Amarin (AMRN) developed a star product in Vascepa, which received FDA approval in July 2011. The FDA nod for its fish oil Vascepa was a smooth process for Amarin, but the NCE (new chemical entity) status has thus far been a headache. The stock is still in purgatory due to a lack of a decision on Vascepa's NCE status. The delay has kept the stock price suspended for months between $11 and $13.
AMRN took a turn for the worse last week, when shares plunged 30% on news that Amarin was going to raise $100 million in debt to commercialize Vascepa. The shares plunged further yesterday, after Amarin announced that it has acquired the services of a consortium, led by Slanmhor Pharmaceutical, for active pharmaceutical ingredient (API) global supply chain for Vascepa. I believe this price decline is a market overreaction and Amarin still remains a strong buy and acquisition target.
Why Buy Amarin at All?
Amarin achieved FDA approval for Vascepa last July. Vascepa is primarily used for the treatment of patients with triglyceride levels greater than 500 mg/dL. Vascepa is a star product because this drug is safer than its closest competitor Lovaza, which generated sales of approximately $1 billion last year. Vascepa is considered safer because it doesn't elevate LDLs, which is a major side effect of Lovaza.
According to AMRN, Vascepa has a 4 million target market in the U.S. alone. While the FDA approval was relatively a smooth process, the NCE status has not been so smooth. If the drug does get NCE status, it will have exclusivity for five years. Vascepa will get three years exclusivity, even if it doesn't get the NCE status. The NCE classification prolongs the patent protection capability of a company, and that is why it is impossible for any party interested in an acquisition to value AMRN until the decision comes through.
Why Is Amarin an Acquisition Target?
Amarin is an attractive M&A target because its total market cap is $1.8 billion, and Vascepa's closest rival Lovaza is garnering annual sales of $1 billion. This M&A will also make more sense from a synergy point of view, as Big Pharma will be better able to commercialize Vascepa due to their better equipped sales force. Amarin's current CEO Joseph S. Zakrzewski has a track record of being involved in M&A activity because he was the one who sold Lovaza to Glaxo Smith Kline (GSK), through the sale of Reliant Pharmaceuticals.
Why Did Amarin Decide to Commercialize Vascepa?
The decision to commercialize Vascepa seems to be a strategic move by Zakrzewski. Investors should remember that prior to the sale of Reliant to GSK, the company had already commercialized Lovaza. Therefore, investor perception that Amarin is no longer an acquisition target is totally misplaced. I believe Zakrzewski is using it as a bargaining chip to speed up negotiations. The patents of Lovaza will start expiring as early as March 2013, giving way to cheaper generics.
Therefore, I believe GSK will be the most interested party in acquiring Amarin, in order to replenish its lost sales from Lovaza. The only wait is for the NCE decision to come though, because no one can buy what they can't value. The NCE decision is not a matter of "if" but "when," and once the NCE decision is out and potential acquirers can value the stock, AMRN will be a major acquisition target by large-cap pharmaceuticals.
Eight sell analysts have a Buy rating on the stock and one has a Hold rating. There are no Underperform or Sell recommendations for the current month. The mean sell-side target for AMRN is $22, which is a 140% upside to current valuations. If we use sell-side EPS estimates of $1.20 for 2015 and $2.00 for 2016, we can calculate a target price as follows:
Average NASDAQ P/E
Average Industry P/E
Target Price with NASDAQ P/E
Target Price with industry P/E
The table above shows that the stock has an upside using both industry and market P/E multiples. The commercialization of Vascepa does not reduce its chances of getting acquired; rather, it has given Zakrzewski more leverage to negotiate and get a higher price for Amarin investors. Therefore, I have a buy rating on AMRN and believe there will be M&A activity as soon as the NCE decision comes out, no matter what it is.