Alkermes plc. (ALKS)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this Annual Report. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. See “Cautionary Note Concerning Forward-Looking Statements” on page 3 of this Annual Report. Factors that might cause future results to differ materially from those projected in the forward-looking statements also include, but are not limited to, those discussed in “Item 1A—Risk Factors” and elsewhere in this Annual Report. A detailed discussion of our 2022 financial condition and results of operations, and of 2023 year-over-year changes as compared to 2022, can be found in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 21, 2024.

Overview

We have a portfolio of proprietary products that we manufacture, market and sell in the U.S.—VIVITROL, ARISTADA, ARISTADA INITIO and LYBALVI. We also earn manufacturing and/or royalty revenues on net sales of products commercialized by our licensees, the most significant of which in 2024 were the long-acting INVEGA products and VUMERITY. We expect VIVITROL, ARISTADA, ARISTADA INITIO, LYBALVI and VUMERITY to generate significant revenues for us in the near- and medium-term as we believe these products are singular or competitively advantaged products in their classes.

In 2024, our net income from continuing operations was $372.1 million, as compared to $519.2 million in 2023. The decrease in net income from continuing operations was primarily due to two significant one-time events in 2023, which were the receipt in June 2023 of back royalties and interest in respect of 2022 U.S. sales of the long-acting INVEGA products, following the successful outcome of the arbitration proceedings related to such products, and the partial release of our valuation allowance maintained against certain Irish deferred tax assets. These events were partially offset by an increase in our product sales, net and a decrease in our operating expenses in 2024. These items are discussed in further detail within the “Results of Operations” section below.

Business Update

In May 2024, we completed the sale of the Athlone Facility to Novo and entered into subcontracting arrangements to continue certain development and manufacturing activities performed at the Athlone Facility, which may continue through the end of 2025.

In November 2023, we completed the separation of our former oncology business into a new, independent, publicly-traded company (the “Separation”), which is more fully described in Note 3, Discontinued Operations, in the “Notes to Consolidated Financial Statements” in this Annual Report.

Results of Operations

As a result of the Separation, the historical results of our former oncology business have been reflected as discontinued operations in our consolidated financial statements through November 15, 2023, the date of the Separation. Prior period results of operations and balance sheet information have been recast to reflect this presentation.

Product Sales, Net

Our product sales, net, consist of sales of VIVITROL, ARISTADA, ARISTADA INITIO, and LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. The following table presents the adjustments deducted from product sales, gross to arrive at product sales, net, for sales of these products during the years ended December 31, 2024 and 2023:

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VIVITROL product sales, gross, increased by 10%, which was primarily due to a 7% increase in the number of units sold and a 3.2% increase in the selling price that went into effect in January 2024. ARISTADA and ARISTADA INITIO product sales, gross, increased by 5%, which was primarily due to a 3% increase in the number of units sold and a 3.0% increase in the selling price that went into effect in January 2024. LYBALVI product sales, gross, increased by 52%, which was primarily due to a 45% increase in the number of units sold and increases of 3.8% and 2.0% in the selling price that went into effect in January 2024 and July 2024, respectively.

The decrease in Medicaid rebates as a percentage of sales was primarily due to the increase in sales of LYBALVI, which has lower Medicaid utilization than VIVITROL, ARISTADA and ARISTADA INITIO, and actual Medicaid utilization rates related to VIVITROL being lower than original estimates, due, in part, to $8.7 million in actual credits received in the fourth quarter of 2024 from certain states related to duplicate Medicaid billings.

The following table compares product sales, net earned during the years ended December 31, 2024 and 2023:

A number of companies currently market and/or are developing products to treat addiction, including alcohol and opioid dependence, that may compete with, and negatively impact, future sales of VIVITROL. Increased competition may lead to reduced unit sales of VIVITROL and increased pricing pressure. The latest to expire of our patents covering VIVITROL will expire in 2029 in the U.S. Pursuant to the terms of a confidential settlement and license agreement entered into in August 2023 with Teva, we granted Teva a non-exclusive, royalty-free, non-transferable, non-sublicensable limited license under the remaining patent covering VIVITROL to market and sell a generic version of VIVITROL in the U.S. beginning on the First Entry Date, or earlier under certain circumstances. Under the terms of a settlement and license agreement entered into in July 2019 with Amneal, we granted Amneal a non-exclusive license under certain patents covering VIVITROL, including the remaining patent covering VIVITROL in the U.S., to market and sell a generic formulation of VIVITROL in the U.S. beginning on the earlier of the First Entry Date, sometime in 2028 or earlier under certain circumstances.

A number of companies currently market and/or are developing products to treat schizophrenia and/or bipolar I disorder that may compete with and negatively impact future sales of ARISTADA, ARISTADA INITIO and LYBALVI. Increased competition may lead to reduced unit sales of ARISTADA, ARISTADA INITIO and LYBALVI and increased pricing pressure. The latest to expire of our patents covering ARISTADA, ARISTADA INITIO and LYBALVI in the U.S. will expire in 2039, 2039 and 2041, respectively; and, as such, we do not anticipate any generic versions of these products to enter the market in the near term.

Manufacturing and Royalty Revenues

Manufacturing revenue from RISPERDAL CONSTA and VUMERITY are recognized at the point in time that the product has been fully manufactured. Royalties earned on our licensees’ net sales of products using our proprietary technologies are recognized in the period such products are sold by our licensees. The following table compares manufacturing and royalty revenues earned in the years ended December 31, 2024 and 2023:

The decrease in royalty revenues related to the long-acting INVEGA products was primarily due to the receipt in June 2023 of back royalties of $195.4 million, inclusive of $8.1 million in late-payment interest, related to 2022 U.S. sales of the long-acting INVEGA products following the successful outcome of the arbitration proceedings related to such products and the expiration of our royalty on U.S. net sales of INVEGA SUSTENNA in August 2024. Pursuant to the Final Award issued in the arbitration proceedings,

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we are entitled to royalty revenues from Janssen related to U.S. net sales of INVEGA TRINZA and INVEGA HAFYERA through certain specified dates in 2030. We expect royalty revenues from net sales of the long-acting INVEGA products to decrease further in 2025, as the royalty revenues related to U.S. net sales of INVEGA SUSTENNA comprised a significant portion of the overall royalty revenues for the long-acting INVEGA products.

For additional discussion of our agreements with Janssen related to the long-acting INVEGA products, including the royalty provisions set forth therein and the related arbitration proceedings and outcome, see the section entitled “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report.

In addition, each of INVEGA SUSTENNA and INVEGA TRINZA is currently subject to Paragraph IV litigation in response to companies seeking to market generic versions of such product. Increased competition from new products or generic versions of any one or more of the long-acting INVEGA products may lead to reduced unit sales of the long-acting INVEGA products, including those not yet genericized, and increased pricing pressure. For a discussion of legal proceedings related to INVEGA TRINZA, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for information about risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “Uncertainty over IP in the biopharmaceutical industry has been the source of litigation and other legal proceedings, and we or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

The increase in VUMERITY revenue was due to an $8.3 million increase in royalty revenue, partially offset by a $3.6 million decrease in manufacturing revenue. The increase in royalty revenue was primarily due to an increase in end-market sales of VUMERITY to $628.0 million in 2024, as compared to $576.3 million in 2023. The decrease in manufacturing revenue was primarily due to a reduction in the selling price. The manufacturing fee we earn is based on our cost to produce VUMERITY. As the assets used to manufacture VUMERITY were classified as held for sale and transferred to Novo in connection with the sale of the Athlone Facility, depreciation expense was removed from the manufacturing cost base, which had a negative impact on our manufacturing fee. For a discussion of our agreements with Biogen related to VUMERITY, including the manufacturing and royalty revenue provisions set forth therein, see the section entitled “Collaborative Arrangements—Biogen” in “Item 1—Business” in this Annual Report.

The decrease in revenue from RISPERDAL CONSTA was primarily due to a decrease of $13.0 million in manufacturing revenue, which was primarily due to a decrease in the number of batches made available to Janssen. The decrease in royalty revenue was due to expirations of the patents covering RISPERDAL CONSTA, which expired in the U.S. in January 2023 and in the EU in 2021. We expect revenues from RISPERDAL CONSTA to continue to decrease as patents covering RISPERDAL CONSTA continue to expire in markets where end-market net sales of RISPERDAL CONSTA occur. We are aware of potential generic and other competition to RISPERDAL CONSTA that may lead to reduced unit sales and increased pricing pressure. For a discussion of our agreements with Janssen related to RISPERDAL CONSTA, including the manufacturing provisions set forth therein, see the section entitled “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report.

During the years ended December 31, 2024 and 2023, we recognized $36.6 million and $49.9 million, respectively, in manufacturing and royalty revenue related to FAMPYRA which is included within “Other” in the table above. As of December 31, 2024, our manufacturing obligations related to FAMPYRA concluded. Accordingly, we do not expect to recognize any revenues related to FAMPYRA going forward.

Certain of our manufacturing and royalty revenues are earned in countries outside of the U.S. and are denominated in currencies in which the product is sold. See “Item 7A—Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report for information on currency exchange rate risk related to our revenues and “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “Currency exchange rates may affect revenues and expenses” for risks related to currency exchange rates.

Costs and Expenses

Cost of Goods Manufactured and Sold

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The decrease in cost of goods manufactured and sold was primarily due to lower cost of goods manufactured for certain legacy products due to a decrease in volumes of such products. This includes RISPERDAL CONSTA as well as products manufactured at the Athlone Facility. This decrease was partially offset by an increase in the cost of goods sold for certain of our proprietary products due to increases in the number of units sold as discussed above, and an increase in costs related to VIVITROL out-of-specification batches and subsequent investigation costs.

