Recently a Seeking Alpha contributor wrote a very good article titled, 4 Reasons Why Amarin Will Continue Tanking. The author's reasons for why he believes Amarin (AMRN) will dive, include new debt, an "Avalanche of Warrants," selling pressure due taxes and margin calls, and insider selling. I agree with most of his contentions. In regards to the new debt, it is disturbing (more on that later). On taxes, although I can't predict how investors will handle Amarin on their returns, I can safely say there will be margin calls (I personally experienced it). In regards to warrants, the level and number are concerning, but most clinical stage pharmaceuticals have those kind of problems. Finally, with regards to insider selling, unless they are selling for some nefarious reason other than profit taking, I don't care.
Many biotech speculators have loved and hated Amarin over the last two years, including me. It has taken all of us on rollercoaster rides of riches and margin calls. So, it's no surprise that it continues to illicit some of the strongest opinions on Seeking Alpha. With that said, in the short term, I do see Amarin continuing its recent slide. When the Board agreed to go to its local shark for a loan, it implied that the company is having a difficult time raising money - especially equity. The new $100 million debt comes at a hefty cost. The terms of loan includes interest rate in the range of 12 to 14%. That amounts to about $12 to $14 million per year (or more than a $1 million per month) just in new interest expense. That's insane for a pre-revenue company. More importantly, there continues to be controversy over Amarin's lack of a five year New Chemical Entity (NCE).
Over the last two weeks, Amarin's stock price seems to be heading back in the direction of pre-FDA approval levels. Just before the PDUFA date, Amarin shares were trading above $15. However, after Vascepa was approved, the stock price took a sharp dive for three reasons. First, everyone was expecting approval, so approval was priced in. Second, along with approval, Amarin did not receive a New Chemical Entity (NCE) status. An NCE would have given Amarin five-year exclusivity for marketing Vascepa. Instead, it is becoming more and more likely that Amarin will only get three years of exclusivity - patent notwithstanding. Third, all clinical stage companies who receive FDA approval come back to Earth in terms of stock price; this is completely predictable. But despite these challenges, I do see a longer-term gain with this stock.
In the short term, I believe Amarin is a prime candidate for shorting. Its ballooning debt levels, warrants, and marketing its only drug by itself all spell doom. More importantly, by taking out additional loan at astronomical costs, the Board sent a very clear signal that it intends to market Vascepa alone with little hope for a buy out. Investors are weary - and rightly so. Therefore, there is massive sell-offs. What's worse is that there does not appear to be any reason for believing that this sell-off will abate anytime soon. So, a further slide seems inevitable - although inevitable often has a way changing its mind. If you don't buy this thesis, you can also look at it from the perspective of potential new investors/buyers. If you are someone with cash burning your pockets and looking to buy into some company, would Amarin be on your list of potential buys given all of these uncertainties? There are other safer bets.
So the question for those looking to short the stock and potential buyers looking to buy in is, what is the right price for both? If I knew that answer, I would be chilling by the beach and not writing for Seeking Alpha - although I would miss all of you (NOT!). This is where experience and instincts kick in. From my experience, I know that $5 is a magic number for many biotech stocks. It is often a point of reaction for investors. Often, you either see a further and more rapid slide or a rapid recovery from that magic number. Look at Synergy Pharmaceuticals (SGYP), Dendreon (DNDN), Idenix (IDIX), and many other speculative biotechs. They all have dipped substantially below $5 before they quickly rebounded. However, none of these companies have the medium-term value that Amarin has. Say what you want about Amarin, but it does have value; we all know that. More importantly over the last two years, the stock has not dipped too far below $5 before roaring back to sanity. So, it will rebound back and Vascepa still has the potential to be a billion-dollar drug. So given all of this over the next few months, I believe it can dip to as low as $5, but I will jump in if and when it gets to $6. Why not just wait you ask? Because the biggest destroyer of value is greed.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMRN over the next 72 hours.