Amarin's (AMRN) November 7 conference call has caused many reactions from its observers. Some think that the company's management is moving in the right direction, others disagree and think more should be done. However, no one seems to have been fazed by the financial calamity hiding in plain sight, one that was released in their interim financials.
Notwithstanding the fact that the company's market cap has been utterly devastated over the past year, that shareholders have lost hundreds of millions of dollars, that four lawsuits have been filed against Amarin and its CEO for allegedly misleading investors, and that serious questions have arisen concerning both Amarin's CEO's competence and the company's future prospects, executive compensation has gone up! In fact, it's still increasing year over year for the current quarter.
How is this possible? The company is losing money, its financial predicament has even prompted the CEO, Joseph Zakrzewski, to question whether or not Amarin can afford to forge ahead with the REDUCE-IT trial.
Amarin's board simply cannot justify such an exorbitant compensation structure for its CEO. Let me show you just how outrageously inordinate the situation is. Its press release states:
Under U.S. GAAP, Amarin reported a net loss of $48.9 million in Q3 2013, or basic and diluted loss per share of $0.29. This net loss included $4.3 million in non-cash, share-based compensation expense, $0.3 million in non-cash, warrant compensation expense, and a $1.4 million loss on the change in the fair value of derivatives. In Q3 2012, GAAP net loss was $26.4 million, or basic and diluted loss per share of $0.18, and included $4.6 million in non-cash share-based compensation expense, $1.2 million in non-cash warrant compensation income, and a $16.5 million non-cash gain on the change in the fair value of derivatives.
For the nine months ended September 30, 2013, Amarin reported a net loss of $150.8 million, or basic and diluted loss per share of $0.96. This net loss included $14.2 million in non-cash share-based compensation expense, $1.2 million in non-cash warrant compensation income, and a $21.1 million gain on the change in the fair value of derivatives. For the nine months ended September 30, 2012, GAAP net loss was $168.6 million, or basic and diluted loss per share of $1.19, and included $13.3 million in non-cash share-based compensation expense, $3.0 million in non-cash warrant compensation expense, and a $68.7 million loss on the change in the fair value of derivatives.
The company is losing money hand over fist; according to its Z-score the company has an 87.60% chance of going bankrupt over the next two years, yet the executive compensation packages are increasing. Instead of scrapping the REDUCE-IT study, which has already swallowed tens of millions of dollars in investments and might eventually become a major boon for the company's future growth, why not cut the unconscionable share awards to Joe Zakrzewski & friends? This alone would pay for the study's ongoing costs. Either way, the compensation issue needs to be addressed.
The press release excerpt above is clear, 10% of the company's losses are actually "non-cash share-based compensation expenses". That is simply unwarranted at this point in time, Amarin's prospects are not what they were a year ago.
Whatever you might think of CEO compensation, this is not standard practice by any means. For the sake of comparison, let's take a look at GlaxoSmithKline's (GSK) CEO compensation package. GSK is a gigantic pharmaceutical company, with a market cap of about 129 billion dollars and a hefty 4.6% dividend, they are the owners of Lovaza and were rumored to be potential acquirers for Amarin's Vascepa. Here is the reported salary information, keep in mind that in 2011, GSK paid him about half of this:
Alternatively, Amarin is a minuscule speck of a pharmaceutical company, with a market cap of about 271 million dollars and a hefty loss of $0.29 a share. Here is the reported salary information:
The observant among you will have noticed that GSK's CEO salary is in British pounds and Joe Z's is in US dollars, however, even accounting for the 1.60 exchange rate, Joe Z is still grossly overpaid at $3.6 million. To put this into perspective you must remember that all of this is before even taking into account the avariciously extortionate share-based compensation that Joe Z receives. This salary comparison data is from 2012, however, as we saw in the press release excerpt above, Amarin is increasing the capital it is allocating to this, the bulk of which will go to Joe Z if last year is any indication.
Why is Amarin's executive non-cash share-based compensation not tied to share price? Indeed, why does it seem inversely correlated? The CEO has no financial incentive to make this company successful, his non-cash share-based compensation is set as a dollar amount instead of a fixed amount of shares like it should be. I cry scandal at such an illogical and unjustified arrangement. However, until the situation changes, these fundamentals do point to a shorting opportunity, especially in light of the company's previously mentioned Z-score.
I have contacted their Investor Relations department to enquire how a small cash strapped company like Amarin, with bankruptcy being a real possibility, can afford to pay such exacting amounts to its CEO. Alas, its lack of response on the matter has confirmed my belief that it cannot. Unlike high triglyceride levels increasing the risk of cardiovascular incidents, there is no doubt that high pointless spending like this increases the risk of bankruptcy.
Despite recent confusion over at the FDA, it seems that according to its website, there isn't much doubt about the former either:
Ask your doctor if you need to take medicine to help lower your cholesterol. Triglycerides are another form of fat in your blood. They can also raise your risk for heart disease. Levels that are borderline high (150-199 mg/dL) or high (200 mg/dL or more) may need treatment.
Additional disclosure: I am long Vascepa, but I am short Joe Zakrzewski.