On October 16th, the advisory committee, reviewing the sNDA filed by Amarin to expand the Vascepa label, voted 9-2 against recommending approval. There is little we can read from recent events to reassure long-suffering Amarin (AMRN) shareholders, but we feel that Amarin is now a compelling long term investment. This report will first look at some of the major concerns voiced during the panel. We will then look into the long term viability of investing in Amarin.
Mineral Oil Placebo issue
Refer to our previous report as to why the FDA is not likely to reject the Vascepa sNDA due to specific concerns regarding the placebo. We feel our position regarding the placebo has since been strengthened by the minimal concern expressed by most of the panelists (excluding McAllister and, we believe, Wilson), and also by the following graph.
As we can see in the graph, there is insufficient evidence suggesting that the patients had stabilized prior to beginning the 12-wk dosing phase of the trial. In fact, the control arm never showed any indication of stabilizing during the trial, but it instead maintained the gradual increase in TG levels seen during the stabilization period. If the mineral oil actually affected the statin therapy, we would have likely seen some deviation from the stabilization trend at the 4th week after randomization. As it stands, there is no convincing evidence that whatever factors led to the drift seen in the control arm did not also adversely affect the treatment arms' performances.
Regardless, in the event of a CRL, Amarin may be asked to conduct a small study confirming the inertness of the mineral oil placebo by conducting a statin's therapy study comparing Amarin's placebo with another placebo. This request should not be taken as a sign that the CRL was issued due to placebo concerns, and thus the market should maintain their REDUCE-IT expectations. We feel that even if Amarin is not asked to conduct such a study, or decides not to do such a study, that positive REDUCE-IT results will be more than enough to justify approval.
Cardiovascular Outcomes Trial issue
The most pressing topic during the advisory committee was whether or not there is sufficient evidence that reducing TG levels would reduce CV events. In our careful review of the comments made by panelists during the course of the day, and in their voting comments, the consensus was that there is insufficient evidence of a clinical benefit from lowering TG levels. As a result, the panel could not justify recommending the expansion of the label prior to the completion of the REDUCE-IT study.
On the other hand, we could not find any instance when a panelist argued that lowering TG with an EPA would not reduce CV events. This may just be a relic from the historically flawed scientific understanding of the relationship between lipid/biomarker parameters and CV events, but it is quite an important distinction to be noted. Even with the recent failures from other controlled studies, the panelists still maintained a neutral perspective when assessing Vascepa. The panelists may have understood that the differences between the compounds and patient populations used in those other trials warranted assessing Vascepa with a clean slate.
Unfortunately, Vascepa's currently approved status for very high TG populations did Amarin no favors during the advisory committee. As did the FDA's reluctance or inability to pull drugs off the market when they are later shown to have no clinical benefit. Multiple times panelists noted that Vascepa was already approved, in the context of simply waiting for REDUCE-IT results. The FDA did caution panelists against using such arguments for disapproving a recommendation for approval. However, these panelists are industry professionals and there was little incentive for them to put their neck on the line when Vascepa is already approved in an industry where doctors already routinely prescribe fish oils off-label.
Following the advisory committee, there has been a lot of disbelief over the justifications provided by the panel for their negative vote. We count ourselves among those befuddled. However, we would caution against making any arguments suggesting that the FDA may see eye-to-eye with Amarin bulls when they review panelist comments.
The simple fact of the matter is that in the event of a negative vote, the FDA becomes the most important voice during the advisory committee. What we can conclude from their comments is that they want evidence that CV events will be reduced before they approve any drugs in this indication. They did not make the case for approving Amarin.
Ultimately, regardless of how things were done in the past, the reduction of CV events is how the FDA is going to assess Vascepa's sNDA. It is not fair to Amarin, but when it's up to the FDA to be soul-crushing, they have a proven track-record. In light of the FDA's position and lacking panel support, the chance of an approval of the current sNDA is practically zero.
We expect Vascepa will achieve peak sales of at least $500M without an approved expansion in their label to include the high TG population. This figure would multiply to an excess of $2B if REDUCE-IT were to show that Vascepa has a CV benefit in the expanded population. These are appropriately conservative figures even in light of pending generic competition from Lovaza. The (GSK) drug, simply put, raises LDL-C and other lipid parameters far too significantly to be considered a worthy threat to Vascepa in an era where guidelines dictate reducing all lipid/biomarker endpoints. In the meantime, here are the 3 mid-term scenarios:
- Amarin completes the REDUCE-IT trial, and it ends up failing to show CV benefit. Amarin will be operating at a loss until 2017, at which time they will have needed to raise $50M. Target share value for 2020 will be in $7. We will assume trial failure has a 50% chance of occurring.
- REDUCE-IT succeeds. The circumstances will be the same as before except that the new target share value for 2020 will be $23. If an sNDA is filed based on statistically significant interim results at the end of '15, the target would be upgraded to $30.
- Amarin throws in the towel and assumes REDUCE-IT will fail. This avoids any noticeable dilution for shareholders at the expense of doing any acquisitions until 2019. We end up with a relatively similar price target seen in the first scenario.
For the following projections we will assume REDUCE-IT continues as planned. Presently, if we exclude all value to the potential approval of a label expansion, the company is worth $1.9 PPS. However, if we assume the label expansion is inevitable following the conclusion of the REDUCE-IT trial, then the fair value would be $6.4 PPS.
By attributing the 50% probability of success to that latter scenario, we calculate the final fair value to be 1.9*0.5 + 6.4*0.5 = $4.15 PPS.
We do not think the market should be expecting significant dilution in the future, let alone in the near-term, given that Amarin would not need to do much more than a 10% dilution at present prices.
In conclusion, those who bought after the advisory committee have gotten the potential label expansion in 2017 for free. Regardless of the chart action from now til PDUFA, it would be advisable to anticipate a dip when the CRL is issued due to wishful catalyst players dumping their shares. Whether or not that dip will end up lower than the current PPS is anyone's guess, but for a long-term investor the difference may not likely be a factor.
Disclaimer: Significant changes in the following assumptions used in this report would have a significant impact on our projections.
- $600M peak revenue estimate if REDUCE-IT fails/terminated
- R&D expenses rise to approximately $23M/qt by 2017
- SG&A expenses are slashed to $18M/qt by the start of 2014
- Product margins are 52%
- Amarin gets a 2 year extension on their debt repayment plan, which also results in a substantial increase to the owed $150M amount
- $50M financing with no more than 15M new shares
- Quarterly revenue growth were such that annual revenues for '14, '15, '16, and '17 are $107M, $189M, $284M, and $388M
- First recorded sales from an expansion approval are during 18Q1