Research and Development Expenses

For each of our R&D programs, we incur both external and internal expenses. External R&D expenses include fees for clinical and preclinical activities performed by CROs, consulting fees, and costs related to laboratory services, the purchase of drug product materials and third-party manufacturing development activities. Internal R&D expenses include employee-related expenses, occupancy costs, depreciation and general overhead. We track external R&D expenses for each of our development programs; however, internal R&D expenses are not tracked by individual program as they can benefit multiple development programs or our products or technologies in general.

The following table sets forth our external R&D expenses for the years ended December 31, 2024 and 2023 relating to our then-current development programs and our internal R&D expenses, listed by the nature of such expenses:

These amounts are not necessarily predictive of future R&D expenses. In an effort to allocate our spending most effectively, we continually evaluate our products under development based on the performance of such products in preclinical and/or clinical trials, our expectations regarding the likelihood of their regulatory approval and our view of their future potential commercial viability, among other factors.

The increase in expenses related to ALKS 2680 was primarily due to an increase in spend related to the advancement of the development programs for the product, including completion of our phase 1b proof-of-concept studies, initiation of our phase 2 clinical studies, Vibrance-1 and Vibrance-2 and preparatory spend in advance of initiation of our phase 2 study for IH. The increase in expenses related to LYBALVI was primarily due to increased spend on our pediatric studies related to the product, partially offset by decreased spend following the completion of our long-term safety and tolerability studies. The decrease in other external R&D expenses was primarily due to identifying cost-effective resourcing options for clinical programming and outsourced data management services and decreases in spend on activities associated with certain of our research programs. The decrease in employee-related expenses was primarily due to a decrease in salaries and benefits related to a 10% reduction in R&D-related headcount during 2024.

Selling, General and Administrative Expenses

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The decrease in selling and marketing expense was primarily due to a $34.6 million decrease in marketing expense related primarily to decreased media spend and free goods, a $7.1 million decrease in professional services, primarily due to the decrease in media spend, and a $3.6 million decrease in employee related expenses, primarily due to a 7% decrease in sales and marketing headcount.

Amortization of Acquired Intangible Assets

Our amortizable intangible assets primarily consisted of technology and collaborative arrangements acquired as part of the acquisition of Elan Drug Technologies (“EDT”) in September 2011. These intangible assets were amortized over 12 to 13 years using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated from the underlying patent or contract, and became fully amortized during 2024.

Other Income, Net

Interest income consists of interest earned on our cash and available-for-sale investments. The increase in interest income was due to an increase in our cash and investments and increases in interest rates due to the rising interest rate environment. Interest expense consists of interest incurred on our previously outstanding term loans scheduled to become due in 2026 (the “Former Term Loans”) under our former amended and restated credit agreement (the “Former Credit Agreement”), which we prepaid in full and terminated on December 19, 2024.

The increase in other income (expense), net was primarily due to the gain on the sale of the Athlone Facility of approximately $1.5 million, following the completion of the sale in May 2024.

Income Tax Provision (Benefit)

The income tax provision in 2024 was primarily due to taxes on income earned in Ireland. The income tax benefit in 2023 was primarily attributable to the partial release of the valuation allowance maintained against certain Irish deferred tax assets, partially offset by taxes on income earned in the U.S. and Ireland. Our effective tax rate during the year ended December 31, 2024 was 16.1%, which exceeds the Irish statutory tax rate of 12.5%, primarily due to non-deductible expenses and income that was taxable at rates higher than the Irish statutory tax rate. The new corporate minimum tax rate of 15.0% did not have a material impact on our business in 2024.

Cumulative unremitted earnings of U.S. subsidiaries totaled approximately $933.5 million as of December 31, 2024. In the event of a repatriation of those earnings in the form of dividends or otherwise, we may be liable for income taxes, subject to adjustment, if any, for foreign tax credits and foreign withholding taxes payable to foreign tax authorities. We estimate that approximately $72.0 million of income taxes would be payable on the repatriation of the unremitted earnings to Ireland.

As of December 31, 2024, we had $393.9 million of Irish NOL carryforwards, $14.1 million of U.S. federal NOL carryforwards, $43.2 million of state NOL carryforwards and $34.0 million of state tax credits which will either expire on various dates through 2039 or can be carried forward indefinitely. These loss and credit carryforwards are available to reduce certain future Irish and foreign taxable income and tax. These loss and credit carryforwards are subject to review and possible adjustment by the appropriate taxing authorities, and may be subject to limitations based upon changes in the ownership of our ordinary shares. Included within these loss and credit carryforwards are $14.1 million of U.S. federal NOL carryforwards and $5.8 million of state NOL

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carryforwards, acquired as part of the acquisition of Rodin Therapeutics, Inc. (“Rodin”) in November 2019, each of which are subject to a $0.5 million annual limitation.

Liquidity and Capital Resources

Our financial condition is summarized as follows:

At December 31, 2024, our investments consisted of the following:

Sources and Uses of Cash

We generated $439.1 million and $401.4 million of cash from operating activities during the years ended December 31, 2024 and 2023, respectively. In December 2024, we prepaid our previously outstanding long-term debt without penalty in the amount of $289.5 million and, during the course of 2024, repurchased approximately $200.0 million of our ordinary shares. We expect that our existing cash, cash equivalents and investments will be sufficient to finance our anticipated working capital and other cash requirements, including capital expenditures, for at least the twelve months following the date from which our financial statements were issued. Subject to market conditions, interest rates and other factors, we may pursue opportunities to obtain financing in the future, including debt and equity offerings, corporate collaborations, bank borrowings, arrangements relating to assets or other financing methods or structures.

Our investment objectives are, first, to preserve liquidity and conserve capital and, second, to generate investment income. We mitigate credit risk in our cash reserves by maintaining a well-diversified portfolio that limits the amount of investment exposure as to institution, maturity and investment type. Our available-for-sale investments consist primarily of short and long-term U.S. government and agency debt securities and corporate debt securities. Our held-to-maturity investments consist of investments that are held as collateral under certain letters of credit related to certain of our lease agreements.

We classify available-for-sale investments in an unrealized loss position that do not mature within 12 months as long-term investments. We have the intent and ability to hold these investments until recovery, which may be at maturity, and it is more-likely-than-not that we would not be required to sell these securities before recovery of their amortized cost.

We have no off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources in the next 12 months. In connection with our acquisition of Rodin, we may become obligated to make up to $825.0 million in future milestone payments to the former shareholders of Rodin, $200.0 million of which would be triggered upon achievement of certain specified clinical milestones, $300.0 million of which would be triggered by the achievement of certain regulatory milestones and $325.0 million of which would be triggered upon the attainment of certain sales thresholds. At December 31, 2024, we had not recorded a liability related to these milestone payments as none of the future events that would trigger a milestone payment were considered probable of occurring.

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Information about our cash flows, by category, is presented in the accompanying consolidated statements of cash flows. The discussion of our cash flows that follows does not include the impact of any adjustments to remove discontinued operations and is stated on a total company consolidated basis. The following table summarizes our cash flows for the years ended December 31, 2024 and 2023:

Operating Activities

Cash flows provided by operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income (loss) for non-cash operating items such as depreciation, amortization and share-based compensation and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.

Cash flows provided by operating activities during 2024 primarily consisted of net income of $367.1 million, adjusted for non-cash items, including share-based compensation of $96.6 million and depreciation and amortization of $28.5 million and deferred income taxes of $40.5 million.

Cash flows provided by operating activities during 2023 primarily consisted of net income of $355.8 million, adjusted for non-cash items, including share-based compensation of $100.9 million and depreciation and amortization of $74.9 million, partially offset by changes in working capital of $36.7 million and deferred income taxes of $99.9 million. During 2023, net income included receipt of $195.4 million from Janssen, inclusive of $8.1 million in late-payment interest, related to 2022 U.S. net sales of the long-acting INVEGA products following the successful outcome of the arbitration proceedings in respect of such products.

Investing Activities

Cash flows used in investing activities during 2024 primarily consisted of $176.2 million in net purchases of investments and the purchase of $33.5 million of property, plant and equipment. These outflows were offset by proceeds from the sale of the Athlone Facility and related business of $97.9 million. Cash flows provided by investing activities during 2023 primarily consisted of $101.1 million in net sales of investments and offset by the purchase of $48.0 million of property, plant and equipment.

We expect to spend approximately $45.0 million to $50.0 million during the year ending December 31, 2025 for capital expenditures. We continue to evaluate our manufacturing capacity based on expectations of demand for the products that we manufacture and will continue to record such amounts within construction in progress until such time as the underlying assets are placed into service, or we determine we have sufficient existing capacity and the assets are no longer required, at which time we would recognize an impairment charge. We continue to periodically evaluate whether facts and circumstances indicate that the carrying value of these long-lived assets to be held and used may not be recoverable.

Financing Activities

Cash flows used in financing activities during 2024 primarily related to the prepayment of our previously outstanding long-term debt in the full amount of $289.5 million, payment for the repurchase of our ordinary shares and related expenses in the amount of $200.3 million, and $29.6 million of employee taxes paid related to net share settlements of equity awards, partially offset by $27.6 million of cash that we received upon exercises of employee stock options. Cash flows used in financing activities during 2023 primarily related to $275.0 million in cash distributed to Mural Oncology plc in connection with the Separation and $28.5 million of employee taxes paid related to net share settlements of equity awards, partially offset by $16.8 million of cash that we received upon exercises of employee stock options.

