One of the biggest decisions in the life of any biotech is whether to keep a promising compound in-house and market it directly, or whether to partner with a larger pharmaceutical company and collect royalties. While there have been a number of notable go-it-alone success stories (including names like Alexion Pharmaceuticals (ALXN), Gilead (GILD), and Amgen (AMGN)), there have also been multiple of examples of companies that essentially shortchanged themselves by marketing a compound on their own.
With Thursday's news that Amarin (AMRN) is raising $100 million in debt and intending to hire 250-300 salespeople, shareholders have been forced to accept the very real possibility that Amarin is not going to get the major partnering or buyout announcement that supported many bullish theses on the stock. While Amarin's Vascepa should hold the potential to ring up more than $1 billion in revenue, the inability to secure a partnership or buyer raises the question of whether shareholders will see maximum value for the drug.
The Amylin Example
While I do not own Amarin, nor do I write on it frequently, I'm struck by some similarities between this story and a biotech stock that I did own for a number of years -- diabetes specialist Amylin Pharmaceuticals. While this story had a happy ending for Amylin shareholders, not all of the possible conclusions are so encouraging for Amarin shareholders.
Amylin's success was predicated on the development of two GLP-1 compounds for diabetes, twice-daily Byetta and once-weekly Bydureon. In being first to market with a powerful new anti-diabetic medication and having the marketing horsepower of Lilly (LLY) behind it, Byetta was a successful drug and Amylin's stock outperformed for a time.
Then serious problems emerged. Novo Nordisk (NVO) launched a better daily GLP-1 drug, and development of Bydureon was bogged down and delayed by FDA worries regarding safety. Along the way, the relationship with Lilly soured significantly, and the two companies ultimately broke up their partnership.
That left Amylin in a position where it had to hire sales reps and market Bydureon on its own. This did not go especially well. Despite clinical data pointing to the superiority of Bydureon to Novo Nordisk's Victoza, Amylin continually disappointed investors, as prescriptions not only lagged initial expectations, but also the prior launch trajectories of Byetta and Bydureon. By my own estimates, had Amylin not sold out to Bristol-Myers Squibb (BMY) and AstraZeneca (AZN), Amylin shareholders would likely have seen 20-50% of the value of Bydureon evaporate through sales shortfalls and higher operating expenses.
Amarin Is Different… But Not Completely
Obviously, there are many significant differences between Amarin and Amylin. One of the key issues surrounding Amarin -- the company's patent and exclusivity position -- was never an issue with Amylin. Likewise, Amylin had to buy its freedom from Lilly at a high price, while Amarin's balance sheet is in better shape.
Yet I still see similarities. For starters, Amarin has to go up against a similar existing drug (Glaxo's (GSK) Lovaza) that is well-entrenched. Yes, Vascepa is superior to Lovaza in many key ways (Lovaza raises LDL, while Vascepa lowers it), but I'll remind readers that Bydureon was supposed to be superior to Novo Nordisk's Victoza, and it didn't matter all that much when it came to prescriptions.
The companies also look similar in so far that the size of the target market may be shifting. Amylin had to contend with the fact that Bydureon was going up against alternative diabetes treatments, many of which (like DPP-IV inhibitors) had more pleasant administration routes. For Amarin, there are rumors and worries that docs are souring on the use of highly purified omega-3 fatty acids for cholesterol reduction.
The reason any of this matters is that as much as bulls wish otherwise, no drug sells itself. While this is admittedly cherry-picking, investors had a lot of enthusiasm regarding what Amylin, Dendreon (DNDN), and Savient (SVNT) could do on their own with impressive-looking new drugs, and those stories did not go particularly well. So it's worth asking whether Amarin has the wherewithal to do the marketing and detailing to get docs to use Vascepa and establish it as a billion-dollar drug.
It's also very much worth asking how much it will cost them to try. Last and not least, at least some investors (bears, at a minimum) are going to point to the lack of a partnership or buyout as "proof" that Big Pharma doesn't care about Vascepa and that the billion-dollar potential is just a mirage.
Still Time To Get A Deal Done
Given Amarin's (lack of) pipeline and the potential difficulties of getting Vascepa slotted into the standard of care, I still think the company would be well-served with a deal. As the Amylin example suggests, rolling out a salesforce does not preclude a later buyout, as most of these reps can be retained (or fired later) with minimal incremental costs in the long-term scheme.
I also happen to think that the controversy regarding getting New Chemical Entity (NCE) status for Vascepa matters more to Amarin as an independent. It's not that I doubt Amarin's patents, nor the extent to which it has its supply locked up. Rather, I think getting NCE status would put generic competitors at bay and reduce the risk of the model. Without the five years of exclusivity (effectively more than six) of an NCE, Amarin might find itself dragged into expensive patent litigation much sooner, and litigation always carries the risk of losing.
It's hard for me to say why Amarin is going this route, but insufficient interest from Big Pharma would be the obvious answer. It's not improbable that companies that badly need near-term revenue (like AstraZeneca) either see the NCE/generic fight as more trouble than it's worth, or too much of a risk to pay top-dollar. That may be particularly true when it comes to the ANCHOR study and the potential of an expanded label -- Vascepa may not be able to keep exclusivity long enough for even a Big Pharma salesforce to max out the billion dollar-plus (or perhaps multi-billion dollar) potential of the product.
The Bottom Line
By and large, I avoid controversial biotech names, as they are often a big headache relative to the returns and there are always other options. To that end, I doubt I'll be buying (or shorting) Amarin. I do believe this recent dive does push the stock below fair value, but there are still too many questions for my comfort. I don't like how management has tried to position the NCE issue, nor do I like the fact that the company will have waited almost half a year post-approval to launch Vascepa.
As a decision to go it alone would reduce Amarin's value by about 25% in my model today, I'll continue to avoid this stock. I do want to re-emphasize, though, that the stock is now below even my more bearish fair value assumptions (predicated on $1 billion in sales), and there could be real value here for investors who can accept the above-average risk and volatility. I also want to point out that Amylin management was seriously criticized for rejecting early bids that they believed undervalued the company, and that holding out for top-dollar got shareholders a 40% higher price. Amarin shareholders should hope to be so lucky if, in fact, management is simply playing hardball for a better offer.