Introduction: Amarin Corporation plc (NASDAQ:AMRN) is a Dublin, Ireland,-based company that markets Vascepa in the United States to treat very high blood levels of the lipid type known as triglycerides (abbreviated as TG).
I analyzed Vascepa and purchased the stock around $8.20 per share about a week ago.
I am a noninvasive cardiologist with pharma industry experience. One of the projects I was involved with from conception to FDA approval was a statin. However, I am not a certified or registered financial analyst or planner in any way. I share these thoughts with Seeking Alpha readers with this background. There are definitely other ways to look at AMRN than the way this article does. I believe that the statements I present as fact are correct, but please do your own research if you are interested in AMRN.
Background: Vascepa is a fish oil product that consists of at least 96% pure EPA (eicosapentanoic acid). Vascepa competes directly with Lovaza, a different fish oil product marketed by GlaxoSmithKline (NYSE:GSK). Lovaza is comprised of EPA, a different acid known as DHA, and other components. GSK obtained marketing rights to Lovaza by purchasing Reliant Pharmaceuticals. Several Reliant executives make up part of the management team of Amarin, including Amarin's CEO. Lovaza's sales in the U.S. are about $1 B annually and show no growth lately. Whether this is because of market saturation, side effects, or other reasons is not known to me. Lovaza's sales suggests a large market opportunity exists for Vascepa simply from its current approved indication, given that Vascepa may be an improvement on Lovaza in side effects, safety and efficacy.
AMRN shares trade in the US as American Depository Receipts (ADRs).
In the 10-K that Amarin filed with the SEC last week, the company implies on pp. 4-5 that it believes that Vascepa has a medical advantage over DHA. Amarin believes that DHA tends to raise "bad cholesterol" levels (i.e., LDL cholesterol). It also believes that its DHA-free product eliminates the "fishy taste and smell" that can be associated with products that contain DHA. It implies that perhaps DHA can aggravate problems of an irregular heartbeat.
The potential profits that Vascepa could garner, given some combination of safety, tolerability and efficacy advantages over Lovaza, have given AMRN a significant value in the stock market. AMRN trades at a $1.2 B market cap based on 150 M (million) primary shares outstanding and a recent market price of $7.80. There are about 190 M fully diluted shares outstanding.
The current indication to treat very high TG does not fully justify AMRN's valuation. The main excitement stems from Amarin's opportunity to market Vascepa for an indication that covers many more patients than does its and Lovaza's current labels. The other major cause of bullish enthusiasm involves the possibility that Vascepa indeed is and comes to be perceived as a superior product to Lovaza, as described briefly above.
Amarin's ANCHOR study appears to show that Vascepa is effective for patients on a statin with moderately elevated TG levels. Lovaza has not demonstrated this capability. Amarin has filed a supplemental NDA for this expanded indication with the FDA, and expects a response by year-end. If granted this indication via the sNDA, Vascepa might then address a US population of 45 million people, rather than the current group of very high TG patients, who are believed to number less than 5 million.
The following assumptions are used for the following exercise in judging whether AMRN's market cap is far enough below a guess at fair value to be worth the risk of purchase. I used 200 M diluted AMRN shares outstanding, no value for the net cash on Amarin's balance sheet, and no value for any non-US potential income. No use for other conditions, such as arthritis, is assumed. No upside from acquisition or development of another product is considered. Because of these restrictions and because of inflationary price increases that are expected for Vascepa over time, no discounting for present value is taken.
This exercise in thinking about how Vascepa and Amarin may fare, and in valuing AMRN, is highly speculative. There is no specific basis for assigning probabilities as is done herein. Amarin is losing money and may never turn a profit. Caveat emptor: Let the AMRN buyer beware.
Bear case: Let's grant bears an 80% chance that AMRN is more or less worthless, or not worth valuing. (I think this is extreme.) The possibilities include the ultimate downside - that Amarin goes bankrupt. They also include a partial victory for the bulls - that Vascepa has some very good years for sales and profits, but that they are insufficient to ultimately justify the current share price. Again, my view is that this is more than fair to the bears.
Next, I address one issue that has harmed the share price.
The NCE issue: As an AMRN bull, I think that Vascepa has durable blockbuster potential. I think and hope that several uncertainties have combined to lower the share price more than is justified.