Debt

In December 2024, we prepaid in full all Former Term Loans under the Former Credit Agreement for a total of $289.5 million. The Company did not incur any early termination penalties in connection with the termination of the Former Credit Agreement (other than customary breakage costs). All liens on the collateral securing the obligations under the Former Credit Agreement were released in connection with the termination. Such prepayment was accounted for as a debt extinguishment. See Note 12, Long-Term Debt, in the “Notes to Consolidated Financial Statements” in this Annual Report for additional discussion related to our Former Term Loans.

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Discontinued Operations

Net loss from discontinued operations consists of the results of our former oncology business and is reported as a separate component of income. For additional information, see Note 3, Discontinued Operations, in the “Notes to Consolidated Financial Statements” in this Annual Report.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments based on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the “Notes to Consolidated Financial Statements” in this Annual Report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the audit and risk committee of our board of directors.

Revenue from Contracts with Customers

We recognize revenue when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenue following the five-step model prescribed under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“Topic 606”): (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy the performance obligations.

Product Sales, Net

Our product sales, net consist of sales in the U.S. of VIVITROL, ARISTADA, ARISTADA INITIO and LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. Product sales, net are recognized when the customer obtains control of the product, which is when the product has been received by the customer.

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, healthcare providers or payers. Our process for estimating reserves established for these variable consideration components does not differ materially from historical practices. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. The following are our significant categories of sales discounts and allowances:

•
Medicaid Rebates—we record accruals for rebates to U.S. states under the Medicaid Drug Rebate Program as a reduction of sales when the product is shipped into the distribution channel using the expected value. We rebate individual U.S. states for all eligible units purchased under the Medicaid program based on a rebate per unit calculation, which is based on our average manufacturer prices. We estimate expected unit sales to individuals covered by Medicaid and rebates per unit under the Medicaid program and adjust our rebate accrual based on actual unit sales and rebates per unit and changes in trends in Medicaid utilization. In 2024, actual Medicaid utilization rates related to VIVITROL were lower than original estimates, due, in part, to $8.7 million in actual credits received in the fourth quarter of 2024 from certain states related to duplicate Medicaid billings. Medicaid rebates for our other products have not differed materially from our estimates;

•
Chargebacks—discounts that occur when contracted indirect customers purchase directly from wholesalers and specialty distributors. Contracted customers generally purchase a product at its contracted price. The wholesaler or specialty distributor, in turn, then generally charges back to us the difference between the wholesale acquisition cost and the contracted price paid to the wholesaler or specialty distributor by the customer. The allowance for chargebacks is made using the expected value and is based on actual and expected utilization of these programs. Chargebacks could exceed historical experience and our estimates of future participation in these programs. To date, actual chargebacks have not differed materially from our estimates;

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•
Product Discounts—cash consideration, including sales incentives, given by us under agreements with a number of wholesaler, distributor, pharmacy, and treatment provider customers that provide them with a discount on the purchase price of products. The reserve is made using the expected value and to date, actual product discounts have not differed materially from our estimates;

•
Product Returns—we record an estimate for product returns at the time our customers take control of our product. We estimate this liability using the expected returns of product sold based on our historical return levels and specifically identified anticipated returns due to known business conditions and product expiry dates. Return amounts are recorded as a reduction of sales. Once product is returned, it is destroyed. Actual product returns have not differed materially from our estimates; and

•
Medicare Part D—we record accruals for Medicare Part D liabilities under the Medicare Coverage Gap Discount Program (“CGDP”) as a reduction of sales. Under the CGDP, patients reaching the annual coverage gap threshold are eligible for reimbursement coverage for out-of-pocket costs for covered prescription drugs. Under an agreement with the Centers for Medicare and Medicaid Services, manufacturers are responsible for reimbursement of prescription plan sponsors for the portion of out-of-pocket expenses not covered under their Medicare plans. Actual Medicaid Part D rebates have not differed materially from our estimates.

A rollforward of our provisions for sales and allowances is as follows:

(1)
“Contractual Adjustments” include “Medicaid Rebates” and “Medicare Part D” accruals

(2)
“Discounts” include “Chargebacks” and “Product Discounts”

Manufacturing Revenue

We recognize manufacturing revenues from the sale of products we manufacture for resale by our licensees. Substantially all of our manufacturing revenues are recognized at a point in time when control of the product passes to the licensee. The sales price for certain of our manufacturing revenues is based on the end-market sales price earned by our licensees. As end-market sales generally occur after we have recorded manufacturing revenue, we estimate the sales price for such products based on information supplied to us by our licensees, our historical transaction experience and other third-party data. Differences between actual manufacturing revenues and estimated manufacturing revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter. The differences between our actual and estimated manufacturing revenues have not been material to date.

Royalty Revenue

We recognize royalty revenues related to the sale by our licensees of products that incorporate our technology. All of our royalties qualify for the sales-and-usage exemption under Topic 606 as (i) such royalties are based strictly on the sales-and-usage by

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the licensee; and (ii) a license of IP is the sole or predominant item to which such royalties relate. Based on this exemption, such royalties are earned in the period the products are sold by our licensees and we have a present right to payment.

Certain of our royalty revenues are recognized based on information supplied to us by our licensees and require estimates to be made. Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter. The differences between our actual and estimated royalty revenues have not been material to date.

Discontinued operations

We determined that the separation of our former oncology business, which was completed on November 15, 2023, represented a disposal plan that met the criteria for classification of the oncology business as a discontinued operation in accordance with ASC 205-20, Discontinued Operations. Accordingly, the accompanying consolidated financial statements for all periods have been updated to present the assets and liabilities associated with the oncology business separately as discontinued operations on the consolidated balance sheet and the results of such discontinued operations reported as a separate component of income in the consolidated statements of operations and comprehensive income (loss).

For additional information related to discontinued operations, see Note 3, Discontinued Operations, in our “Notes to Consolidated Financial Statements” in this Annual Report.

Impairment of Long-Lived Assets

Long-lived assets, other than goodwill which is separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset.

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.

Goodwill

We evaluate goodwill for impairment for our reporting units annually, as of October 31, and whenever events or changes in circumstances indicate the carrying value of the reporting units may not be recoverable. A reporting unit is an operating segment, as defined by GAAP, or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by management. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics. As of December 31, 2024, we have one operating segment and two reporting units. Our goodwill, which solely relates to the Business Combination, has been assigned to one reporting unit which consists of the former EDT business.

We have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we elect this option and determine, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Among other relevant events and circumstances that affect the fair value of reporting units, we consider individual factors, such as microeconomic conditions, changes in the industry and the markets in which we operate as well as historical and expected future financial performance. Alternatively, we may elect to not first assess qualitative factors and instead immediately perform the quantitative impairment test.

On October 31, 2024, we elected to perform a qualitative impairment test and determined that, based on the weight of all available evidence, the fair value of the reporting unit more-likely-than-not exceeded its carrying value.

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Valuation of Deferred Tax Assets

We evaluate the need for deferred tax asset valuation allowances based on a more-likely-than-not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of deferred tax assets:

•
future reversals of existing taxable temporary differences;

•
future taxable income exclusive of reversing temporary differences and carryforwards;

•
taxable income in prior carryback years; and

•
tax-planning strategies.

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors including, but not limited to:

•
nature, frequency and severity of recent losses;

•
duration of statutory carryforward periods;

•
historical experience with tax attributes expiring unused; and

•
near- and medium-term financial outlook.

We utilize a rolling three years of actual and current year anticipated results as the primary measures of cumulative income (losses) in recent years. For additional information related to our assessment of our valuation allowance, see Note 17, Income Taxes in the “Notes to Consolidated Financial Statements” in this Annual Report.

The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations. For information related to risks surrounding our deferred tax assets, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Our deferred tax assets may not be realized.”

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies, “New Accounting Pronouncements” in our “Notes to Consolidated Financial Statements” in this Annual Report for discussion, if any, of new accounting standards.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this Annual Report. The following discussion contains forward-looking statements. Actual results may differ significantly from those projected in the forward-looking statements. See “Cautionary Note Concerning Forward-Looking Statements” on page 3 of this Annual Report. Factors that might cause future results to differ materially from those projected in the forward-looking statements also include, but are not limited to, those discussed in “Item 1A—Risk Factors” and elsewhere in this Annual Report. A detailed discussion of our 2021 financial condition and results of operations, and of 2022 year-over-year changes as compared to 2021, can be found in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 16, 2023.

Overview

We have a portfolio of proprietary products that we manufacture, market and sell in the U.S.—VIVITROL, ARISTADA, ARISTADA INITIO and LYBALVI. We also earn manufacturing and/or royalty revenues on net sales of products commercialized by our licensees, the most significant of which in 2023 were the long-acting INVEGA products and VUMERITY. We expect VIVITROL, ARISTADA, ARISTADA INITIO, LYBALVI and VUMERITY to generate significant revenues for us in the near- and medium-term as we believe these products are singular or competitively advantaged products in their classes.

In 2023, our net income from continuing operations was $519.2 million, as compared to net loss from continuing operations of $33.2 million in 2022. The increase in net income from continuing operations was primarily due to increases of $142.4 million in product sales, net, $411.4 million in manufacturing and royalty revenue and $99.6 million in income tax benefit, partially offset by increases of $34.9 million in cost of goods manufactured and sold and $99.0 million in selling, general and administrative expenses. The increase in manufacturing and royalty revenue primarily relates to the successful outcome of the arbitration proceedings in respect of the long-acting INVEGA products. These items are discussed in further detail within the “Results of Operations” section below.

