Lesson About The Risk-Reward Profile For Amarin Investors

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 |  Includes: AMRN, MYGN
by: PSalerno

Recently I noted many bullish articles about Amarin (NASDAQ:AMRN), especially by this contributor, who has authored 11 bullish articles about AMRN and holds the highest record; but there are many other AMRN bulls out there.

They were bullish about AMRN even last summer when the stock was trading above $11 and up to $16. This price discounted an enormous growth in sales. These articles are excellent examples of the flawed logic underlining sometimes complex analysis and argumentation that can be viewed as impressive and solid by the readers. These authors quoted clinical trials to support their views, so apparently there was some background.

The problem is that they quoted only the positive studies, not the most remarkable. The FDA panel's decision shocked most, including AMRN, as approval for Vascepa (a fish oil pill) was considered as a sure thing.

At the moment there is no serious study demonstrating that EPA (the active ingredient of Vascepa) can reduce the cardiovascular events (NYSE:CVE) it was intended for. Reducing the fats in the blood is not enough, as the high fats are not always correlated to CVE and theoretically could even be a consequence, not a cause, like the fever associated in many diseases. We want to fight a disease, not a clinical parameter.

Modern science has made progress by verifying closely the hypothesis performing controlled and reviewed trials, not creating drugs on assumptions.

Even the long term side effects of the drug have not been scrutinized in depth. There is no evidence, but the suspect that oil fish can enlarge the risk of some kinds of tumors.

The lesson to be taken here is to not put too much trust when somebody tells you that a new drug can reach 1 or 20 Billion in sales; fantasy and hope are not investing.

Look at the balance sheet and how the company is burning cash. Total liabilities are exceeding total asset by a large amount, every body can see this on the company's website or even at Yahoo finance. There is no complex analysis to be made to see that AMRN is at risk of bankruptcy if unable to raise cash.

On the other side, there are other biotech stocks, like Myriad Genetics (NASDAQ:MYGN), who are facing potential problems, and are already discounting a solid contraction in sales and profit. MYGN has no debt and no need to raise cash, so can face even a contraction in earnings without problems, and the bears are totally overlooking the new products in the pipeline. In this case any possible positive or less negative than expected outcome could led to strong, quick rallies.

Keep in mind that MYGN was trading between $26 and $30 in the end of 2007-early 2008 when the company had 0 earnings, while now it is trading at $23-24 after an October low near $22.30; as the market is expecting a contraction in sales and earnings.

This negative sentiment was enough to break the uptrend in place since 2010 started at $14 level. I am not sure if this is a good long term investment, but I am sure it can offer nice opportunities at least in the form of tradeable rallies.

This stock will have 2 catalysts shortly:

1-The next earning report can offer (for the first time) some clue about the real impact of competition versus the main product, the BRCAnalysis, but also about the growth that new products like Prolaris are achieving.

2- The pending trials for patent's infringement against competitors Ambry, Genebygene, and recently against Quest Diagnostic (NYSE:DGX).

The purpose of this article is to show 2 different cases where the risk-reward profile is shifted on opposite directions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MYGN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.