Amarin - The Yo-Yo Of M&A Speculators

| About: Amarin Corporation (AMRN)

It's been another intense week for Amarin (NASDAQ:AMRN) traders and investors who have watched (and pushed) the stock back and forth between the $10-$11 and $11-$12 range in each of the last five trading sessions. This all occurred after Amarin released Q3 2012 earnings, which I summarized here.

Brief Overview of the Situation

The earnings report gave us an uninteresting and somewhat unimportant update on the company's financial situation. However, it did give us some very valuable insight into the company's situation and upcoming plans for the Q1 2013 launch of flagship drug Vascepa.

Vascepa (formerly known as AMR-101) received approval by the FDA in July 2012 for the treatment of patients with triglyceride levels greater than 500 mg/dL (which represents a huge U.S. patient population of 4 million according to company figures). Tainting the FDA approval was the FDA's non-decision on the NCE (New Chemical Entity) status of Vascepa, which means the difference between five and three years of exclusivity in the drug market.

While the company doesn't care nearly as much about the NCE status due to its confidence in its existing (and upcoming) patent protection of Vascepa's active component, it made it obvious in its recent commentary that the NCE status is indeed interfering with M&A talks. The FDA's indecision on that particular indication for Vascepa was so annoying that CEO Joseph Zakrzewski basically said that he'd rather just take a "no" on the NCE status of the drug and be done with it, and its implications on the long-term potential of Vascepa.

A Volatile Week for AMRN

This week, we saw the market digest this news (while wrestling with larger forces affecting the broader market as well). It looked as if Amarin was ready to pull itself a bit closer to the 52-week high made just prior to FDA approval, but bears descended heavily into the stock in Wednesday's trading -- erasing most of the gains made after the quarterly earnings report.

This was completely reversed on the morning of Thursday, Nov. 15, when it became public knowledge that the much larger Teva Pharmaceuticals (NYSE:TEVA) was interested in the acquisition of Amarin, as well as AstraZeneca (NYSE:AZN) -- although we already knew about its interest in Amarin weeks ago. AMRN was initially up about 8%-9% as I described in my recap of yesterday's trading, but saw a more conservative 5.14% gain by the closing bell. Considering how weak the broader market has been, 5.14% in the green is quite decent on a single piece of information like this.

The Terribly Frustrating NCE Indecision

The monthly Orange Book update by the FDA that should come out today could finally put end to the frustrating NCE-related speculation that has put pressure on Amarin ever since Vascepa's approval. More importantly, the market's renewed M&A speculation can provide some bullish momentum for the beaten-down stock. This is because Amarin would fetch a high price if a deal was struck in the near term. Most are expecting somewhere around $20-$30/share. For instance, this article on Seeking Alpha describes $20/share as the result of a "conservative revenue estimate" for Vascepa.

To put it in perspective, GlaxoSmithKline's Lovaza earns about $1 billion each year. The market is expecting Vascepa (as a superior drug) to perform better, or at least on par with it. A ~$3 billion cost for acquiring Vascepa would make it well worth a revenue stream of $1 billion annually.

The buyout price of Amarin (if it does happen) would probably be affected by the NCE status due to the gain/loss of two years of exclusivity in the triglyceride-lowering drug market. Considering how far Amarin's valuation has deviated from the market's buyout estimates, we might see the NCE decision as a positive catalyst with a yes or a no.

Going back to the recent earnings release, note that the company mentioned the NCE status as a hurdle for M&A activity. There's a chance that Amarin will be acquired once the uncertainty over the NCE status is eliminated.

Trading AMRN Depends on Your Risks and Perceptions

Although I have already mentioned it in my disclosure, I am long Amarin stock. To enhance returns, I also utilize options strategies. Specifically for AMRN, I have found success in selling covered call options in reaction to the NCE indecision. On Nov. 1, I sold a bundle of November 2012 $14.00 call options for a particularly attractive price of $0.35, which will yield about 3% on their expiration tomorrow.

If there is an NCE decision on today's Orange Book update, I don't plan to sell more covered calls for fear that I would miss the upside in the event that Teva, AstraZeneca, or some other company were to buy the company outright. Without an NCE decision, however, I do think that covered calls are a good idea. If we don't see an acquisition, it will be another month of NCE speculation and stagnation for AMRN stock. This is an ideal environment for this option strategy.

For those who expect a buyout, there are some cheap call options with 2013 expirations available that would provide astronomical returns on even a $20/share buyout. March 2013 $9.00 call options are going for $4.40. This would mean 150% returns if AMRN were bought for a low $20 estimate anytime before March 2013. At a more optimistic price of $30, this would mean ~380% returns.

Clearly, there are many strategies to employ. They all depend on the risks you're willing to take, and your take on the M&A speculation.

Disclosure: I am long AMRN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.