Amarin: Facts And Risk/Reward Suggests Current Pricing Is A Great Entry Point

| About: Amarin Corporation (AMRN)

Amarin (NASDAQ:AMRN) is an Irish biotech whose ADRs are traded on Nasdaq in the United States. Amarin is a one-product biotech company on the verge of commercialization. Its raison d'être is Vascepa, a highly purified fish oil. Per the FDA data sheet for its indications:

VASCEPA is an ethyl ester of eicosapentaenoic acid (EPA) indicated as an adjunct to diet to reduce triglyceride levels in adult patients with severe (≥ 500 mg/dL) hypertriglyceridemia.

The bottom line, for those who want to skip to the end: Amarin is extremely undervalued at today's prices. By the end of the first quarter, I expect a share price of $12 to $13.50; within a year the price should trade above $16. My confidence levels are roughly 60 percent to reach or exceed the first quarter target, and 90 percent for the year-end target.

Picking winners in the stock market is usually not for the risk-averse. Risk and reward are linked for a reason; folks putting up their cash, whether for a loan, or as an ownership stake in a company, want a return which compensates them not only for the time value of their funds, but also adds a cushion sufficient to cover their risk. This approach presumes equal access to, and understanding, of information. However, the distribution of information, and even more so, the understanding of it, is imperfect, creating constant opportunities to garner outsized earnings--but only if you accurately understand the information in play.

Rarely does one find a sure thing-or more accurately, an extremely high probability outcome, there being no such animal as a sure thing in our world-with returns which promise up t0 100 percent or more in the coming year. The evidence is compelling that Amarin presents just such a rare opportunity. Currently (1/02/2013) valued at $8.30 per share, AMRN is poised to increase in value by perhaps 25 percent in the next quarter alone, and if analysts are correct-and I think most of them are too conservative-it should trade north of $15 by this time next year.

"But," you protest, "how can you make such a strong statement about a company that is bleeding cash, has only one product--which they are still struggling to bring to market--and which has lost nearly 40 percent of its value just in the past month, and is down over 50 percent since its 52 week high, reach in late July?"

Frankly, those factors help support the case. Since it received FDA approval in July of this past year Amarin's price per share has plummeted, while it has continued to build its impressive array of patents protecting its franchise. From a postapproval high of nearly $16, the company now finds its fortunes pegged at a share price of $7.70. This price is much closer to the 52-week low ($6.13) than to the 52-week high ($15.96), and demonstrates that uncertainty is a greater driver of price than information. The loss is value runs counter to milestones achieved, and is reflective of disappointment and a rush for the exits over the past month, as Vascepa-Amarin's proprietary Omega-3 treatment for very high triglycerides (>500mg/dl)-has awaited and FDA determination regarding its New Chemical Entity status. Gaining that label would further protect Vascepa against litigation over patent issues for five years, giving rock-solid assurance to potential big pharma suitors that Vascepa would provide strong positive cash flows for an extended period.

Executives charged with making decisions at this level are safer waiting than taking the risk of misinterpreting the strength of other protections Amarin has in place for Vascepa. This phenomenon is widely recognized; risk experts Tim Koller, Dan Novallo and Zane Williams note:

...countervailing behavioral forces-amplified by the way companies structure their reward systems-that lead managers to become risk averse or unwilling to tolerate uncertainty even when a project's potential earnings are far larger than its potential losses... (McKinsey Quarterly, August 2012)

Exec's who wrongly bet on an opportunity may lose their jobs; those who wait and make less money (for their company) because of being risk-averse get raises and career advancement. Careful analysis, however, demonstrates that for Amarin, NCE is a secondary issue; the patent fence around Vascepa is robust, broad, and provides extensive protection until at least 2030. SA contributor 'EFSinvestment' noted in an article August 20, 2012, that Amarin is building a significant portfolio of patent protection for Vascepa, while acknowledging that NCE approval could still be a sticking point among potential acquirers. That picket fence of patents has only grown stronger over the ensuing months; most recently--on December13, 2012--Amarin received notification of Notice of Allowance for U.S. Patent Application Serial Number 13/623,450.

