Amarin: Binary Outcome From The 60% Interim REDUCE-IT Analysis

| About: Amarin Corporation (AMRN)

Summary

Amarin exercised its option to convert $150 million in exchangeable notes into approximately 61 million shares.

This move makes sense since it de-risks Amarin's balance sheet at little cost (a conversion premium of approximately 3.3 million shares) in case REDUCE-IT isn't stopped early.

Amarin also saves $5 million per year in interest.

I believe the chance of a REDUCE-IT stop at 60% is quite low. The market may be pricing the chance of a stop at the 60% look at under 10%.

A continuation of REDUCE-IT still allows Amarin a chance of a stop at 80% and the potential expanded indication after study completion.

Amarin (NASDAQ:AMRN) announced that it was exercising its right to mandatorily exchange $150 million in exchangeable notes into equity. This reduces its debt while adding approximately 61 million to its share/ADS count. Amarin now has around 270 million shares outstanding, with perhaps around 320 million shares after the dilution from restricted stock, preferred share conversions and in-the-money stock options. This transaction combined with its recent equity offering has significantly improved Amarin's balance sheet. Amarin's net debt is only around $10 million now, although Amarin is still expected to burn cash for a while.

The Note Redemption

It was an easy decision for Amarin to elect to exercise the mandatory redemption feature on its May 2014 and November 2015 Exchangeable Senior Notes. If REDUCE-IT was stopped early at the upcoming 60% analysis, the debtholders would convert the notes into shares anyway. If REDUCE-IT isn't stopped early at 60%, then Amarin may not get another chance to mandatorily convert the notes for a while and is left with the debt.

Basically, if REDUCE-IT is successful at any point, its share price will be high enough for the debtholders to want to convert it at their option. If REDUCE-IT isn't successful, Amarin doesn't want to be saddled with the additional debt. From Amarin's perspective the mandatory conversion protects against a negative scenario while not actually giving up much upside in a positive scenario since the notes would be converted anyway in a positive scenario. The only drawback to Amarin initiating the conversion rather than the noteholders is that it will need to issue approximately 3.3 million shares (as a premium for Amarin initiating it) in addition to the 57.7 million shares due based on the conversion price. However, the additional dilution from the premium is offset by the interest that Amarin will save. Converting the notes now (rather than waiting for a positive REDUCE-IT outcome) might save approximately $10 million in interest if that positive outcome doesn't occur until 2018.

Binary Situation

The big question coming up for Amarin is whether REDUCE-IT will be stopped for overwhelming efficacy at the 60% interim analysis expected in September (although October remains a possibility). Although I believe that there is a low chance of REDUCE-IT being stopped at 60%, the effect on Amarin's share price should be more muted now that it has reduced its debt and now that its share price has come down from its highs.

If REDUCE-IT is not stopped at the 60% interim analysis, it would be a modest negative for Amarin. There would still be the opportunity for a stop at the 80% interim analysis plus success at completion of the final analysis. The consequences of REDUCE-IT not being stopped at 60% includes continuing related R&D expenses, delayed access to the large REDUCE-IT population and the reduced probability of Vascepa being a wonder drug. If REDUCE-IT is stopped at 60% for overwhelming efficacy, that would indicate outstanding results for Vascepa. A continuing REDUCE-IT would lower the high end of expectations for Vascepa. It could still be shown to be a very effective drug, but not at the level required for a stop at 60%.

It is difficult to say what Amarin's share price will end up being with an early stop at 60% and with a decision to continue REDUCE-IT. I've modeled in a price of $10 per share in the former scenario and $2.40 per share in the latter scenario. With those numbers, Amarin would have an expected value equivalent to its current share price if there is a 7% chance of a stop at 60%.

Conclusion

I believe that there is a high probability that REDUCE-IT continues on until at least the 80% interim analysis. However, Amarin is continuing to display very solid Vascepa growth and has significantly de-risked its balance sheet. That makes it a decent long-term value in my opinion even if REDUCE-IT continues on until the final analysis. Amarin is currently trading for approximately a 4x EV to 2018 sales multiple based on its projected YE 2017 cash balance and projected 2018 sales (not including the effect of any expanded indication).

I am currently in Amarin with a long position that I have mostly sold covered calls against. The high implied volatility inherent in the options should offset much/all of any decline in its stock if REDUCE-IT continues, while I have still allowed room for some upside if there is a surprise stop at 60%.

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Disclosure: I am/we are long AMRN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.