Business Update

On November 15, 2023, we completed the separation of our oncology business into Mural Oncology plc (“Mural”), a new, independent, publicly-traded company (the “Separation”). The Separation was effected by means of a distribution of all of the outstanding ordinary shares of Mural to our shareholders (the “Distribution”), in which each of our shareholders received one ordinary share, nominal value $0.01 per share, of Mural for every ten ordinary shares, par value $0.01 per share, of Alkermes held by such shareholder as of the close of business on November 6, 2023, the record date for the Distribution. The effective time of the Distribution was 12:01 a.m. Eastern time on November 15, 2023 (the “Separation Date”). In connection with the Separation, we entered into a separation agreement with Mural that, among other things, sets forth the principal terms of the Separation and the Distribution, and a number of other ancillary agreements. The Separation and related agreements are more fully described in Note 3, Discontinued Operations, in the “Notes to Consolidated Financial Statements” in this Annual Report.

On December 14, 2023, we announced that we entered into a definitive agreement to sell the Athlone Facility to Novo and plan to enter into subcontracting arrangements to continue certain development and manufacturing activities currently performed at the Athlone Facility for a period of time after the closing of the transaction, which arrangements may continue through the end of 2025. The transaction is subject to various uncertainties and risk, including, without limitation, satisfaction of the conditions to closing of the transaction on the anticipated timeline, potential negative impacts on our relationships with current suppliers or licensees or diversion of management and employee attention from daily business operations, and risks inherent in the transition to subcontracting arrangements. The transaction is expected to close in mid-2024, subject to certain closing conditions.

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Results of Operations

As a result of the Separation, the historical results of our oncology business have been reflected as discontinued operations in our consolidated financial statements through the Separation Date. Prior period results of operations and balance sheet information have been recast to reflect this presentation.

Product Sales, Net

Our product sales, net, consist of sales of VIVITROL, ARISTADA and ARISTADA INITIO, and LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. The following table presents the adjustments deducted from product sales, gross to arrive at product sales, net, for sales of these products during the years ended December 31, 2023 and 2022:

VIVITROL product sales, gross, increased by 13%, which was primarily due to an increase of 5% in the number of VIVITROL units sold and a 6% increase in the selling price of VIVITROL that went into effect in January 2023. ARISTADA and ARISTADA INITIO product sales, gross, increased by 11%, which was primarily due to an increase of 8% in the number of ARISTADA and ARISTADA INITIO units sold and a 3% increase in the selling price of ARISTADA and ARISTADA INITIO that went into effect in January 2023. LYBALVI product sales, gross, increased by 102%, which was primarily due to an increase of 97% in the number of units sold and increases of 6% and 3% in the selling price of LYBALVI that went into effect in November 2022 and July 2023, respectively.

The following table compares product sales, net earned during the years ended December 31, 2023 and 2022:

A number of companies are working to develop products to treat addiction, including alcohol and opioid dependence, that may compete with, and negatively impact, future sales of VIVITROL. Increased competition may lead to reduced unit sales of VIVITROL and increased pricing pressure. The latest to expire of our patents covering VIVITROL will expire in 2029 in the U.S. Pursuant to the terms of a confidential settlement and license agreement entered into in August 2023 with Teva, we granted Teva a non-exclusive, royalty-free, non-transferable, non-sublicensable limited license under the remaining patent covering VIVITROL to market and sell a generic version of VIVITROL in the U.S. beginning on the First Entry Date, or earlier under certain circumstances. Under the terms of a settlement and license agreement entered into in July 2019 with Amneal, we granted Amneal a non-exclusive license under certain patents covering VIVITROL, including the remaining patent covering VIVITROL in the U.S., to market and sell a generic formulation of VIVITROL in the U.S. beginning on the earlier of the First Entry Date, sometime in 2028 or earlier under certain circumstances.

A number of companies currently market and/or are developing products to treat schizophrenia and/or bipolar I disorder that may compete with and negatively impact future sales of ARISTADA, ARISTADA INITIO and LYBALVI. Increased competition may lead to reduced unit sales of ARISTADA, ARISTADA INITIO and LYBALVI and increased pricing pressure. The latest to expire of our patents covering ARISTADA, ARISTADA INITIO and LYBALVI in the U.S. will expire in 2039, 2039 and 2041, respectively; and, as such, we do not anticipate any generic versions of these products to enter the market in the near term. We expect our product sales, net will continue to grow as VIVITROL continues to penetrate the alcohol dependence market in the U.S., as ARISTADA and ARISTADA INITIO continue to gain market share in the U.S., and as we continue to grow sales of LYBALVI in the U.S.

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Manufacturing and Royalty Revenues

Manufacturing revenue from RISPERDAL CONSTA and VUMERITY are recognized at the point in time that the product has been fully manufactured. Manufacturing revenues for other third-party products using our proprietary technologies are mostly recognized over time as products move through the manufacturing process, using an input method based on costs as a measure of progress. Royalties earned on our licensees’ net sales of products using our proprietary technologies are generally recognized in the period such products are sold by our licensees. The following table compares manufacturing and royalty revenues earned in the years ended December 31, 2023 and 2022:

Our agreements with Janssen related to the long-acting INVEGA products provide for tiered royalty payments, which consist of a patent royalty and a know-how royalty, both of which are determined on a country-by-country basis. The patent royalty, which equals 1.5% of net sales, is payable in each country until the expiration of the last of the patents with valid claims applicable to the product in such country. The know-how royalty is a tiered royalty of 3.5% on calendar year net sales up to $250 million; 5.5% on calendar year net sales of between $250 million and $500 million; and 7.5% on calendar year net sales exceeding $500 million. The know-how royalty rate resets to 3.5% at the beginning of each calendar year and is payable until 15 years from the first commercial sale of a product in each individual country, subject to expiry of the agreement.

In November 2021, we received notice from Janssen of partial termination of our license agreement under which we provided Janssen with rights to, and know-how, training and technical assistance in respect of, our NanoCrystal technology, which was used to develop the long-acting INVEGA products. The partial termination became effective in February 2022, at which time Janssen ceased paying us royalties related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA. Accordingly, we ceased recognizing royalty revenue related to sales of these products in February 2022. In April 2022, we commenced binding arbitration proceedings related to, among other things, Janssen’s partial termination of this license agreement and Janssen’s royalty and other obligations under the agreement. In May 2023, the Tribunal issued the Final Award, which concluded the arbitration proceedings.

The Final Award provided that we were due back royalties of $195.4 million, inclusive of $8.1 million in late-payment interest, related to 2022 U.S. net sales of the long-acting INVEGA products, which we received from Janssen in the second quarter of 2023, and are entitled to 2023 and future royalty revenues from Janssen related to net sales of INVEGA SUSTENNA through August 20, 2024, INVEGA TRINZA through the second quarter of 2030 (but no later than May 2030 when the license agreement expires) and INVEGA HAFYERA through May 2030 (when the license agreement expires).

Following issuance of the Final Award, we recognized royalty revenues related to the back royalties for 2022, as described above, and resumed recognizing royalty revenue related to ongoing U.S. sales of the long-acting INVEGA products. Royalty revenues related to the long-acting INVEGA products increased by $370.4 million during 2023, as compared to 2022, primarily due to the receipt of the back royalties and late-payment interest described above and a full year of royalty revenue related to worldwide net sales of the long-acting INVEGA products of approximately $290.7 million, as compared to royalty revenue of $115.7 million during 2022. Janssen’s worldwide net sales of the long-acting INVEGA products were $4,115.0 million during 2023, as compared to $4,140.0 million during 2022.

We expect royalty revenues from net sales of the long-acting INVEGA products to decrease in the near-term, as the royalty revenues related to net sales of INVEGA SUSTENNA are expected to end on August 20, 2024, which could have a significant impact on our INEVGA SUSTENNA royalty revenues during 2024. In addition, each of INVEGA SUSTENNA and INVEGA TRINZA are currently subject to Paragraph IV litigation in response to companies seeking to market generic versions of such products. Increased competition from new products or generic versions of these products may lead to reduced unit sales of such products and increased pricing pressure. For a discussion of these legal proceedings, see Note 19, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for information about risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

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We receive a 15% royalty on worldwide net sales of VUMERITY manufactured and packaged by us, subject to increases in such royalty rate for VUMERITY manufactured and/or packaged by Biogen or its designees, in the period that the end-market sales of VUMERITY occur. We also recognize manufacturing revenue related to VUMERITY at cost plus 15%, upon making available bulk batches of VUMERITY to Biogen and, to the extent we package such product, then also when packaged batches of VUMERITY are made available to Biogen. Manufacturing revenue from VUMERITY increased by $10.4 million during 2023, primarily due to an increase in the number of bulk batches made available to Biogen. Royalty revenue related to VUMERITY increased by $3.4 million during 2023, due to an increase in end-market net sales of VUMERITY, which were $576.3 million during 2023, as compared to $553.4 million during 2022.

We recognize manufacturing revenue for RISPERDAL CONSTA at the point in time when RISPERDAL CONSTA has been fully manufactured, which is deemed to have occurred when the product is approved for shipment by both us and Janssen. We record royalty revenue, equal to 2.5% of Janssen’s end-market net sales, in the period that the end-market sales of RISPERDAL CONSTA occur. We expect revenues from RISPERDAL CONSTA to continue to decrease over time as patents covering RISPERDAL CONSTA expire in markets where end-market net sales of RISPERDAL CONSTA occur. We are aware of potential generic and other competition to RISPERDAL CONSTA that may lead to reduced unit sales and increased pricing pressure. The decrease in revenue from RISPERDAL CONSTA during 2023 was primarily due to decreases of $6.6 million in manufacturing revenue and $6.1 million in royalty revenue. The decrease in manufacturing revenue was primarily due to a decrease in the number of U.S. batches made available to Janssen and a 7% decrease in the rest of world average selling price of the product. The decrease in royalty revenue was primarily due to expirations of the patents covering RISPERDAL CONSTA, which expired in the U.S. in January 2023 and expired in the EU in 2021.

