Seeking Alpha
Profile| Send Message|
( followers)  

(This article is the first part of a two-part series discussing Amarin's recent 8k, conference call, and my previous articles.)

Amarin (NASDAQ:AMRN) management released their Q2 2013 numbers on Thursday, August 8, and two things were immediately apparent to me. First, the revenues were much lower than Wall Street expected, and second, my predictions for the quarter were going to be way off. This was particularly problematic for me, as I had made a statement regarding that if my numbers were wrong, that I would then eat my hat. For those expecting a speedy, poorly written article to appear from me instantaneously after the conference call defending my miscalculation, unfortunately you were likely forced to instead read a speedy, poorly written copy-and-paste article from someone else because I was busy trying to figure out whether a hat goes best with ketchup or soy sauce.

Let's start with Wall Street. The analyst average predicted Amarin to earn $8.43 million in revenue, while the company only reported $5.5 million in product revenue. To say that Amarin fell a bit short of Wall Street expectations would be putting it lightly.

Moving on to my own horrendously wrong prediction found here, I expected Amarin to report earnings revenue of roughly $10.431 million. If one was to go by my numbers, Amarin appears to have really fallen short and perhaps taken a month off of work to focus on their tans early in the summer. Of course, if one was to compare my numbers to Wall Street's predictions and the reality of what occurred, it appears that I may need to go back and study second grade math, so perhaps it is better to put the focus on me than on Amarin in terms of my predictions.

Plain and simple, I was wrong. My prediction for revenue was way off. I am a big believer in owning it when you make a mistake (what I actually consider the easy part), but further, I think it is equally important to understand why you made the mistake, and what it means moving forward. So today, I thought I would delve into the mistakes I made, what the company actually reported, and what Q2 numbers and conference call comments likely mean for the future.

Biotech Will Made Some Serious Errors in Predicting

One of the problems with taking a partial quarter of sales and attempting to model forward from it into the future is that there are a lot of unknown factors. In terms of my numbers, I took a very simplistic approach that attempted to factor in the unknowns, and used a based model based solely off of revenues, prescriptions, and the cost of goods in Q1 2013. Specifically, I proceeded by "using a hard number of $223 per script revenue number, and a cost of goods calculated as revenue divided by 1.82, which was the ratio indicated by the Q1 numbers ($2,341,000 revenue divided by the cost of goods number of $1,287,000 gives us 1.82 rounded)." Using the revenue of $223 per script revenue number seemed like a good idea at the time because it was derived in a simple and straightforward manner -- taking the Q1 2013 revenues from the table below and dividing them by the number of prescriptions.

Prescriptions

Revenues

Product costs

Net Loss

EPS

10,484

$2.341

$1.287

$(62,158)

$(0.41)

Unfortunately, this type of simplistic modeling was unable to account for the discounts that occurred across the Q2 sales numbers as well as the GAAP method used in deferring revenue. Even though my prescription prediction of 46,757 was very close (Amarin reported 47,355), this failure led my revenue prediction to be way off.

My Predicted Q2 2013 Earnings (dollars in thousands excluding EPS)

Prescriptions

Revenue

Product Cost

Net Profit/Loss

EPS / diluted

46,757

$10,431

$5,735

$(58,516)

$(0.39) / (0.34)

So, where exactly were the mistakes made? There were two main areas, as I mentioned above, discounting and GAAP deferral reporting. In terms of discounting, although Amarin has seen a large amount of Tier 2 coverage shifts recently, the discount cards given out for those customers that had Tier 3 coverage in Q2 lowered the amounts that they were paying to line-up with what would normally be Tier 2 out-of-pocket costs. These discounts meant that the revenues that Amarin reported, "based on the resale of Vascepa for the purpose of filling prescriptions," when combined with actual increases in Tier 2 coverage, meant that the predicted numbers were going to be skewed, and that an overestimation of revenue would occur. This was where my first error took place. My second big mistake was in the GAAP reporting methods, and I forgot to factor in something very simple that Amarin continued in Q2 from Q1 -- "In accordance with U.S. Generally Accepted Accounting Principles (US GAAP), and consistent with Q1 reporting, until the company has more operating history with the commercialization of Vascepa, it is recognizing revenue based not on its sales to wholesalers…" -- which means that Amarin would have a large amount of deferred revenue. In fact, the company reports that through the first 6 months of 2013, it has recorded $1.8 million in such deferred revenue.

Combine those two mistakes, and it is easy to see why my numbers were way off. I failed to accurately predict the revenues per script, did not correctly include the deferred revenue, and failed to adequately account for GAAP reporting methods of reporting sales for companies not reporting revenues the prior year. Although this is unsurprising given the limited dataset that I was working with from the prior (and in fact I touched on this limitation), the takeaway from the whole thing is pretty simple: I messed up on my predictions and I was wrong. Bring on the hat.

Despite Lower Than Expected Revenues, Numbers Are Looking Good

Moving on past the fact that Amarin didn't meet Wall Street expectations and that my predictions were way off, there was plenty of good news for those investors who read the 8K and listened to the conference call. For those who thought the call wasn't important and decided to turn down the volume halfway through, they really missed out on some important things that were highlighted.

Although Amarin missed on the revenue expectations, they actually beat the expectations for the earnings per share, with the analyst average predicting a $0.40 loss and the company reporting a $0.26 loss per share. This is a phenomenal number in my opinion, and reflects several positives that the company reported.

First, the gross margin as a percentage of net revenues improved from 45% to 48% in the second quarter as compared to the first quarter of 2013, and the company also predicted that this percentage could go into the high 70's/low 80's at some point in the future. Increasing the gross margin is important for long-term success, and as the company continues to grow prescription numbers, this number will be more and more important.

Further, speaking of margins, the company also stated "The majority of Vascepa capsules sold during the six months ended June 30, 2013 included API sourced from a single API supplier. Amarin's purchases of API from this supplier in 2012 and early 2013 are at higher cost per kilogram than expected future purchases from this supplier." This is important moving forward because the additional API suppliers the company has lined up should lower costs significantly.

A second important number was also revealed, and that was that the company's cost of goods sold during the quarter ended June 30, 2013 was only $2.8 million as compared to $1.3 million for the quarter ended March 31, 2013. When you consider the fact that the amount of prescriptions went from 10,484 to 47,355, this is a pretty small increase in cost of goods, and makes me more comfortable about the cost of goods moving forward.

Another important number that has been the focus of much speculation was the operating expenses or "cash burn", and investors who wanted to see a drop in this number from the first quarter should have been pleased - Q2 saw operating expenses of $54.29 million, down from the Q1 operating expenses of roughly $62.39 million (using the combined six months operating costs expressed in the most recent 8k with the recent quarter subtracted to establish Q1).

The final number in terms of performance that really caught my eye was the company reporting improved formulary access reflected by the increasing number of lives covered with Tier 2 status -- to greater than 72 million -- with over 190 million lives covered on formulary overall. This is important for two reasons. First, doctors are more likely to prescribe a drug that is covered on Tier 2 versus Tier 3 or no coverage (an advantage that Lovaza has enjoyed over Vascepa) and second, this Tier 2 shift means that less of the discount cards will be used by new patients, which should increase the revenues per script in the long run.

All in all, some great numbers were revealed, but there is still more to the story.

In the second part of this article, I will address the positive takeaways from the conference call and also some of the negatives that I saw in terms of the 8k and heard in the conference call, and end with my conclusion about the future of the company in 2013 and 2014.

Source: Amarin: Q2 Results, My Prediction Errors, And The Future: Part I