In addition, Amarin has entered into agreements with key suppliers which build significant barriers to entry for anyone attempting to enter the market. The company continues to increase key ingredient capacity ahead of the Vascepa launch later this quarter; just this morning, AMRN sent out a press release announcing submission late last month of a Supplemental New Drug Application (NASDAQ:SNDA) to the FDA seeking approval for BASF as an additional active pharmaceutical ingredient supplier of icosapent ethyl for production of Vascepa.

Let's look at a few key milestones AMRN achieved in the past year:

  • Received several key patent allowances and/or approvals. Amarin has secured considerable protection for Vascepa through 2030 for its Marine and Anchor applications. Eleven patent applications have now been issued or allowed by the USPTO; over thirty additional Vascepa-related USPTO applications are pending;
  • Received PDUFA (Prescription Drug User Fee Act) approval of its NDA (New Drug Application) application for what is now trademarked 'Vascepa' on July 26, 2012
  • Received significant, positive attention from numerous analysts, including Citi and JP Morgan. A total of eleven analysts are following AMRN, nine have a 'buy' (or equivalent) rating; two have a neutral stance. Not a single analyst recommends selling at this point, and while price targets range between $10 (Wedbush) and $28 (Jeffries), the mean estimate 12 months from now is almost $19. Put as a percentage, the average analyst projects a return of over 240 percent in the next 12 months! Six brokerages reviewed their targets and ratings December. Of these, two maintained prior price targets, while four reduced them. Noteworthy, though, is that only Wedbush cut its rating, to 'Neutral' from 'Outperform'.
  • AMRN has nearly completed its hiring of about 250 seasoned sales reps-experienced in marketing cardiovascular drugs to clinicians, and with significant contacts with the buyers in the medical community.

"Okay," you say, "so there's a lot of upside. But why can't Big Pharma simply scoop them up at $10 or $12, if the price is currently so depressed? Wouldn't most shareholders welcome that, after the turbulence of the past few months?"

If you've haunted any of the Amarin-related message boards, or read the comments under other Seeking Alpha articles on Amarin, you'd certainly recognize that many retail investors would, indeed, welcome a quick buyout at a modest premium over today's value. Fortunately for those with a longer investment horizon, and a bigger picture of this company, Amarin is headquartered in Ireland. Irish regulations require that any buyout must obtain a 90 percent approval from shareholders. The drivers in that conversation will not be the message board pundits, but the hedge funds and venture capital groups that have funded the build-up to this moment. Those investors are more than willing to wait a few months (or years) to get a couple hundred percent more return on their initial investment (remember, they got in early, so their basis is generally pretty low). These investors aren't trying to make a quick buck by popping in and out with day or momentum trades; rather, they are looking to make the big bucks by seeing their strategic investment through until it makes sense to sell according to their own internal criteria.

Looking at what's been going on, and reading between the lines of corporate conversations, it seems likely that there have been significant discussions of a buyout with at least a couple of suitors. However, those suitors are unwilling to pay what the management team values AMRN's net present value (NYSE:NPV) to be, a price which accords significant value not only to the initial MARINE applications, but also to the ANCHOR indications which will be seeking approval and additional patent protections in the coming year. For a while the Amarin Board of Directors and management was hopeful that a deal could be consummated by about this time, but absent what Joe Z and company felt were fair offers, they decided instead to allow Zakrzewski an opportunity to replicate the path he took with Reliant/Lovaza.

That might seem daunting, but when one weighs the experience of the management, the availability of extremely competent sales people due to structural changes in the industry and recent layoffs which fed into the a greater than normal availability of a highly trained and connected cardiovascular pharmaceuticals sales force, and the demonstrated-and frequently commented on-outright superiority of Vascepa vis-à-vis Lovaza, and I expect an extremely successful launch. With the launch about to begin, sales figures will begin leaking out before the end of the first quarter. Those figures ought to rekindle some conversations; ongoing patent and trials results will simply add fuel to buyout price targets.

Ultimately, I expect a buyout, but probably not in the first half of 2013. As sales progress and trial and patent data continues rolling out, the value to big pharmaceuticals will become clearer, and jump significantly. In the end, I expect a buyout to go for over $30. The management team has done a great job of identifying a compound worth many billions, proving its efficacy, and is now going about the business of demonstrating its markets, both immediate and longer term.

The bottom line: this is an extremely rare opportunity to buy low and sell much higher in a short period of time. AMRN is extremely compelling at these levels.

Disclosure: I hold long equity and option positions in 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.