Certain of our manufacturing and royalty revenues are earned in countries outside of the U.S. and are denominated in currencies in which the product is sold. See “Item 7A—Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report for information on currency exchange rate risk related to our revenues and “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “Currency exchange rates may affect revenues and expenses” for risks related to currency exchange rates.

Costs and Expenses

Cost of Goods Manufactured and Sold

(1)
Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

The increase in cost of goods manufactured and sold during 2023 was primarily due to an increase of $8.0 million in the cost of goods manufactured for VUMERITY and increases of $15.5 million, $13.3 million and $6.2 million, respectively, in the cost of goods sold for VIVITROL, LYBALVI and ARISTADA, partially offset by a decrease of $2.0 million in the cost of goods manufactured for RISPERDAL CONSTA. The increase related to VUMERITY was primarily due to increased manufacturing activity, as described above. The increases related to LYBALVI and ARISTADA were primarily due to the increases in sales activity, as described above. The increase in the cost of goods sold related to VIVITROL was due to an increase in sales activity, as described above, and an increase in costs related to out-of-specification batches. These increases were partially offset by decreases in cost of goods manufactured for RISPERDAL CONSTA, primarily due to a decrease in U.S. batches made available to Janssen, as described above, and in the cost of goods manufactured for certain legacy products that we manufacture due to a decrease in sales of such products.

Research and Development Expenses

For each of our research and development (“R&D”) programs, we incur both external and internal expenses. External R&D expenses include fees for clinical and preclinical activities performed by contract research organizations, consulting fees, and costs related to laboratory services, the purchase of drug product materials and third-party manufacturing development activities. Internal R&D expenses include employee-related expenses, occupancy costs, depreciation and general overhead. We track external R&D expenses for each of our development programs; however, internal R&D expenses are not tracked by individual program as they can benefit multiple development programs or our products or technologies in general.

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The following table sets forth our external R&D expenses for the years ended December 31, 2023 and 2022 relating to our then-current development programs and our internal R&D expenses, listed by the nature of such expenses:

(1)
Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

These amounts are not necessarily predictive of future R&D expenses. In an effort to allocate our spending most effectively, we continually evaluate our products under development based on the performance of such products in preclinical and/or clinical trials, our expectations regarding the likelihood of their regulatory approval and our view of their future potential commercial viability, among other factors.

The increase in expenses related to ALKS 2680 during 2023 was primarily due to an increase in early-stage development expenses, including chemistry manufacturing and controls expenses and spend on a phase 1b proof-of-concept study, which was initiated in the second quarter of 2023. The decrease in expenses related to LYBALVI during 2023 was primarily due to decreased spend on certain ongoing long-term safety and tolerability studies as they near completion, partially offset by increased spend on the pediatric study related to the product. The decrease in other external R&D expenses was primarily due to the termination of the ALKS 1140 clinical development program in the second quarter of 2022.

Selling, General and Administrative Expenses

(1)
Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

The increase in selling and marketing expense during 2023 was primarily due to a $72.1 million increase in marketing spend related to the launch of the direct-to-consumer campaign for LYBALVI. Employee-related expenses also increased by $25.2 million, primarily related to a 5% increase in sales and marketing headcount and an increase in employee travel as our in-person activities increased.

The increase in general and administrative expense during 2023 was primarily due to an increase in salaries and benefits of $7.6 million and an increase in our branded prescription drug fee of $2.1 million, partially offset by a decrease in professional services fees of $2.4 million, primarily due to decreased legal expenses.

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Amortization of Acquired Intangible Assets

Our amortizable intangible assets consist of technology and collaborative arrangements acquired as part of the acquisition of EDT in September 2011, which are being amortized over 12 to 13 years. We amortize our amortizable intangible assets using the economic use method, which reflects the pattern that the economic benefits of the intangible assets are consumed as revenue is generated from the underlying patent or contract.

Based on our most recent analysis, amortization of intangible assets included within our consolidated balance sheet at December 31, 2023 is expected to be approximately $2.0 million in the year ending December 31, 2024.

Other Income (Expense), Net

Interest income consists primarily of interest earned on our available-for-sale investments. Interest expense consists of interest incurred on our 2026 Term Loans. The increases in interest income and interest expense were primarily due to increases in interest rates over the past twelve months, due to the rising interest rate environment during the year.

The change in the fair value of contingent consideration was due to the determination during 2022 that it was unlikely we would collect any further contingent consideration proceeds under our agreements with Baudax Bio, Inc. (“Baudax”) in effect at the time, and accordingly, we reduced the fair value of the contingent consideration to zero, as discussed in Note 6, Fair Value, in the “Notes to Consolidated Financial Statements” in this Annual Report.

Income Tax (Benefit) Provision

(1)
Prior period amounts have been retrospectively adjusted to reflect the effects of the Separation.

The income tax benefit in 2023 was primarily attributable to the partial release of the valuation allowance maintained against certain Irish deferred tax assets, partially offset by taxes on income earned in the U.S. and Ireland. The income tax provision in 2022 was primarily due to U.S. federal and state taxes on income earned in the U.S. and the tax impact of employee equity activity. No provision for income tax has been provided on undistributed earnings of our foreign subsidiaries because such earnings are indefinitely reinvested in the foreign operations. Cumulative unremitted earnings of overseas subsidiaries totaled approximately $797.0 million at December 31, 2023. In the event of a repatriation of those earnings in the form of dividends or otherwise, we may be liable for income taxes, subject to adjustment, if any, for foreign tax credits and foreign withholding taxes payable to foreign tax authorities. We estimate that approximately $70.8 million of income taxes would be payable on the repatriation of the unremitted earnings to Ireland.

As of December 31, 2023, we had $1.3 billion of Irish NOL carryforwards, $14.6 million of U.S. federal NOL carryforwards, $43.2 million of state NOL carryforwards, $9.7 million of federal R&D credits and $31.0 million of state tax credits which will either expire on various dates through 2043 or can be carried forward indefinitely. These loss and credit carryforwards are available to reduce certain future Irish and foreign taxable income and tax. These loss and credit carryforwards are subject to review and possible adjustment by the appropriate taxing authorities and may be subject to limitations based upon changes in the ownership of our ordinary shares.

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In December 2022, the EU agreed to implement a corporate minimum tax rate of 15% on companies with combined annual revenue of at least €750.0 million. The Irish government has transposed the corporate minimum tax rules into Irish legislation with effect as of January 1, 2024.

Liquidity and Capital Resources

Our financial condition is summarized as follows:

At December 31, 2023, our investments consisted of the following:

Sources and Uses of Cash

We generated $401.4 million and $21.0 million of cash from operating activities during the years ended December 31, 2023 and 2022, respectively. We expect that our existing cash, cash equivalents and investments will be sufficient to finance our anticipated working capital and other cash requirements, such as capital expenditures and principal and interest payments on our long-term debt, for at least the twelve months following the date from which our financial statements were issued. Subject to market conditions, interest rates and other factors, we may pursue opportunities to obtain additional financing in the future, including debt and equity offerings, corporate collaborations, bank borrowings, arrangements relating to assets or other financing methods or structures. In addition, the 2026 Term Loans have an incremental facility capacity in an amount of $175.0 million, plus additional potential amounts provided that we meet certain conditions, including a specified leverage ratio.

Our investment objectives are, first, to preserve liquidity and conserve capital and, second, to generate investment income. We mitigate credit risk in our cash reserves by maintaining a well-diversified portfolio that limits the amount of investment exposure as to institution, maturity and investment type. Our available-for-sale investments consist primarily of short and long-term U.S. government and agency debt securities, corporate debt securities and debt securities issued and backed by non-U.S. governments. Our held-to-maturity investments consist of investments that are held as collateral under certain letters of credit related to certain of our lease agreements.

We classify available-for-sale investments in an unrealized loss position that do not mature within 12 months as long-term investments. We have the intent and ability to hold these investments until recovery, which may be at maturity, and it is more-likely-than-not that we would not be required to sell these securities before recovery of their amortized cost.

We have no off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources in the next twelve months. In connection with our acquisition of Rodin Therapeutics, Inc. (“Rodin”) in November 2019, we may become obligated to make up to $825.0 million in future milestone payments to the former shareholders of Rodin, $200.0 million of which would be triggered upon achievement of certain specified clinical milestones, $300.0 million of which would be triggered by the achievement of certain regulatory milestones and $325.0 million of which would be triggered upon the attainment of certain sales thresholds. At December 31, 2023, we had not recorded a liability related to these milestone payments as none of the future events that would trigger a milestone payment were considered probable of occurring.

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Information about our cash flows, by category, is presented in the accompanying consolidated statements of cash flows. The discussion of our cash flows that follows does not include the impact of any adjustments to remove discontinued operations and is stated on a total company consolidated basis. The following table summarizes our cash flows for the years ended December 31, 2023 and 2022:

Operating Activities

Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flow is derived by adjusting our net income (loss) for non-cash operating items such as depreciation, amortization and share-based compensation and changes in operating assets and liabilities, which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our results of operations.

Cash flows provided by operating activities during 2023 were $401.4 million and primarily consisted of net income of $355.8 million, adjusted for non-cash items, including share-based compensation of $100.9 million and depreciation and amortization of $74.9 million, partially offset by changes in working capital of $36.7 million and deferred income taxes of $99.9 million. During 2023, net income included receipt of $195.4 million from Janssen, inclusive of $8.1 million in late-payment interest, related to 2022 U.S. net sales of the long-acting INVEGA products following the successful outcome of the arbitration proceedings in respect of such products.

