Last week, I wrote about Amarin (AMRN), stating, "Amarin is extremely undervalued at today's prices." While that article laid out some compelling reasons for a large increase in the company's value in the coming year - projecting a likely year-over-year return of around 100% - a number of skeptics suggested that if there was such great value to be had, and the value was so clear, Big Pharma would not be so reluctant to make a buyout deal.
Skipping to the bottom line, here is my condensed response: Look at how AMRN has managed its supplier relationships, not only near term, but for the longer term. Understand how AMRN managed the sales side, at how they've managed the FDA's NCE process. Some analysts and some potential buyers of the company have failed to see the big picture, and think Amarin's situation is a disaster. Look again; look at the Board of Directors, at the recent sales hires, at the substance of the communications we've seen between AMRN and others. Management is doing a stellar job of both positioning VASCEPA for a good launch, and positioning shareholders for a better return on their investment. Read on for a more detailed analysis of the facts.
Skepticism among biotechs is well-justified; a 2008 article examining biotech funding and risk by the Royal Society of Chemistry found that most private equity investors look for a five year exit strategy, while most biotech investments require at least a ten year window to maturity. Excitement is further dampened by the significant liability threats contained in these products; the RSC cites Vioxx as one example. Success rate estimates for biotechs vary widely - I've found estimates from one percent by John Mayo of the private equity firm Celtic Pharma, to ten or even fifteen percent; universally dismal at any of those rates. However, Amarin is at a different point than the average biotech: it's through Phase II testing; it has an FDA approval for its drug, VASCEPA; VASCEPA has a multi-billion dollar market; the drug is a natural product - albeit highly purified - with almost no significant side effects; the so let's look a little deeper at the evidence on AMRN.
I'll start by acknowledging what I suspect is common knowledge - that many biotech startups start up with one thought in mind: a big buyout once a product is identified. Investors put is a few millions. The founders have a compelling concept worthy of Phase I trials or beyond. A competent staff is put together to take it to that point, and if all works out, the company is bought out after some early promise, with investors, founders, and staff all reaping significant paydays.
But that's not the only model. A few years ago, a biotech out of Liberty Corner, NJ, developed a new cardiovascular drug based on refined omega-3 fish oils. After development, there was interest from big pharmaceuticals, but not price agreement, and Reliant brought its product, Lovaza, to market itself. Following a successful launch, in 2007, GlaxoSmithKline (GSK) purchased the Reliant for $1.65 billion, folding it into GSK's US operations. Current annual sales in the US are around a billion dollars, with another $400 million in sales ex US.
Fast forward a few years, and much of the Reliant team has come together again at Amarin, starting with the hire of CEO Joe Zakrzewski, who had been Reliant's COO leading up to and through its buyout by GSK. Numerous other Reliant alumni have landed at Amarin, including Amarin's President of R&D Steve Ketchum (Senior Vice President, Research and Development and Medical Affairs at Reliant), Chief Commercial Officer Paul Huff (Vice President of Marketing at Reliant); Director of National Accounts Ken Mayes (Area Director, National Accounts at Reliant) and Senior Director, Managed Care Marketing Joe Gilhooly (Director, Managed Care Marketing at Reliant). This listing is illustrative, not exhaustive. In addition, key Amarin personnel have deep ties to bigger pharmaceuticals. Chief among these is Amarin and Chief Medical Officer Declan Doogan; prior to arriving at Amarin served 25 years as Senior Vice President for World Wide Development at Pfizer (PFE). From Sanofi-Aventis (SNY), Amarin got its Senior Director, Marketing in Arun Padmanabhan and Director of Marketing, Will Fahey.
Looking at AMRN's recent sales-side hires, more connections to Pfizer emerge. Management hires in late November were followed by significant layoffs in the Pfizer CV unit in December. As patent protections roll off, and as the productivity paradigm of repping pharmaceutical products shifts to a more productive model of fewer reps, many other large pharmaceuticals are following the same route. However, reps are still a critical piece of marketing drugs, and AMRN followed the Pfizer layoffs with its own hiring and go-it-alone strategy. A discerning viewer might suspect a linkage between the hiring of PFE senior talent, the announcement of PFE layoffs, and AMRN's announcement of its need for those same reps a week later. Furthermore, Amarin's repping model looks suspiciously like the hybrid CSO/in house model developed by Pfizer.
Besides the sales side, AMRN has also been busy addressing the supply side. Unlike get-rich-quick biotechs, Amarin has established rich, long-term relationships with key suppliers of omega-3 ingredients, and others with the capacity to refine these to the exacting standards necessary for manufacture and encapsulation of VASCEPA. Agreements with BASF/Equateq, Chemport, Nisshin and a Slanmhor consortium which includes DSM provide not only a secure supply chain of key ingredients for many years forward, but those agreements also compose a formidable barrier to entry for competitors down the road, and impose costs to competition which will make even generics challenged to offer a better price point than AMRN can with its branded VASCEPA product. For example, Equateq signed a long-term supply agreement with Amarin under which Equateq will sell up to $20 million/year of API for use in VASCEPA.
Furthermore, Amarin is also engaging in a similar manner with key elements of the process. On Christmas Day, Le Monde ran a business article noting that Novasep is building a key refining element, at a cost of €30 million ($39.55 million U.S.) for AMRN in Mourenx, to meet an expected surge in VASCEPA demand with the approval of the ANCHOR applications of VASCEPA later this year or in early 2014. AMRN is providing a key piece of the funding for the Novasep expansion, as it has for Chemport, Equateq, and Nisshin. In short, Amarin is not acting like a get-rich-quick biotech startup. Rather, Amarin executives are acting like they have a great product they are unwilling to sell short - and they have the experienced team to pull it off, having done so before.
Additional disclosure: I hold both shares and options for long positions in AMRN.