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Summary

  • Co-promotion agreement with Kowa is an excellent move to boost sales while conserving cash.
  • Requires estimated 10% increase in prescriptions in 2014 and 28% increase in prescriptions in 2018 for agreement to provide positive value to Amarin.
  • Significant Vascepa growth still required for Amarin to complete REDUCE-IT without additional funding. Estimated average of 9,100 NRx per week required between 2014 and 2016.
  • Vascepa NRx likely needs to reach above 6,000 per week by end of 2014 to be on track for the above goal.

Amarin (NASDAQ:AMRN) has recently shown some modest improvement in Vascepa prescription numbers, reaching around 3,000 NRx per week again for the first time since October. This improvement comes despite Amarin cutting its salesforce in half to reduce expenses. The 3,000 NRx per week was still well below the estimated 7,500 NRx per week (based on weekly averages between 2014 and 2016) that was needed to reach the TRx numbers that would generate enough revenue to complete REDUCE-IT without additional funding. While there was some growth in Vascepa's numbers, it was quite haphazard and a faster rate of growth was needed to reach the necessary 7,500 NRx per week average.

The co-promotion agreement with Kowa Pharmaceuticals America appears to be an excellent move to try to move Vascepa's numbers significantly upward. It appears that the agreement involves minimal incremental expenses for Amarin and restores sales detail frequency to at least pre-layoff levels, at the cost of a percentage of gross margin.

However, much work still needs to be done as it appears that Vascepa now needs to average around 9,100 NRx per week to achieve the TRx numbers required to complete REDUCE-IT without additional funding. Approximately 15,800 NRx per week is required for Amarin to reach break-even in 2016.

The Kowa Pharmaceuticals America Co-Promotion Agreement

Based on estimated 65% gross margin for Vascepa from May to December 2014, and a co-promotion fee of 9% of Vascepa's gross margin during that time period, the breakeven point for the agreement is an increase in prescriptions of approximately 10%. Amarin would have needed 500,000 TRx to reach $40.6 million in gross margin in 2014. Under this agreement, they need to reach 549,451 TRx to get the same gross margin. There are some additional variables based on sales levels and other factors that aren't outlined publicly, so I have just used the basic agreement details here.

 

TRx

Revenue/TRx

Gross Margin

Gross Margin ($)

2014 Without Kowa

500,000

$125

65%

$40,625,000

2014 With Kowa

549,451

$125

59%

$40,625,033

Difference

10%

   

The breakeven point increases to approximately 28% more prescriptions in 2018 based on Kowa getting 22% of Vascepa's gross margin and Vascepa's base gross margin increasing to 77%.

 

TRx

Revenue/TRx

Gross Margin

Gross Margin ($)

2018 Without Kowa

2,000,000

$125

77%

$192,500,000

2018 With Kowa

2,564,143

$125

60%

$192,503,036

Difference

28%

   

Note that the TRx numbers in the above tables are just for illustrative purposes and are not actual projections.

The agreement with Kowa appears to be a good move for Amarin. It does appear to result in Vascepa's effective gross margin being capped at around 60% instead of reaching near 80% in the long run. However, Amarin's most pressing issues are conserving cash and ramping up sales with minimal incremental expenses. Achieving 80% gross margin doesn't mean much if overall sales numbers aren't high enough. The co-promotion agreement appears to give Amarin a chance at getting the sales numbers towards the levels it needs to finish REDUCE-IT without requiring additional capital. I would say that Amarin needs to get Vascepa's NRx numbers up to over 6,000 per week by the end of 2014 to be on track to finish REDUCE-IT without additional funding.

Amarin's Expense Levels
I had earlier estimated that Amarin's cash expenses for SG&A would be approximately $52 million per year, and that its cash R&D expense would be another $48 million per year with the REDUCE-IT study continuing. This total of $100 million per year seems slightly optimistic based on the comments from Amarin's Q4 2013 conference call. I am now expecting $115 million per year in combined cash SG&A and R&D expenses in 2014, with perhaps a $10 million decrease in 2015 and 2016 due to slightly lower REDUCE-IT costs in those years.

Total Cash Outflows

Here's an updated look at the total estimated cash expenses and required payments in each year. Amarin is looking at around $146.7 million in cash payments in 2014, increasing to $165.2 million in 2016 for a three year total of $460.1 million. The BioPharma repayments below reflect the regular payment schedule. Actual repayments during 2014 to 2016 may be substantially less since Vascepa sales were lower than expected, leading to a partial deferral of the BioPharma repayments. For example, there was a repayment of $1 million in February 2014 instead of the scheduled $2.5 million. The difference is deferred until at least Q2 2017.

$ Million

2014

2015

2016

SG&A

$65.0

$65.0

$65.0

R&D

$50.0

$40.0

$40.0

BioPharma

$26.5

$38.0

$55.0

Cash Interest

$5.2

$5.2

$5.2

Total

$146.7

$148.2

$165.2

    

Required Sales Levels

Sales for Vascepa have slowly climbed back up after falling post sales force cuts. NRx is now over 3,000 per week, which is approximately where it was in October 2013. TRx is between 6,000 and 7,000, and based on Lovaza's TRx/NRx ratio of approximately 2.67, we'd expect Vascepa to eventually reach around 8,000 TRx if it maintains NRx of 3,000 per week.

For Amarin to be able to complete REDUCE-IT without additional funding and with its current cost structure (including the co-promotion agreement), Vascepa will need at least approximately 3.8 million prescriptions between 2014 and the beginning of 2017. This is approximately 24,400 TRx per week, which is achievable with approximately 9,100 NRx per week. Such prescription levels will generate approximately $285 million in gross margin during those, leaving Amarin with a cash outflow of approximately $175 million between 2014 to 2016. If required BioPharma repayments are 50% deferred, then Amarin's cash burn will be $115 million, leaving it with approximately $75 million in cash starting 2017. That will probably be sufficient to carry Amarin through to the completion of the REDUCE-IT study in 2017.

 

TRx

Revenue/TRx

Gross Margin

Gross Margin ($)

2014 to 2016

3,800,000

$125

60%

$285,000,000

For Amarin to reach cash flow break-even in 2016, including full BioPharma repayments, it will require approximately 2.2 million prescriptions that year. This is approximately 42,300 TRx per week, which is achievable with approximately 15,800 NRx per week.

 

TRx

Revenue/TRx

Gross Margin

Gross Margin ($)

2016

2,200,000

$125

60%

$165,000,000

Conclusion

The co-promotion agreement with Kowa Pharmaceuticals America appears to be both a positive and necessary move for Amarin. Vascepa sales need to increase significantly for Amarin to be able to complete REDUCE-IT without additional funding. While there has been progress with increased NRx recently, the growth didn't appear strong enough or steady enough to provide confidence that Vascepa would reach the required target numbers. Vascepa still needs to average triple the current NRx numbers over the next three years for Amarin to be able to complete REDUCE-IT without additional funding. This is a challenging target, but I believe that averaging 9,100 NRx per week with the help of Kowa's sales force is more achievable than averaging 7,500 NRx on Amarin's own (which is the number that would provide similar cash burn levels). If Vascepa's NRx numbers are up to 6,000 per week by the end of 2014, I would say that it is on a reasonable trajectory to reach that target.

Source: Amarin: How The Co-Promotion Agreement With Kowa Affects Required Sales Targets