Cash flows provided by operating activities during 2022 were $21.0 million and primarily consisted of net loss of $158.3 million, adjusted for non-cash items including share-based compensation of $94.3 million, depreciation and amortization of $77.9 million, change in the fair value of contingent consideration of $21.8 million and changes in working capital of $12.8 million, partially offset by deferred income taxes of $32.8 million.

Investing Activities

Cash flows provided by investing activities during 2023 were primarily due to $101.1 million in net sales of investments, offset by the purchase of $48.0 million of property, plant and equipment. Cash flows used in investing activities during 2022 were primarily due to $28.0 million in net purchases of investments and the purchase of $38.3 million of property, plant and equipment.

We expect to spend approximately $35.0 million during the year ending December 31, 2024 for capital expenditures. We continue to evaluate our manufacturing capacity based on expectations of demand for the products that we manufacture and will continue to record such amounts within construction in progress until such time as the underlying assets are placed into service, or we determine we have sufficient existing capacity and the assets are no longer required, at which time we would recognize an impairment charge. We continue to periodically evaluate whether facts and circumstances indicate that the carrying value of these long-lived assets to be held and used may not be recoverable.

Financing Activities

Cash flows used in financing activities during 2023 primarily related to $275.0 million in cash distributed to Mural in connection with the Separation and $28.5 million of employee taxes paid related to the net share settlement of equity awards, partially offset by $16.8 million of cash that we received upon exercises of employee stock options. Cash flows used in financing activities during 2022 primarily related to $18.2 million of employee taxes paid related to the net share settlement of equity awards and $3.0 million of principal payments on our 2026 Term Loans, partially offset by $19.6 million of cash that we received upon exercises of employee stock options.

Debt

At December 31, 2023, our borrowings consisted of $291.8 million outstanding under the 2026 Term Loans. The 2026 Term Loans bear interest at SOFR plus a credit spread adjustment applicable to the interest period and an applicable margin of 2.5% with a floor of 0.5%. Principal payments of $0.8 million are to be made quarterly through 2025, with a final payment of $285.8 million due in March 2026. Please refer to Note 12, Long-Term Debt, in the “Notes to Consolidated Financial Statements” in this Annual Report for a discussion of our outstanding term loans.

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Discontinued Operations

Net loss from discontinued operations consists of the results of our oncology business and is reported as a separate component of income. For additional information, please refer to Note 3, Discontinued Operations, in the “Notes to Consolidated Financial Statements” in this Annual Report.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments based on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review these accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the “Notes to Consolidated Financial Statements” in this Annual Report. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effects of matters that are inherently uncertain. We have reviewed these critical accounting estimates and related disclosures with the audit and risk committee of our board of directors.

Revenue from Contracts with Customers

When entering into arrangements with customers, we identify whether our performance obligations under each arrangement represent a distinct good or service or a series of distinct goods or services. If a contract contains more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. The fair value of performance obligations under each arrangement may be derived using an estimate of selling price if we do not sell the goods or services separately.

We recognize revenue when or as we satisfy a performance obligation by transferring an asset or providing a service to a customer. Management judgment is required in determining the consideration to be earned under an arrangement and the period over which we are expected to complete our performance obligations under an arrangement. Steering committee services that are not inconsequential or perfunctory and that are determined to be performance obligations are combined with other research services or performance obligations required under an arrangement, if any, in determining the level of effort required in an arrangement and the period over which we expect to complete our aggregate performance obligations.

Product Sales, Net

Our product sales, net consist of sales in the U.S. of VIVITROL, ARISTADA, ARISTADA INITIO and LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. Product sales, net are recognized when the customer obtains control of the product, which is when the product has been received by the customer.

Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, healthcare providers or payers. Our process for estimating reserves established for these variable consideration components does not differ materially from historical practices. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment. The following are our significant categories of sales discounts and allowances:

•
Medicaid Rebates—we record accruals for rebates to U.S. states under the Medicaid Drug Rebate Program as a reduction of sales when the product is shipped into the distribution channel using the expected value. We rebate individual U.S. states for all eligible units purchased under the Medicaid program based on a rebate per unit calculation, which is based on our average manufacturer prices. We estimate expected unit sales to individuals covered by Medicaid and rebates per unit under the Medicaid program and adjust our rebate accrual based on actual unit sales and rebates per unit and changes in trends in Medicaid utilization. To date, actual Medicaid rebates have not differed materially from our estimates;

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•
Chargebacks—discounts that occur when contracted indirect customers purchase directly from wholesalers and specialty distributors. Contracted customers generally purchase a product at its contracted price. The wholesaler or specialty distributor, in turn, then generally charges back to us the difference between the wholesale acquisition cost and the contracted price paid to the wholesaler or specialty distributor by the customer. The allowance for chargebacks is made using the expected value and is based on actual and expected utilization of these programs. Chargebacks could exceed historical experience and our estimates of future participation in these programs. To date, actual chargebacks have not differed materially from our estimates;

•
Product Discounts—cash consideration, including sales incentives, given by us under agreements with a number of wholesaler, distributor, pharmacy, and treatment provider customers that provide them with a discount on the purchase price of products. The reserve is made using the expected value and to date, actual product discounts have not differed materially from our estimates;

•
Product Returns—we record an estimate for product returns at the time our customers take control of our product. We estimate this liability using the expected returns of product sold based on our historical return levels and specifically identified anticipated returns due to known business conditions and product expiry dates. Return amounts are recorded as a reduction of sales. Once product is returned, it is destroyed. Actual product returns have not differed materially from our estimates; and

•
Medicare Part D—we record accruals for Medicare Part D liabilities under the Medicare Coverage Gap Discount Program (“CGDP”) as a reduction of sales. Under the CGDP, patients reaching the annual coverage gap threshold are eligible for reimbursement coverage for out-of-pocket costs for covered prescription drugs. Under an agreement with the Centers for Medicare and Medicaid Services, manufacturers are responsible for reimbursement of prescription plan sponsors for the portion of out-of-pocket expenses not covered under their Medicare plans. Actual Medicaid Part D rebates have not differed materially from our estimates.

A rollforward of our provisions for sales and allowances is as follows:

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Manufacturing Revenue

We recognize manufacturing revenues from the sale of products we manufacture for resale by our licensees. Substantially all of our manufacturing revenues are recognized at a point in time when control of the product passes to the licensee. The sales price for certain of our manufacturing revenues is based on the end-market sales price earned by our licensees. As end-market sales generally occur after we have recorded manufacturing revenue, we estimate the sales price for such products based on information supplied to us by our licensees, our historical transaction experience and other third-party data. Differences between actual manufacturing revenues and estimated manufacturing revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter. The differences between our actual and estimated manufacturing revenues have not been material to date.

Royalty Revenue

We recognize royalty revenues related to the sale by our licensees of products that incorporate our technology. All of our royalties qualify for the sales-and-usage exemption under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, (“Topic 606”) as (i) such royalties are based strictly on the sales-and-usage by the licensee; and (ii) a license of IP is the sole or predominant item to which such royalties relate. Based on this exemption, such royalties are earned in the period the products are sold by our licensees and we have a present right to payment.

Certain of our royalty revenues are recognized based on information supplied to us by our licensees and require estimates to be made. Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period in which they become known, which is generally within the same quarter. The differences between our actual and estimated royalty revenues have not been material to date.

Discontinued operations

We determined that the separation of our oncology business, which was completed on November 15, 2023, represented a disposal plan that met the criteria for classification of the oncology business as a discontinued operation in accordance with ASC 205-20, Discontinued Operations. Accordingly, the accompanying consolidated financial statements for all periods have been updated to present the assets and liabilities associated with the oncology business separately as discontinued operations on the consolidated balance sheet and the results of such discontinued operations reported as a separate component of income in the consolidated statements of operations and comprehensive income (loss).

For additional information related to discontinued operations, refer to Note 3, Discontinued Operations, in our “Notes to Consolidated Financial Statements” in this Annual Report.

Impairment of Long-Lived Assets

Long-lived assets, other than goodwill which is separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When evaluating long-lived assets for potential impairment, we first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted and without interest charges). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset’s estimated fair value, which may be based on estimated future cash flows (discounted and with interest charges). We recognize an impairment loss if the amount of the asset’s carrying value exceeds the asset’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset.

When reviewing long-lived assets for impairment, we group long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.

The announcement of the planned sale of the Athlone Facility constituted an impairment-triggering event. Accordingly, we performed a review of our long-lived intangible assets in accordance with ASC 350, Intangibles — Goodwill and Other and determined that the carrying value of our long-lived assets did not exceed the estimated fair value of such long-lived assets.

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Goodwill

We evaluate goodwill for impairment for our reporting units annually, as of October 31, and whenever events or changes in circumstances indicate the carrying value of the reporting units may not be recoverable. A reporting unit is an operating segment, as defined by GAAP, or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and is reviewed by management. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic characteristics. As of December 31, 2023, we have one operating segment and two reporting units.

Our goodwill, which solely relates to the Business Combination, has been assigned to one reporting unit which consists of the former EDT business.

We have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If we elect this option and determine, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required; otherwise, no further testing is required. Among other relevant events and circumstances that affect the fair value of reporting units, we consider individual factors, such as microeconomic conditions, changes in the industry and the markets in which we operate as well as historical and expected future financial performance. Alternatively, we may elect to not first assess qualitative factors and instead immediately perform the quantitative impairment test.

When some, but not all, of a reporting unit is to be disposed of, the accounting for that reporting unit’s goodwill will depend on whether the disposal group constitutes a business. If the disposal group constitutes a business, we attribute a portion of the reporting unit’s goodwill to the disposal group based on the relative fair values of: (i) the disposal group; and (ii) the portion of the reporting unit that will be retained.

