Medical Device Daily Executive Editor

With the failure of a drug, look for negative impact on the drug delivery system.

With the acquisition of new businesses, look for “streamlining” of various operations to follow.

An instance of the “drug/device-failure” formula was unveiled this week with the statement by Alkermes (Cambridge, Massachusetts) that it must restructure its operations following the decision by Eli Lilly (Indianapolis) to terminate its AIR Insulin program (Medical Device Daily, March 11, 2008), an inhaled insulin development effort, and the third such program to be scrapped in recent weeks.

And Inverness Medical Innovations (Waltham, Massachusetts) is following the “acquisition/streamlining” formula, obvious fallout from its heady series of acquisitions over the past year-and-a-half.

Alkermes, the developer of the inhaler device for Lilly’s AIR insulin product, said it is reducing its workforce by about 150 employees – about 18% of its total workforce — and closing its AIR manufacturing facility in Chelsea, Massachusetts, based on the expected financial hit from Lilly’s action.

Lilly’s withdrawal from the AIR insulin effort follows the decision by Pfizer (New York) late last year to abandon its inhaled insulin product, Exubera, being developed with Nektar Therapeutics (San Carlos, California) (MDD, Oct. 22, 2007), and then the move by Novo Nordisk (Bagsvaerd, Denmak) in January to end its partnership with Aradigm (Hayward, California) for the development of AERx iDMS (MDD, Jan. 17, 2008).

Overall, the three decisions provide further emphatic underlining of the difficulties of the inhaled insulin effort: primarily large developmental costs and low expected payback. Exubera, the only such product to win FDA approval, had captured a miniscule 1% of the insulin market.

David Broecker, president/CEO of Alkermes, said, “We are implementing a new operational cost structure to align our expenses with near-term revenues,” which he said would be lower than previously predicted. “The flexibility of our business model allows us to adapt our cost structure while maintaining our ability to develop innovative products of our own.”

Terminated employees, Alkermes said, are eligible for a severance package, including continuation of benefits and outplacement service.

“Alkermes’ financial foundation remains strong, and we are focused on maintaining this strength moving forward,” said Broecker. “Lilly’s termination of the program forced us to make difficult choices about the optimal size of the organization,” he said, and expressing thanks for the hard work of the laid-off employees.

Alkermes said it does not anticipate any savings in FY08 as a result of the restructuring, concluded at the end of this month. It said it expects to take a restructuring charge in 4Q of FY08 of $5 million-$10 million associated with the workforce reduction and facility-related expenses. It will take an impairment charge of up to $15 million in 4Q of FY08 related to fixed assets at the Chelsea facility.

It said that in FY 09 it will see cost savings of $15 million-$20 million, with more detailed financial expectations for FY09 to be issued in May.

As of Dec. 31, 2007, Alkermes reported cash and investments of $516.6 million.

The company’s product pipeline includes extended-release injectable, pulmonary and oral products for the treatment of prevalent, chronic diseases, such as central nervous system disorders, addiction and diabetes. It has research and manufacturing facilities in Massachusetts and Ohio.

Inverness, a manufacturer of rapid diagnostic products, said that to streamline its worldwide operations it has begun closing two facilities in the San Francisco area housing its Cholestech and HemoSense operations, and also a manufacturing plant in Louisville, Colorado, which produces its BioStar OIA product lines.

The Cholestech operation, acquired by Inverness last September (MDD, Sept. 14, 2007), manufactures the Cholestech LDX system, a point-of- care blood cholesterol monitor, and related lipids used to test patients at risk of, or suffering from, heart disease and related conditions. These operations will move to the Inverness Biosite facility in San Diego.

The HemoSense operation, acquired last November (MDD, Nov. 8, 2007), manufactures the INRatio System, a hand-held blood coagulation monitor for management of warfarin, a medication used to prevent blood clots. It too is expected to be moved to the Biosite facility.

Inverness said the transfers will take place in phases over the next 12-18 months and will produce manufacturing savings of about $10 million annually, along with general/administrative savings of $5 million annually beginning the second half of 2009.

The three operations employ about 345 people: Cholestech, 180; HemoSense, 95; and BioStar, 70. Inverness said that “some reductions” in staffing levels for Cholestech and HemoSense are expected as these operations are consolidated with existing operations in San Diego over the next 18 months.

The closure of the BioStar plant is expected to result in the elimination of about 56 positions.

Restructuring charges of about $12 million are anticipated for all costs including write-down of equipment and leasehold improvements, severance cost and rent obligations. These costs will be included as a component of the costs of the acquisitions of Cholestech and HemoSense.

Closing of the Colorado manufacturing facilities will come around the end of 2Q08, and is the result of Inverness’s decision to exit the BioStar OIA product line, the company said. OIA products will be available for purchase through the end of 1Q09.

Inverness said the closure will produce general/administrative savings of about $3 million annually, beginning the second half of 2008. Restructuring charges of about $9.5 million are anticipated for write-down of equipment and leasehold improvements, severance cost and rent, and to be recorded during the first half of 2008.

Field sales staff and certain back office functions from all three operations are already being consolidated as part of Inverness’ previously reported formation of a centralized North American shared services center in Orlando, Florida.