I'm writing this article as a "counterpoint" to the article "Amarin Investors Should Avoid the Bear Traps," published on 6/10/13, by Andrew Colburn. While I respect and appreciate his well-written thoughts on Amarin, I have some counterpoints I'd like to point out. I've started leaning bearish again on Amarin (NASDAQ:AMRN) of recent, reducing my position of late to just puts, and I wanted to paint the other side of the picture for investors.
Basically, I wanted to let people realize that there is still a ton to be skeptical about when it comes to discussing Amarin's bearish points, which Colburn calls "constantly and consistently wrong or full of holes." Much of Colburn's argument is based around nothing but pure speculation, and it's important for skeptical-minded people to realize that many of the arguments made by bulls are as thin as a sheet of paper when examined from the right angle.
From its website, "Amarin Corporation is a biopharmaceutical company focused on the commercialization and development of therapeutics to improve cardiovascular health. Amarin's product development program leverages its extensive experience in lipid science and the potential therapeutic benefits of polyunsaturated fatty acids. Vascepa (icosapent ethyl) is Amarin's first FDA approved product and is available in the United States by prescription."
After the drug's approval, the company failed to produce any major pharmaceutical partners, brought on its own sales staff, and is taking a stab at launching Vascepa on its own. So far, the launch hasn't gone amazingly well, but it hasn't gone poorly. Numbers had been running commensurate to prescription predictions and the stock has been stuck in limbo between $6.50 and $8 for the past two months.
Let's run down the topics that Colburn covered, one at a time:
There's No Market for Vascepa
Colburn, in his article states:
This is the earliest bear thesis I can remember. Simply put, 'There is no market for Amarin's Vascepa or prescription grade fish oil in general' (EPA to be more precise). This thesis was shot down early as GlaxoSmithKline's (NYSE:GSK) Lovaza had already surpassed $1B in yearly sales. 2011 - Now Lovaza has stayed within the top 70 best selling prescription drugs each quarter. It peaked during this time period in Q4 2012 reaching a sales rank of 51. Keep in mind the majority of sales for Lovaza are off label use (TGs 500), a market Vascepa should be APPROVED for by year-end.
The bullish argument here is counterproductive for two reasons:
1. He's basing the fact that there's no market, citing the fact that Lovaza has already covered what little of a market there already is - making a great point for bears. Also, GSK is a company with significantly more resources in terms of both sales and marketing, than are available to Amarin - the company's performance launching a drug should not be compared to what Amarin is capable of. GSK could launch a Turkey Sandwich pill tomorrow and market it well enough to secure enough prescriptions to make it seem impressive.
2. Furthermore, the whole argument is based on the fact that Lovaza sales are due to off label use, which Amarin has not yet been approved for. Anyone that tells you approval for this indication is a definite yes is not seeing the picture clearly. Bulls are dealing with forward-looking speculation here, far from facts.
Here, I agree with Colburn, actually. Patent strength is something that Amarin definitely seems to have working to its advantage.
Amarin announced in late May that another patent for Vascepa was approved, making this the 15th such patent to be issued (with 23 patent applications issued or allowed within the USPTO, and 30 more applications in place) for the company's prescription fish oil pill. Amarin said the following in its press release:
Amarin Corporation plc , a biopharmaceutical company focused on the commercialization and development of therapeutics to improve cardiovascular health, announced today that the United States Patent and Trademark Office (USPTO) has published notification of a Notice of Allowance for Amarin's U.S. Patent Application Serial Number 13/417,899 titled "Pharmaceutical Compositions Comprising EPA and a Cardiovascular Agent and Methods of Using the Same." This application includes claims intended to protect the Vascepa® (icosapent ethyl) indication approved by the U.S. Food and Drug Administration (FDA) based on Amarin's MARINE clinical trial results specifically those results seen in patients on statin therapy.
The patents are an area of strength for Amarin bulls because they could play key roles for Vascepa should their ANCHOR indication be approved.