On October 31, 2023, in connection with the Separation, we performed a quantitative impairment test and, while we determined that, based on the weight of all available evidence, the fair value of the reporting unit more-likely-than-not exceeded its carrying value, it was also determined that as a portion of the IP that transferred to Mural was owned by the reporting unit to which our goodwill was assigned, a portion of our goodwill was allocated to Mural. Please refer to Note 9, Goodwill and Intangible Assets in our “Notes to Consolidated Financial Statements” in this Annual Report for additional information.

In connection with the planned sale of the Athlone Facility, we have reviewed FASB ASC 805, Business Combinations and, based on the definitions therein, have determined that the Athlone Facility constitutes a business and, accordingly, a portion of our goodwill was allocated to the Athlone Facility and is classified as “Assets held for sale” within the accompanying consolidated balance sheets as of December 31, 2023 and 2022. Please refer to Note 9, Goodwill and Intangible Assets in our “Notes to Consolidated Financial Statements” in this Annual Report for additional information.

Valuation of Deferred Tax Assets

We evaluate the need for deferred tax asset valuation allowances based on a more-likely-than-not standard. The ability to realize deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of deferred tax assets:

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future reversals of existing taxable temporary differences;

•
future taxable income exclusive of reversing temporary differences and carryforwards;

•
taxable income in prior carryback years; and

•
tax-planning strategies.

The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence factors including, but not limited to:

•
nature, frequency and severity of recent losses;

•
duration of statutory carryforward periods;

•
historical experience with tax attributes expiring unused; and

•
near- and medium-term financial outlook.

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We utilize a rolling three years of actual and current year anticipated results as the primary measures of cumulative income (losses) in recent years. For additional information related to our assessment of our valuation allowance, see Note 17, Income Taxes in the “Notes to Consolidated Financial Statements” in this Annual Report.

The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and future profitability. Our accounting for deferred tax consequences represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material effect on our financial condition and results of operations. For information related to risks surrounding our deferred tax assets, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Our deferred tax assets may not be realized.”

Recent Accounting Pronouncements

Please refer to Note 2, Summary of Significant Accounting Policies, “New Accounting Pronouncements” in our “Notes to Consolidated Financial Statements” in this Annual Report for discussion, if any, of new accounting standards.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following should be read in conjunction with our consolidated financial statements and related notes beginning on page F‑1 of this Annual Report. The following discussion contains forward‑looking statements. Actual results may differ significantly from those projected in the forward‑looking statements. See “Cautionary Note Concerning Forward‑Looking Statements” on page 3 of this Annual Report. Factors that might cause future results to differ materially from those projected in the forward‑looking statements also include, but are not limited to, those discussed in “Item 1A—Risk Factors” and elsewhere in this Annual Report. A detailed discussion of our 2020 financial condition and results of operations, and of 2021 year-over-year changes as compared to 2020, can be found in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 16, 2022.

Overview

We have a portfolio of proprietary products that we manufacture, market and sell in the U.S.—VIVITROL, ARISTADA, ARISTADA INITIO and most recently, LYBALVI, which we launched commercially in October 2021. We also earn manufacturing and/or royalty revenues on net sales of products commercialized by our licensees, the most significant of which in 2022 were the long-acting INVEGA products and VUMERITY. We expect VIVITROL, ARISTADA, ARISTADA INITIO, LYBALVI and VUMERITY to generate significant revenues for us in the near‑ and medium‑term as we believe these products are singular or competitively advantaged products in their classes.

In 2022, we incurred an operating loss of $142.3 million, as compared to an operating loss of $29.3 million in 2021. The increase in the operating loss was primarily due to an increase in operating expenses of $51.0 million and a decrease in revenues of $62.0 million. These items are discussed in further detail within the “Results of Operations” section below.

In November 2022, we announced our intent, as approved by our board of directors, to separate our neuroscience business and oncology business. We are exploring a separation of the oncology business into an independent, publicly-traded company as part of an ongoing review of strategic alternatives for the oncology business. Following the planned separation, we would focus on driving growth of our proprietary commercial products: LYBALVI, ARISTADA, ARISTADA INITIO and VIVITROL and on advancing the development of pipeline programs focused on neurological disorders. We also expect to retain manufacturing and royalty revenues related to our licensed products and third-party products using our proprietary technologies under license. Oncology Co. would focus on the discovery and development of cancer therapies, including the continued development of nemvaleukin alfa and our portfolio of novel, preclinical, engineered cytokines. The separation, if consummated, is expected to be completed in the second half of 2023 and is subject to customary closing conditions, including final approval by our board of directors and, if sought, receipt of a private letter ruling from the IRS and/or tax opinion from our tax advisors.

COVID-19 Update

The COVID-19 pandemic has impacted, and may continue to impact, many aspects of society, including the operation of healthcare systems, global travel, supply and labor markets and other business and economic activity worldwide. A number of the marketed products from which we derive revenue, including manufacturing and royalty revenue, are injectable medications administered by healthcare professionals, which have been, and may continue to be, adversely impacted to varying degrees as a result of COVID-19 related closures, restrictions, labor shortages and other disruptions that have transpired, and may continue to transpire, while the pandemic persists.

The COVID-19 pandemic has caused, and may continue to cause, varying degrees of disruption to our employees and our business operations. While we have continued to operate our manufacturing facilities and supply our medicines throughout the pandemic, we have at times during the pandemic experienced labor or supply chain disruptions at our manufacturing facilities and may continue to experience such disruptions while the pandemic persists, which could impact our ability to manufacture our products and the third-party products from which we receive revenue in a timely matter or at all. In addition, while we have continued to conduct R&D activities, including our ongoing clinical trials, the COVID-19 pandemic has at times impacted the timelines of certain of our early-stage discovery efforts and clinical trials, and may continue to impact such timelines while the pandemic persists. We work with our internal teams, our clinical investigators, R&D vendors and critical supply chain vendors to continually assess, and mitigate, the potential impact of COVID-19 on our manufacturing operations and R&D activities.

The degree to which the COVID-19 pandemic may continue to impact our employees, business, financial condition and results of operations will depend on the ultimate severity and duration of the pandemic and the manner in which it continues to evolve, including the emergence, prevalence and severity of new COVID-19 variants, and future developments in response thereto. Due to these and numerous other uncertainties surrounding the ongoing COVID-19 pandemic, the actual impact of the pandemic on our financial condition and operating results may differ from our current projections. For additional information about risks and uncertainties related to the COVID-19 pandemic that may impact our business, our financial condition or our results of operations, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Our business, financial condition and results of operations have been, and may continue to be, adversely affected by the ongoing COVID-19 pandemic or other similar outbreaks of contagious diseases.”

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Results of Operations

Product Sales, Net

Our product sales, net consist of sales in the U.S. of VIVITROL, ARISTADA, ARISTADA INITIO, and following its commercial launch in October 2021, LYBALVI, primarily to wholesalers, specialty distributors and pharmacies. The following table presents the adjustments deducted from product sales, gross to arrive at product sales, net for sales of VIVITROL, ARISTADA, ARISTADA INITIO and LYBALVI in the U.S. during the years ended December 31, 2022 and 2021:

Product sales, net during the years ended December 31, 2022 and 2021 were as follows:

VIVITROL product sales, gross, increased by 7% in 2022 which was primarily due to an increase of 2% in the number of VIVITROL units sold and a 6% increase in the selling price of VIVITROL that went into effect in April 2022. ARISTADA and ARISTADA INITIO product sales, gross, increased by 11% in 2022 which was primarily due to an increase of 8% in the number of ARISTADA and ARISTADA INITIO units sold and a 3% increase in the selling price of ARISTADA and ARISTADA INITIO that went into effect in April 2022. The increase in LYBALVI during 2022, as compared to 2021, was due to the product having a full year of sales in 2022 following its commercial launch in October 2021.

The decrease in Medicaid rebates as a percentage of sales was primarily due to actual Medicaid utilization rates related to VIVITROL being lower than original estimates as such rates normalize from initial pandemic levels and due to the increased sales of LYBALVI, which had lower Medicaid utilization than VIVITROL and ARISTADA.

A number of companies are working to develop products to treat addiction, including alcohol and opioid dependence, that may compete with, and negatively impact, future sales of VIVITROL. Increased competition may lead to reduced unit sales of VIVITROL and increased pricing pressure. The latest to expire of our patents covering VIVITROL will expire in 2029 in the U.S. and expired in Europe in 2021. Under the terms of a settlement and license agreement, we granted Amneal a license under certain patents covering VIVITROL, including the latest to expire patent covering VIVITROL in the U.S., to market and sell a generic formulation of VIVITROL in the U.S. beginning sometime in 2028 or earlier under certain circumstances. We are currently engaged in Paragraph IV litigation with certain Teva entities in respect of the last to expire patent covering VIVITROL in the U.S. For a discussion of these legal proceedings, see Note 17, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report and for information regarding the risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “Risks Related to our Intellectual Property—We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers”. A number of companies currently market and/or are developing products to treat schizophrenia and/or bipolar I disorder that may compete with and negatively impact future sales of ARISTADA, ARISTADA INITIO and LYBALVI. Increased competition may lead to reduced unit sales of ARISTADA, ARISTADA INITIO and LYBALVI and increased pricing pressure. The latest to expire of our patents covering ARISTADA, ARISTADA INITIO and LYBALVI in the U.S. will expire in 2039, 2039 and 2032, respectively; and, as such, we do not anticipate any generic versions of these products to enter the market in the near term. We expect our product sales, net will continue to grow as VIVITROL continues to penetrate the alcohol dependence and opioid dependence markets in the U.S., as ARISTADA and ARISTADA INITIO continue to gain market share in the U.S., and as we continue the commercial launch of LYBALVI.