One of these uncertainties is whether Vascepa will obtain New Chemical Entity (NCE) status from the FDA. The FDA approved Vascepa for marketing about eight months ago, but unusually still has not decided on NCE status.
This issue was addressed in a 2011 discussion (qualifications of the author are unknown; multiple analyses of this topic exist that have been done more recently):
Simply put, if AMR101 is designated as a New Chemical Entity (NCE) by the FDA, the product receives five years of market exclusivity after approval in the United States, regardless of the patent situation (sometimes referred to as Hatch-Waxman exclusivity). During this time the FDA will also not accept or approve ANDA's or 505(b)(2) applications for generic versions (except in case of ANDA with Paragraph IV certification that can be filed 1 year before NCE exclusivity expires).
It is important to note that a product can receive a 3 year period of market "data exclusivity" if it contains an active moiety (see definition below) that has been previously approved but has been the subject of new clinical investigation by the sponsor that were essential for approval. FDA will not approve any ANDA's during this time, but they can be filed. Amarin's efforts with AMR101 clearly meet this threshold, so I will not discuss this point further.
The writer believed that Vascepa would deserve three years of protection from a generic approval from the 2012 approval date even if it were denied the five years of protection that NCE status grants. (This sounds correct to me, though I am not an FDA regulatory specialist.) I'm not certain how material two years of difference actually is to investors in the final analysis. Thus I wonder if a bit too much has been made of the NCE decision - though it is clearly important.
Even so, the entire NCE issue may be a bit of a red herring for the real bull case on AMRN.
As I see it, prolonged blockbuster status for Vascepa can only occur if the patents, knowledge, raw material access, etc. were to combine to keep competition at bay for many years. Amarin's management makes this very argument.
The bull case: I evaluate the bull case as the sum of only two 10% possibilities. The upside still looks attractive for the stock even assuming that the hoped-for major success of Vascepa only has a 20% chance of occurring. I assume a 50% profit margin after all taxes should the product reach blockbuster status. (Cost structure: 5% COGS + 25% SG&A yields 70% profit margin, which shrinks to 50% after corporate taxes and taxes to the shareholder. Modest changes to these assumptions do not affect my ultimate conclusion.)
Here then are two bullish scenarios.
A. "Basic" bull case. This assumes an average of $3 B annual sales for 10 years, say for calendar years 2016-2025. This sales volume equals triple Lovaza's peak sales, yet the population addressed by Vascepa if the sNDA is accepted is more than 10X Lovaza's sales. So, I think it's a very reasonable and attainable possibility.
This scenario gives $30 B in total sales, or $15 B in total after-tax profits to the investor. A 10% chance of this occurring gives $1.5 B in risk-adjusted profits. Dividing by 200 million fully-diluted shares (assumed per above) gives this possibility a $7.50/share current value.
B. Super Bull case. This assumes that the sNDA indication is granted and then the PROVE-IT study testing for an outcomes benefit in fact shows a benefit by 2019 or sooner. In that situation, Vascepa could become extraordinarily successful. I will assume for this scenario $6 B in average annual sales for 15 years, say from 2016-2030. Those $90 B in total sales are then assumed to translate back to $45 B in after-tax profits to the AMRN shareholder. A 10% chance of this occurring gives $4.5 B in risk-adjusted profits, or $22.50 per fully-diluted share as the stock's intrinsic value under this one scenario.
Thus the above calculations, assuming a 20% chance of Vascepa going "all the way", provide a "quick and dirty" estimate of AMRN's current value of about $30/share.
Whatever value one wants to assign to the other possibilities is gravy - and not trivial.
Conclusion: While one never knows what manufacturing problems or side effects will show up with any launch of a new drug product, my bias is those possibilities are unlikely. I am looking forward to the Vascepa launch going well, which could lead to a higher price for AMRN as 2013 moves along.
I am also optimistic that the FDA's decision on the sNDA will be favorable for Amarin this year. If that optimism is misplaced and the FDA also decides against NCE status for AMRN, then I would expect the stock to have significant downside risk from today's price.
Overall, I think that this volatile, highly risky equity has a positive risk-reward ratio with meaningful long-term capital gains potential.
Additional disclosure: Not investment advice. Please note the various cautions in the article. AMRN is a speculative stock, ownership of which could easily lead to the loss of one's entire investment.