned from sales of Risperdal Consta to Janssen. While the manufacture and supply
agreement with Janssen specifies annual minimum revenues expected to be paid to Alkermes over a ten
year period beginning in calendar 2003, we expect our annual manufacturing revenues to exceed those
annual minimums. In December 2002, Janssen prepaid the first two years of minimum manufacturing
revenues to us, totaling $23.9 million and these amounts were recorded as deferred revenue in our
consolidated balance sheets. We have assigned and contributed to Royalty Sub the right to all
manufacturing fees payable to ACT II under the manufacturing and supply agreement  see Subsequent
Event in the notes to the condensed consolidated financial statements. As of December 31, 2004,
all of the prepayment was earned and there were no amounts recorded as a current liability under
the caption Deferred revenue in the condensed consolidated balance sheets. We do not have any off-balance sheet arrangements, other than operating leases in the ordinary
course of business. Capital expenditures were approximately $12.7 million for the nine months
ended December 31, 2004, principally reflecting equipment purchases and building expansion and
improvements. We expect our capital expenditures to total approximately $25.0 million during
fiscal year 2005, primarily to expand our manufacturing infrastructure for Risperdal Consta and
Vivitrex in addition to continued improvements to our manufacturing and development facilities in
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 the existing loans, General Electric Capital Corporation (GE) and Johnson
& Johnson Finance Corporation have security interests in certain of our assets. 20




---



##### Table of Contents



On December 22, 2004, we entered into a term loan in the principal amount of $3.7 million with GE.
The term loan is secured by certain of our equipment pursuant to a security agreement and is
subject to an ongoing financial covenant. The loan is payable in 36 monthly installments with the
final installment due on December 27, 2007 and bears a floating interest rate equal to the one
month London Interbank Offered Rate (LIBOR), which is determined monthly, plus a certain fixed
interest rate. We may prepay the term loan without any penalty, contingent on GEs approval, and
further use the $3.7 million of available credit to finance new equipment purchases with the same
terms and conditions as noted below. If we fail to pay any amounts when due, or is in default
under or fails to perform any term or condition of the security agreement, then GE may elect to
accelerate the entire outstanding principal amount of the loan with accrued interest such that the
amounts are immediately due and payable from us to GE. In addition, all amounts accelerated shall
bear interest at 18% until such amounts are paid in full. Additionally, on December 22, 2004, we entered into a commitment for equipment financing with GE.
The equipment financing will further require an amendment to an existing Master Lease Agreement
dated as of October 16, 2002, as amended by Amendment dated November 7, 2002, by and between us and
GE. The equipment financing, in the form of an equipment lease line, provides us the ability to
finance up to $18.3 million in new equipment purchases through December 31, 2005. The equipment
financing would be secured by the purchased equipment and will be subject to a financial covenant.
The lease terms would provide us with the option at the end of the lease to (a) purchase the
equipment from GE at the then prevailing market value, (b) renew the lease at a fair market rental
value, subject to remaining economic useful life requirements, or (c) return of the equipment to
GE, subject to certain conditions. In January 2005, we announced that we will expand production capacity for Risperdal Consta by
building a third production line. This expansion at our Wilmington, Ohio, facility is designed to
meet anticipated future demand for Risperdal Consta. Under the terms of the agreement, we will be
responsible for managing the design, engineering, construction, validation and all other aspects of
the project based upon a mutually-agreed project plan, and Janssen will reimburse us for such costs
incurred in accordance with a mutually agreed upon budget. Upon validation of such facility,
Alkermes will be responsible for on-going operating costs. On February 1, 2005, Alkermes Controlled Therapeutics Inc. II (ACT II), a Pennsylvania
corporation and wholly-owned subsidiary of Alkermes, Inc., pursuant to the terms of a purchase and
sale agreement, sold, assigned and contributed to RC Royalty Sub LLC, a Delaware limited liability
company, and wholly-owned subsidiary of ACT II (Royalty Sub) the rights of ACT II to collect
certain royalty payments and manufacturing fees (the Royalty Payments) payable to ACT II under
the Janssen Agreements (defined below) and certain agreements that may arise in the future, in
exchange for approximately $145 million in cash. The Royalty
Payments arise under (i) the license
agreements dated February 13, 1996 for the United States and its territories and February 21, 1996
for all countries other than the United States and its territories, by and between ACT II and
Janssen Pharmaceutica Inc. and certain of its affiliated entities (JP) and (ii) the Manufacturing
and Supply Agreement dated August 6, 1997 by and between JPI Pharmaceutica International (JPI and
together with JP, Janssen), JP and ACT II (collectively,
the Janssen Agreements). The assets of Royalty Sub will not
be available to satisfy other obligations of ours. Also on February 1,
2005, Royalty Sub issued an aggregate principal amount of
$170 million of its
Risperdal Consta® PhaRMA SM Secured 7% Notes due 2018 (the 7% Notes) to
certain institutional investors in a private placement and at a discount for net proceeds after
transaction expenses of approximately $145 million. The Royalty Payments are the sole source of
payment for the 7% Notes. We will receive all of the Risperdal Consta revenues in excess of
interest, premium, if any, and principal payments. Principal on the 7% Notes must be paid in full
by the final legal maturity date of January 1, 2018, unless redeemed earlier. Non-payment of
principal will not be an event of default prior to January 1, 2018. The annual cash coupon rate is 7% and is payable
quarterly, beginning on April 1, 2005, however portions of the principal amount that are not paid
off in accordance with the expected principal repayment profile will accrue interest at 9.75%. The
yield to maturity on the 7% Notes is 9.75%. Through January 1, 2009, the 7% Note holders will
receive only the quarterly cash interest payments. In addition, beginning on April 1, 2009, principal
payments will be made to investors, subject to certain conditions. Timing of the principal repayment will be based
on the revenues received by Royalty Sub but will occur no earlier than equally over the twelve
quarters between April 1, 2009 and 21