Also, the addition of numerous patents are a very small step to continuing to separate Vascepa from other future fish-oil pills, which could theoretically increase the chance of a pharma company having to buyout Amarin, as opposed to competing with it. Bears will argue that if the Vascepa launch itself fails (or is not approved for ANCHOR), the patents are essentially meaningless and useless.
Colburn, in his article, states:
I personally think Amarin will be granted NCE status. It is metabolized differently than Lovaza and the mechanism of action was not properly defined when Lovaza was granted NCE. If the answer were so straightforward as some bears believe, the FDA would not be taking so long rendering a decision. This is strictly my opinion of course.
The fact of the matter here is that like the ANCHOR indication, this is something that still has a decision pending and is anything but locked up. What we do know is that the FDA has failed to grant Vascepa NCE status thus far and that it's anything but a sure thing. Skeptics again look at this and realize that there's no argument based on facts or historical evidence, yet an argument that relies around what "potentially" could happen in the future - hardly a bear "trap."
Lovaza Script Decrease
Amidst increasing news and studies from doctors that are moving away from fish oils, Matt Herper makes a great point - Vascepa would have cleaned up in 2009, but now - maybe not so much. Herper's original article includes several interesting contentions, like these sentiments from a U.S. doctor:
One US doctor told her he prescribed fish oil "a little bit" but didn't know how to choose between Lovaza and Vascepa. "I think that whole foods are the way to go. If you want to get your fish oil, eat your fish. There are probably other good things in there besides long-chain fatty acids," a second U.S. doctor told her. A third added: "I used to prescribe Lovaza a lot, but I stopped because the data just weren't there. Now, I very, very rarely prescribe it. The new EPA omega-3 won't change that."
Bulls continue to laugh in the face of both doctors and scientists continuing to have reserved sentiments about the use of fish oil, let alone its use as a prescription versus OTC. Bears, like myself, tend to let the people that work in the fields of science and research, do the dictating about what is and isn't effective. More on this in a bit.
The launch, argued by bulls to be in line to reach 100M prescriptions by the end of the year, has gone nothing more than "adequately." Even Amarin executives on the last two conference calls have been anything but excited about how things are going, simply choosing to say "we're encouraged" several times over.
While Vascepa's numbers are basically tracking well, there are a couple of indeterminable factors. It's important to remember that historical performance doesn't necessarily predicate how things are going to go for the rest of the year. If a baseball team puts up three runs in the first inning, they're "on track" for 27 runs that game - will they reach it? Maybe, maybe not.
Recently, over the past few weeks, the numbers on a weekly basis are looking a bit weaker for Vascepa. This could be because of cyclical growth in prescriptions, or possibly a pullback in the drug. Again, another instance where time will tell the tale. Hardly an ironclad argument - again, an argument based primarily on forward-looking speculation.
Massive Cash Burn
Colburn, in his article, states:
Yes, Amarin burned some heavy cash in Q1; however, from the Q1 conference call:
Amarin's purchases of API from the supplier in 2012 and early 2013 are at a higher cost for retail and expected for future purchases from the supplier. The unusually high cost of goods as a percentage of revenue is attributable to another things including start-up costs, geography, discount to wholesalers, exchange rate exposures, lower volume and less favorable economic terms than those with other manufacturers.
Meaning the coming quarters will be at a lower burn rate. With $201.8M cash on hand, Amarin is far from broke this year. Amarin can last until Q2 2014 at expected forward burn rates. I will admit, cash on hand does mean partnership, dilution (in my opinion unlikely), or buyout when the larger Anchor indication is approved at year-end.
Alright, first things first - we agree that the company burned through a ton of cash in the first quarter ($50 MM +). I've spoken about this at length in previous articles.
I realize that starting from scratch is going to take a ton of money, but this kind of burn leaves Amarin susceptible to getting extremely close to running out of cash if it cannot get Vascepa sales to pick up. This, combined with the studies reported yesterday that have much more potential of being looked at over the coming days, make Amarin an extremely large risk. From the latest earnings release:
Under GAAP, Amarin reported a net loss of $62.2 million in the first quarter of 2013, or basic and diluted loss per share of $0.41. This net loss included $4.9 million in non-cash share-based compensation expense, $0.5 million in non-cash warrant compensation income, and a $3.6 million gain on the change in the fair value of derivatives. In the first quarter of 2012, GAAP net loss was $88.3 million, or basic and diluted loss per share of $0.65, and included $3.9 million in non-cash share-based compensation expense, $2.4 million in non-cash warrant compensation expense, and a $66.2 million loss on the change in the fair value of derivatives.
With a $62 million cash burn and just $2.3 million in Vascepa revenues, Amarin could potentially be headed for a major cash crunch before 2013 ends.
Amarin lists its operational priorities as:
- Increasing revenues from sales of Vascepa
- Continuing managed care migration from Tier 3 to Tier 2 coverage
- Gaining approval of the ANCHOR indication sNDA (PDUFA date of December 20, 2013)
- Planning for the commercialization of the ANCHOR indication
In a SWOT analysis, I could list these same things under potential threats for the company. With the clock ticking on its cash burn on if it doesn't knock all four of these out of the park, the company could be in trouble.
Colburn cannot guarantee a reduced cash burn rate in the future. It's simply speculation - he can say that Amarin is going to continue to try and manage costs, but he cannot guarantee bulls that the cash burn is going to improve by any factor - it's pure guesswork until we get the filings. Again, we have a skeptic's "show me the evidence" point of view here on the cash burn coming down. Hardly an argument, again, that's iron-clad.
Fish Oil Studies Showed No Benefit
Yeah - back to that whole pesky "doctors and scientists don't seem to be super sure about fish oils" argument that keeps popping up in the face of Amarin longs.
The bullish arguments against the validity of the clinical results published are that Pfizer (NYSE:PFE) funded the study (and the subsequent conspiracy theory that they were rumored to have bid for AMRN), and that the dose used during the study is in question.
Aside from the Pfizer argument, yet again, being based on speculation and no hard evidence, we need to remember that this was a clinical study published in an accredited journal of medicine. The study said, verbatim:
In a large general-practice cohort of patients with multiple cardiovascular risk factors, daily treatment with n−3 fatty acids did not reduce cardiovascular mortality and morbidity.
It's quite a pretzel that you have to twist to avoid that rather concrete looking conclusion, but I'll give Colburn credit for giving it a try.
AstraZeneca Bought Omthera, Nobody Wants Vascepa
Here, Colburn basically makes the bearish case in its entirety with his headline. Colburn lays the groundwork for this one by saying:
Omthera was just purchased by AstraZeneca (NYSE:AZN) for $323M (12.70/share) with an additional 4.70/share if it is able to achieve other milestones with its lead product, Epanova. Bears like Adam Feuerstein have used this deal with AZN to relentlessly attack AMRN with claims of a theoretical "price ceiling" equaling 4.50/share. It's funny how this purchase contradicts a previous bear thesis of a no fish oil market.
It is funny, in the sense that people can argue that all of the big Pharma companies have no idea what they're doing and that they're all just "overlooking" Amarin. Clearly, this isn't true. Amarin has not been bought out for a reason - either big Pharma is not confident in the product, they feel the price is too high, or they're waiting for more results. Again, at least here, we have an argument that is based on the speculation that "Amarin will get bought out." From a skeptics point of view, we're basing buying on pure guessing again, as nothing guarantees that Amarin will get bought out. Longs have been claiming that a buyout has been coming since the FDA's approval, yet we've seen nothing of the sort as Amarin tries to ford this river alone.
Conclusion - Amarin Stock Performance
The facts are as follows:
- Many of Amarin's insiders sold off right after the FDA approval
- Amarin's stock has been down over 50% since then
- It is no coincidence that Amarin does not have a partner in big pharma
So, bulls will continue to rely on the speculation of the future to justify their Amarin purchases and holdings that have lost value. The fact of the matter remains, at a $1 billion market cap, Amarin is a speculation driven stock trading at speculative prices. While Amarin could potentially be a success down the road, it's still important for investors to see the risk here. Best of luck to all investors.