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Amarin (NASDAQ:AMRN) was dealt a heavy blow when the ADCOM panel voted against approving Vascepa for its ANCHOR indication. While the FDA does not have to follow the recommendation of its ADCOM panel, the chances of approval on December 20th should be considered minimal due to the decisiveness of the vote. As a result of the vote, Amarin's stock price fell 61% and remains down over 70% from its close on October 7. Amarin has also been forced to lay off half its employees to reduce its rate of cash burn.

We believe that Amarin has become an interesting speculative play at its current price. Certainly there are a lot of potential pitfalls. REDUCE-IT may still not result in label expansion approval and the outcome of that study is not expected until 2016. It is uncertain what peak sales Vasecpa can achieve with only its MARINE indication. As well, Amarin may still need to raise additional capital as it attempts to complete the REDUCE-IT study while continuing to increase Vascepa prescriptions. Amarin may also conclude that it is better to focus all its resources on targeting the MARINE population rather than continuing with the REDUCE-IT study.

The FDA decision does seriously limit the approved target market for Vascepa. However, Vascepa is still approved for its MARINE indication, which could still eventually represent a peak market of $1.2 billion according to Leerink Swann. As well, Vascepa may still be approved for its ANCHOR indication after the REDUCE-IT study is completed. We are going to assess Amarin's value based on its current situation in further detail below.

Slow But Steady Growth In New Prescriptions

After some strong early growth in new Vascepa prescriptions, the rate of increase has slowed, but appears to be growing linearly still. Rolling four week new prescriptions (NRx) have increased from 10,054 during the four weeks ending July 12 to 12,392 for the four weeks ending October 4. Average new prescriptions have increased by around 50 per week over the last 12 weeks, with growth picking up in September.

Four Weeks Ending

NRx

Increase in NRx

February 22, 2013

1,981

March 22, 2013

4,466

2,485

April 19, 2013

6,566

2,100

May 17, 2013

9,057

2,491

June 14, 2013

9,252

195

July 12, 2013

10,054

802

August 9, 2013

10,545

491

September 6, 2013

11,165

620

October 4, 2013

12,392

1,227

Prescription numbers from Symphony

Solid Projected Refill Numbers

We have modeled prescription refill rates at 50% for new users and 70% for users who have already refilled once, with the refill decision time being approximately seven weeks after the last prescription. We have found that this is a fairly accurate fit to past data as the table below shows and will monitor the prediction accuracy going forward.

Projected and actual Vascepa refills based on the above formula

Four Weeks Ending

Projected

Actual

April 19, 2013

1,361

1,647

May 17, 2013

3,059

3,054

June 14, 2013

5,023

5,493

July 12, 2013

7,033

7,076

August 9, 2013

9,000

8,397

September 6, 2013

10,182

9,966

October 4, 2013

11,536

11,642

What this implies is that each new Vascepa user will account for approximately 2.67 prescriptions over their lifetime (also that TRx/NRx will eventually approach 2.67). This is quite similar to Lovaza's 2013 TRx/NRx ratio of 2.80). There may be some slight upside for Vascepa if refill rates for users who have refilled two times or more are higher than those who have refilled only once, but long-term TRx/NRx numbers are likely to be in the 2.6 to 3.0 range based on current data.

Knowing this, the key number to focus on is NRx. Vascepa's peak sales can essentially be calculated by taking maximum NRx and multiplying it by 2.67. As mentioned before, new prescriptions are continuing to climb slowly but steadily and it is difficult to say where it will top out. It is also uncertain how the sales force cuts will affect Vascepa's momentum, although given Amarin's inexperience in selling drugs, there were likely quite a few inefficiencies originally.

One other takeaway from knowing the TRx/NRx ratio is that Vascepa's revenues should increase to approximately $64 million in FY2014 even if weekly new prescriptions do not increase from current levels. If weekly new prescriptions fell to 2,500, we'd still expect Vascepa's revenues to be around $51 million in FY2014. Both of these numbers are well above Q2 FY2013's annualized revenue rate of $21 million. Amarin should easily be able to triple revenues from Q2 FY2013's run rate, but continued growth above that point will require increases in weekly new prescriptions.

Assumptions

We are going to discuss a couple different scenarios below. Some assumptions include:

  • A 50% new user refill rate and 70% refill rate for users who have already refilled once.
  • The refill decision occurring seven weeks after the last prescription on average.
  • $150 net revenue per prescription
  • 75% gross margin in FY2014 and 80% gross margin in FY2015.
  • $120 million in annual SG&A and R&D expenses
  • Interest and debt repayments are as scheduled

The net revenue per prescription is based on Q1 and Q2 results showing $7.842 million in recognized revenue versus 57,819 normalized prescriptions, and increased to account for the likely decrease in stocking discounts and other introductory rebates in future periods. Gross margin expectations are based on management comments in this release.

Scenario 1:

New prescriptions increase by 50 per week during the rest of 2013 and then increase by 65 per week in 2014 and 2015 due to slightly increased off-label usage.

FY2014

FY2015

Prescriptions

648,679

1,111,387

Revenue

$97,301,850

$166,708,050

Gross Margin

$72,976,388

$133,366,440

Estimated Cash Outflow

$151,700,000

$163,200,000

Change In Cash

-$78,723,613

-$29,833,560

This scenario appears to be one that Amarin's management is aiming towards based on expectations for less than $80 million in cash burn in 2014. If Vascepa can follow this trajectory then Amarin will be cash positive in 2016 and may not need to raise additional capital. However, this scenario would be fairly tight, with cash and cash equivalents likely falling below $80 million at some point.

Valuing Amarin at an EV of 4x FY2015 revenue would make Amarin worth approximately $2.95 per share.

Scenario 2:

New prescriptions increase by 50 per week during the rest of 2013 and then increase by 100 per week in 2014 and 2015 due to more significant gains in awareness and off-label usage.

FY2014

FY2015

Prescriptions

738,310

1,432,863

Revenue

$110,746,500

$214,929,450

Gross Margin

$83,059,875

$171,943,560

Estimated Cash Outflow

$151,700,000

$163,200,000

Change In Cash

-$68,640,125

$8,743,560

In this scenario Vascepa is successful in gaining more off-label usage. These numbers are not exceptionally aggressive as 2015 new prescriptions would average under 12,000 per week in this scenario, compared to Lovaza's current 33,000 per week.

Valuing Amarin at an EV of 4x FY2015 revenue would make Amarin worth approximately $4.35 per share.

Conclusion

Amarin is quite a speculative play right now given the uncertainty about how the sales force reductions will affect momentum and the potential introduction of a generic Lovaza before Amarin can expand Vascepa's target market via the results of the REDUCE-IT study.

However, Amarin is worth nearly $3 per share based on its current sales trajectory with MARINE approval only, and $4.35 per share if it can improve its new prescription rate moderately. There is also extremely substantial upside if the REDUCE-IT study is successful, although that is quite far off still.

One more cautious strategy may be to monitor Vascepa's performance post sales force reductions. If Vascepa continues with even modest new prescription growth, then Amarin is undervalued at current prices even without approval for Vascepa's ANCHOR indication.

Source: Amarin: Potentially Worth $3 To $4 Without Expanded Approval