---



##### Table of Contents



January 1, 2012, subject to certain conditions. The 7% Notes, however, may be redeemed at Royalty Subs option, subject, in certain circumstances, to the payment
of a redemption premium. The 7% Notes have not been and will not be registered under the Securities Act of 1933 and may not
be offered or sold in the United States absent an applicable exemption from the registration
requirements of the Act. A more detailed description of the obligations of Alkermes and Royalty
Sub can be found in our Form 8-K, filed with the Securities and Exchange Commission in connection
with this transaction. 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, arrangements relating to assets or other financing methods or
structures. 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 and, for any future proprietary
products, the sales, marketing and promotion expenses associated with marketing products. We believe that our current cash and cash equivalents and short-term investments combined with
anticipated manufacturing and royalty revenues, research and development revenues under
collaborative arrangements, the approximately $145 million in net proceeds received from the
private placement of the 7% Notes and interest income, will be sufficient to meet out anticipated
capital requirements through at least March 31, 2007. The contractual cash obligations disclosure included in our annual report on Form 10-K for the year
ended March 31, 2004 has not materially changed since we filed that report, except for the term
loan and purchase obligations as follows: One to
    
    
    Four to
    
    
    AfterLess Than
    
    
    Three Years
    
    
    Five Years
    
    
    Five YearsOne
Year
    
    

(Fiscal
    
    

(Fiscal
    
    

(After(In thousands)
    
    Total
    
    
    (Fiscal 2005)
    
    
    2006 - 2008)
    
    
    2009-2010)
    
    
    Fiscal 2010)Contractual Cash Obligations:Term Loan
    
    $
    4,178
    
    
    $
    212
    
    
    $
    3,966
    
    
    $
    
    
    
    $
    7% Notes (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    5,580
    
    
    
    4,860
    
    
    
    720
    
    
    
    
    
    
    
    
   (1)
    
    The 7% Notes were issued by RC Royalty Sub LLC, a wholly-owned subsidiary of Alkermes. The 7%
Notes are non-recourse to Alkermes. We may need to raise substantial additional funds for longer-term product development, including
development of our proprietary product candidates, regulatory approvals and manufacturing and sales
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. 
 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 is used to preserve our capital until it is required to fund
operations, including our research and development activities. Our short-term investments and
restricted investments consist of U.S. Government obligations, high-grade corporate notes and
commercial paper. All of our investments in debt securities are classified as available-for-sale
and are recorded at fair value. Our investments 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 policy we do not believe that we have a material exposure to interest
rate risk. Although our 22




---



##### Table of Contents



investments are subject to credit risk, 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 investments are sensitive to changes in interest rates. Interest rate
changes would result in a change in the net fair value of these financial instruments due to the
difference between the market interest rate and the market interest rate at the date of purchase of
the financial instrument. A 10% decrease in market interest rates would not result in a material
impact on the net fair value of such interest-sensitive financial instruments. A 10% increase or decrease in market interest rates on our term loan with GE would not result in a
material impact on our operations. Since the interest rates on our 2 1/2% Subordinated Notes, 3.75%
Convertible Subordinated Notes, capital leases and the Notes issued in the private placement in
February 2005 are fixed, we are not subject to interest rate risk on these financial instruments. We hold warrants of public companies received in connection with collaboration and licensing
arrangements, which are recorded as derivatives under the caption Other assets in the condensed
consolidated balance sheets. The recorded value of such warrants, and accordingly our Other income
(expense), net, can fluctuate significantly based on fluctuations in the market value of the
underlying securities of the issuer of the warrants Foreign Currency Exchange Rate Risk The royalty revenues we recognize and report in our condensed consolidated statements of operations
and the related payments we receive on our Risperdal Consta product are calculated as a percentage
of the net sales made by our collaborative partner. Some of these sales made by our collaborative
partner are made in foreign countries. These foreign sales are initially denominated in foreign
currency in which the sale is made and subsequently converted into U.S. dollars at the then foreign
currency spot rate to determine the amount that our collaborative partner pays us as royalties.
Fluctuations in the foreign currency exchange ratio between the U.S. dollars and these foreign
currencies will have the effect of increasing or decreasing our recognized and reported royalty
revenues and the related payments we receive even if there is a constant amount of sales in foreign
currencies. For example, if the U.S. dollar strengthens against a foreign currency, then our
royalty revenues and related payments will decrease given a constant amount of sales in such
foreign currency. The impact on our royalty revenues and related payment from fluctuations in foreign currency
exchange rates is based on a number of factors, including the amount of sales in any foreign
currency, the exchange ratio (and the change in the foreign currency exchange ratio from the prior
period) between a foreign currency and the U.S. dollar, and the amount of sales by our
collaborative partner that are denominated in foreign currencies. We do not currently hedge our
foreign currency exchange rate risk. 
 Item 4. Controls and Procedures As of December 31, 2004, our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2004, our disclosure controls and procedures were
effective in ensuring that material information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and forms, including
ensuring that such material information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. During the period covered by this report, there have been
no changes in our internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. 23




---



##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Beginning in October 2003, we and certain of our current and former officers and directors were
named as defendants in six purported securities class action lawsuits filed in the United States
District Court for the District of Massachusetts. The cases were captioned: Bennett v. Alkermes,
Inc., et. al., 1:03-CV-12091 (D. Mass.); Ragosta v. Alkermes, Inc., et. al., 1:03-CV-12184 (D.
Mass.); Barry Family LP v. Alkermes, Inc., et. al., 1:03-CV-12243 (D. Mass.); Waltzer v. Alkermes,
Inc., et. al., 1:03-CV-12277 (D. Mass.); Folkerts v. Alkermes, Inc., et. al., 1:03-CV-12386 (D.
Mass.); and Slavas v. Alkermes, Inc., et. al., 1:03-CV-12471 (D. Mass.). On May 14, 2004, the six
actions were consolidated into a single action captioned: In re Alkermes Securities Litigation,
Civil Action No. 03-CV-12091-RCL (D. Mass.). On July 12, 2004, a single consolidated amended
complaint was filed on behalf of purchasers of our common stock during the period April 22, 1999 to
July 1, 2002. The consolidated amended complaint generally alleges, among other things, that,
during such period, the defendants made misstatements to the investing public relating to the
manufacture and FDA approval of our Risperdal Consta product. The consolidated amended complaint
seeks unspecified damages. On September 10, 2004, we and the individual defendants filed a motion
to dismiss all claims asserted against us and them in a consolidated amended complaint in their
entirety. The Court heard oral argument on the motion on January 12, 2005, and we are awaiting a
decision on the motion. Although we believe these allegations are without merit and intend to
vigorously defend against them, the litigation process is inherently uncertain and there can be no
guarantee as to the ultimate outcome of these matters. From time to time, we may be subject to other legal proceedings and claims in the ordinary course
of business. We are not currently aware of any such proceedings or claims that we believe will
have, individually or in the aggregate, a material adverse effect on our business, financial
condition or results of operations. 
 Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits: Exhibit No.10.1
    
    Promissory Note by and between Alkermes, Inc. and General
Electric Capital Corporation, dated December 22, 2004
(filed herewith).10.2
    
    Master Security Agreement by and between Alkermes, Inc. and
General Electric Capital Corporation dated December 22,
2004 (filed
herewith).10.3
    