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Manufacturing and Royalty Revenues

Manufacturing revenue from RISPERDAL CONSTA and VUMERITY are recognized at the point in time that the product has been fully manufactured. Manufacturing revenues for third-party products using our proprietary technologies are mostly recognized over time as products move through the manufacturing process, using an input method based on costs as a measure of progress. Royalties earned on our licensees’ net sales of third-party products using our proprietary technologies are generally recognized in the period such products are sold by our licensees. The following table compares manufacturing and royalty revenues earned in the years ended December 31, 2022 and 2021:

Our agreements with Janssen related to the long-acting INVEGA products provide for tiered royalty payments, which consist of a patent royalty and a know-how royalty, both of which are determined on a country-by-country basis. The patent royalty, which equals 1.5% of net sales, is payable in each country until the expiration of the last of the patents with valid claims applicable to the product in such country. The know-how royalty is a tiered royalty of 3.5% on calendar year net sales up to $250 million; 5.5% on calendar year net sales of between $250 million and $500 million; and 7.5% on calendar year net sales exceeding $500 million. The know-how royalty rate resets to 3.5% at the beginning of each calendar year and is payable until 15 years from the first commercial sale of a product in each individual country, subject to expiry of the agreement. For more information about the license agreement with Janssen in respect of the long-acting INVEGA products, see “Collaborative Arrangements—Janssen” in “Item 1—Business” in this Annual Report.

In November 2021, we received notice of partial termination of our license agreement with Janssen under which we provided Janssen with rights to, and know-how, training and technical assistance in respect of, our small particle pharmaceutical compound technology, known as NanoCrystal technology, which was used to develop INVEGA SUSTENNA/XEPLION, INVEGA TRINZA/TREVICTA, and INVEGA HAFYERA/BYANNLI. The partial termination became effective in February 2022, at which time Janssen ceased paying royalties related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S. In April 2022, we commenced binding arbitration proceedings related to, among other things, Janssen’s partial termination of this license agreement and Janssen’s royalty and other obligations under the agreement. On December 21, 2022, we received the Interim Award for these proceedings from the Tribunal, in which the Tribunal agreed with our position that, while Janssen may terminate the agreement, it may not continue to sell Products (as defined in the agreement) developed during the term of the agreement without paying royalties pursuant to the term of the agreement. This award is not yet final. We will engage with Janssen and the Tribunal in additional proceedings prior to the Tribunal’s issuance of a final award. Accordingly, we have not recognized royalty revenue related to U.S. sales of long-acting INVEGA products since February 2022. For additional information regarding the arbitration proceedings with Janssen, see Note 17, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report. For information about risks relating to the notice of partial termination and our collaborative arrangements more broadly, see “Item 1A—Risk Factors” in this Annual Report and specifically the section entitled “We rely heavily on our licensees in the commercialization and continued development of products from which we receive revenue and, if our licensees are not effective, or if disputes arise in respect of our contractual arrangements, our revenues could be materially adversely affected.”

The decrease in royalty revenues from the long-acting INVEGA products was primarily due to Janssen’s partial termination of our license agreement related to such products. When the partial termination of the license agreement became effective in February 2022, Janssen ceased paying royalties related to sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA in the U.S. and we stopped recognizing royalty revenue related to net sales of these products. During 2022, Janssen’s rest of world net sales were $1,426.0 million, as compared to $1,472.0 million during 2021. We expect royalty revenues from net sales of XEPLION, TREVICTA and BYANNLI to decrease over time. The amount, timing and duration of royalty revenues from sales of INVEGA SUSTENNA, INVEGA TRINZA and INVEGA HAFYERA depend upon the outcome of our dispute with Janssen related to the impact of its partial termination of our license agreement on its obligations to continue to pay us know-how royalties in accordance with the terms of the agreement.

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In addition, each of INVEGA SUSTENNA and INVEGA TRINZA are currently subject to Paragraph IV litigation in response to companies seeking to market generic versions of such products. Increased competition from new products or generic versions of these products may lead to reduced unit sales of such products and increased pricing pressure. For a discussion of these legal proceedings, see Note 17, Commitments and Contingent Liabilities in the “Notes to Consolidated Financial Statements” in this Annual Report, and for information about risks relating to these legal proceedings, see “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “We or our licensees may face claims against IP rights covering our products and competition from generic drug manufacturers.”

We recognize manufacturing revenue for RISPERDAL CONSTA at the point in time when RISPERDAL CONSTA has been fully manufactured, which is deemed to have occurred when the product is approved for shipment by both us and Janssen. We record royalty revenue, equal to 2.5% of Janssen’s end-market net sales, in the period that the end-market sales of RISPERDAL CONSTA occur. The decrease in revenue from RISPERDAL CONSTA was primarily due to a decrease of $3.2 million in royalty revenue, partially offset by a $2.2 million increase in manufacturing revenue. This decrease in royalty revenue was due to a decrease in end-market sales of RISPERDAL CONSTA, which was $485.0 million during 2022, as compared to $592.0 million during 2021. The increase in manufacturing revenue was primarily due to an increase in the number of units approved for shipment to Janssen. We expect revenues from RISPERDAL CONSTA to decrease over time. The latest to expire patent covering RISPERDAL CONSTA expired in 2021 in the EU and expired in January 2023 in the U.S., and we are aware of potential generic competition for RISPERDAL CONSTA that may lead to reduced unit sales and increased pricing pressure.

We receive a 15% royalty on worldwide net sales of VUMERITY for product manufactured and packaged by us, subject to increases for VUMERITY manufactured and/or packaged by Biogen or its designees, in the period that the end-market sales of VUMERITY occur. We also recognize manufacturing revenue related to VUMERITY at cost plus 15%, upon making available bulk batches of VUMERITY to Biogen and, to the extent we package such product, then also when packaged batches of VUMERITY are made available to Biogen. The increase in revenue from VUMERITY was due to increases of $6.7 million and $21.4 million in manufacturing revenue and royalty revenue, respectively. The increase in manufacturing revenue was due to an increase in the number of packaged batches that were manufactured for Biogen, partially offset by a manufacturing issue related to VUMERITY, which, for a period during 2022, negatively impacted the number of commercial batches we were able to manufacture. The increase in royalty revenue was due to an increase in net sales of VUMERITY, which were $553.4 million during 2022, as compared to $410.0 million during 2021.

The decrease in other manufacturing and royalty revenue was primarily due to the decision from an arbitration panel in October 2022, which found that we must return to Acorda $16.5 million (inclusive of prejudgment interest and administrative fees) previously paid by Acorda under a license agreement between the Company and Acorda. In November 2022, the panel found that we must pay to Acorda an additional $1.8 million (inclusive of prejudgment interest). These amounts represent a portion of the royalty revenue paid to us by Acorda since July 2020 related to AMPYRA. We paid the $16.5 million in October 2022 and paid the additional $1.8 million in December 2022. In addition, during the three months ended June 30, 2022, we had recorded $3.2 million of royalty revenue related to AMPYRA as we believed that we had met the necessary revenue recognition criteria under the Financial Accounting Standards Board Accounting Standards Codification 606, Revenue from Contracts with Customers (“Topic 606”). However, as a result of the arbitration ruling, we reversed the $3.2 million as the panel found that we were no longer entitled to be paid those royalties. During the three months ended September 30, 2022, we recorded both the approximately $18.3 million in repayments and the $3.2 million reversal as reversals of royalty revenue within “Manufacturing and royalty revenue” in the accompanying consolidated statements of operations and comprehensive loss. As a result of the arbitration ruling, we no longer have a contractual obligation to manufacture and supply AMPYRA or a contractual right to receive future manufacturing or royalty revenue related to AMPYRA. In January 2023, Acorda filed a petition with the U.S. District Court for the Southern District of New York asking the court to confirm in part and modify in part the final arbitral award rendered by the arbitration panel in October 2022 and, as part of the requested modification, seeking an additional approximately $66.0 million in damages. We intend to contest this petition and believe it is without merit.

Certain of our manufacturing and royalty revenues are earned in countries outside of the U.S. and are denominated in currencies in which the product is sold. See “Item 7A—Quantitative and Qualitative Disclosures about Market Risk” in this Annual Report for information on currency exchange rate risk related to our revenues and “Item 1A—Risk Factors” in this Annual Report, and specifically the section entitled “Currency exchange rates may affect revenues and expenses” for risks related to currency exchange rates.

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Costs and Expenses

Cost of Goods Manufactured and Sold

The increase in cost of goods manufactured and sold was primarily due to increases of $6.4 million and $4.8 million, respectively, in the cost of goods manufactured for VUMERITY and RISPERDAL CONSTA and increases of $5.6 million and $10.2 million, respectively, in the cost of goods sold for VIVITROL and LYBALVI. The increases related to VUMERITY and RISPERDAL CONSTA were primarily due to increased manufacturing activity, as discussed above. The increase related to LYBALVI was primarily due to the increase in sales activity, as discussed above. The increase related to VIVITROL was primarily due to an increase in costs incurred for out-of-specification batches, as well as an increase in sales activity, as discussed above.

Research and Development Expenses

For each of our R&D programs, we incur both external and internal expenses. External R&D expenses include fees for clinical and non-clinical activities performed by CROs, consulting fees, and costs related to laboratory services, the purchase of drug product materials and third-party manufacturing development activities. Internal R&D expenses include employee-related expenses, occupancy costs, depreciation and general overhead. We track external R&D expenses for each of our development programs; however, internal R&D expenses are not tracked by individual program as they can benefit multiple programs or our technologies in general.

The following table sets forth our external R&D expenses for the years ended December 31, 2022 and 2021 relating to our then-current development programs and our internal R&D expenses, listed by the nature of such expenses: