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"Don't fight the tape"

-Wall Street Maxim

Amarin (NASDAQ: AMRN), which was initially a very profitable covered call trade for me, has been seeing extremely weak trading in the last week. I actually exited my position in the stock for an overall ~5% loss earlier this month to allocate the capital into another trade (dodging most of the downside out of sheer luck), although I've continued to watch Amarin closely from the sidelines.

The trend is clearly strong, and down once again. It also seems that the bears are especially encouraged now that AMRN is at fresh 52-week lows (and dropping).

Why is Amarin getting crushed with such great performance in the broader market?

For one, I want to point out that Amarin (and many other biotech & small pharma stocks) tend to trade within their own little bubble, which means that AMRN traders are not worried about macro-related events like the banking crisis in Cyprus, the continuing issues that Italy has with its debt, or anything of the sort.

Amarin's recent bearishness is "organically" generated, and seems to be heavily based on these two factors:

-Very modest prescription sales coming in for Vascepa point to overshots in expectation.

-There seems to be increasing speculation that Vascepa will not receive NCE designation, which may (or may not) be confirmed in April.

Many investors will have to wait until Amarin's next earnings release in May to even have a ballpark estimate of Vascepa's performance in the current hypertriglyceridemia indication that it's approved for, but many institutional investors have the edge with weekly and monthly prescription data that is telling them exactly how (not) well Vascepa is doing 2 months after market launch.

While Vascepa's peak potential in the MARINE indication can't be determined at this point, the bears who were betting against Amarin's ability as a smaller pharmaceutical company to launch a hypertriglyceridemia drug against a market that has been saturated with an inferior (but similar) product were mostly right.

Weak launches result in weak trading, which is why AMRN has the potential to head down significantly, even after its recent drop to ~$7.30/share on the poor prescription statistics alone.

The NCE status of Vascepa seems to tie into this quite deeply, since it seems that acquisition offers for Amarin Corporation were based on this particular designation which would mean the difference between 3 and 5 years of US drug exclusivity. Although Amarin has extensive patent protection on Vascepa up to this point, larger pharmaceutical companies seem too focused on the NCE status for this to matter in the long run.

The implication is that if the NCE status doesn't work in favor of Vascepa, it's much less likely that Amarin will see any buyout or favorable partnerships, which poses some serious problems for the company if/when they target the ANCHOR indication.

The ANCHOR indication would allow Vascepa to target patients with high triglyceride levels, specifically between 200-500 mg/dL. For now, this seems to be the "meat" of the bullish argument for Amarin due to the sheer number of patients that have triglycerides in this range. It's also important to know that GlaxoSmithKline's (NYSE: GSK) Lovaza is only approved for the hypertriglyceridemia indication for patients with over 500 mg/dL - equivalent to Vascepa's current indication.

Amarin's CEO Joe Z. admitted that the company definitely doesn't have the resources to market Vascepa for the ANCHOR indication, which implies that we will need to see at least a partnership between Amarin and larger pharmaceutical company - probably before 2014 to see substantial market penetration for ~40 million Americans.

Overall, after seeing Vascepa's launch for the MARINE indication, I think that the "Amarin is too small" argument has gained a lot of merit, which alters my perceptions on the stock's potential going forward.

Since the NCE designation threatens the ANCHOR market potential in quite a few ways by threatening the company's chances at a buyout or partnership, I don't see a favorable risk/reward situation in AMRN until we receive a decision by the FDA.

Until then, I think AMRN has too many unknowns to make a firm judgment call on the stock's long-term potential. The short side of the trade is getting quite crowded (~17% of shares are in short positions) while the long side of the trade is threatened not only by fundamental data but by the shifting opinion of the market. I only like to "fight the tape" when I'm highly confident in my call.

Source: Why Amarin Is Struggling So Much