    Addendum No. 001 To Master Security Agreement by and
between Alkermes, Inc. and General Electric Capital
Corporation, dated December 22, 2004 (filed herewith).10.4*
    
    Fourth Amendment To Development Agreement and First
Amendment To Manufacturing and Supply Agreement by and
between JPI Pharmaceutica International, Janssen
Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 20, 2000 (with certain confidential
information deleted) (filed herewith).10.5*
    
    Third Amendment To Development Agreement, Second Amendment
To Manufacturing and Supply Agreement and First Amendment
To License Agreements by and between JPI Pharmaceutica

International, Janssen Pharmaceutica Inc. and Alkermes
Controlled Therapeutics Inc. II, dated April 1, 2000 (with
certain confidential information deleted) (filed herewith).10.6*
    
    Agreement by and between JPI Pharmaceutica International,
Janssen Pharmaceutica Inc. and Alkermes Controlled
Therapeutics Inc. II, dated December 21, 2002 (with certain
confidential information deleted) (filed herewith).10.7*
    
    Amendment to Agreement by and between JPI Pharmaceutica
International, Janssen Pharmaceutica
 24




---



##### Table of Contents



Exhibit No.Inc. and Alkermes Controlled Therapeutics Inc. II, dated December 16, 2003
(with certain confidential information deleted) (filed
herewith).10.8*
    
    Amendment to Manufacturing and Supply Agreement by and
between JPI Pharmaceutica International, Janssen
Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 22, 2003 (with certain confidential
information deleted) (filed herewith).10.9*
    
    Fourth Amendment To Manufacturing and Supply Agreement by
and between JPI Pharmaceutica International, Janssen
Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated January 10, 2005 (with certain confidential
information deleted) (filed herewith).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith).
   *
    
    Confidential treatment requested for portions of this document and is pending
clearance with the Securities and Exchange Commission. 25




---



##### Table of Contents



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 8, 2005
    By:
    /s/ Richard F. PopsRichard F. PopsChief Executive Officer and Director
(Principal Executive Officer) Date: February 8, 2005
    By:
    /s/ James M. FratesJames M. FratesVice President, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting Officer) 26




---



##### Table of Contents



Exhibit Index Exhibit No.10.1
    
    Promissory Note by and between Alkermes, Inc. and General
Electric Capital Corporation, dated December 22, 2004
(filed herewith).10.2
    
    Master Security Agreement by and between Alkermes, Inc. and
General Electric Capital Corporation dated December 22,
2004 (filed
herewith).10.3
    
    Addendum No. 001 To Master Security Agreement by and
between Alkermes, Inc. and General Electric Capital
Corporation, dated December 22, 2004 (filed herewith).10.4*
    
    Fourth Amendment To Development Agreement and First
Amendment To Manufacturing and Supply Agreement by and
between JPI Pharmaceutica International, Janssen
Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 20, 2000 (with certain confidential
information deleted) (filed herewith).10.5*
    
    Third Amendment To Development Agreement, Second Amendment
To Manufacturing and Supply Agreement and First Amendment
To License Agreements by and between JPI Pharmaceutica
International, Janssen Pharmaceutica Inc. and Alkermes
Controlled Therapeutics Inc. II, dated April 1, 2000 (with
certain confidential information deleted) (filed herewith).10.6*
    
    Agreement by and between JPI Pharmaceutica International,
Janssen Pharmaceutica Inc. and Alkermes Controlled
Therapeutics Inc. II, dated December 21, 2002 (with certain
confidential information deleted) (filed herewith).10.7*
    
    Amendment to Agreement by and between JPI Pharmaceutica
International, Janssen Pharmaceutica Inc. and Alkermes
Controlled Therapeutics Inc. II, dated December 16, 2003
(with certain confidential information deleted) (filed
herewith).10.8*
    
    Amendment to Manufacturing and Supply Agreement by and
between JPI Pharmaceutica International, Janssen
Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated December 22, 2003 (with certain confidential
information deleted) (filed herewith).10.9*
    
    Fourth Amendment To Manufacturing and Supply Agreement by
and between JPI Pharmaceutica International, Janssen
Pharmaceutica Inc. and Alkermes Controlled Therapeutics
Inc. II, dated January 10, 2005 (with certain confidential
information deleted) (filed herewith).31.1
    
    Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (furnished herewith).32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (furnished herewith).
   *
    
    Confidential treatment requested for portions of this document and is pending
clearance with the Securities and Exchange Commission. 27