Summary and investment decision
This report analyzes Amarin's (AMRN) stock ahead of an FDA decision on its AMR101 clinical trial data on or before July 26. The phase III data presented by the company is impressive regarding the clinical benefits of reducing triglyceride (TG) and LDL levels.
Based on our research, it is highly probable (>95%) that the FDA will approve the drug for its designated uses. Such an approval will significantly enhance Amarin's valuation. We have a price target of $18 for Amarin by the end of 2012, assuming FDA approval on or before July 26th with a market launch by Q4 2012 through partnership with pharmaceutical companies (Baseline Scenario).
We also present other scenarios that might affect company valuation. In the Optimistic Scenario, the assumption is that the FDA approves the use of AMR101 in patients on statin therapy in 2013, thus expanding market size for the product. The estimated stock price is $32.
The initial market size for AMR 101 is approximately $1B, encompassing more than 3.8 million people with TG levels greater than 500 mg/dL in the United States alone. Currently, only 3.6% patients are treated with drugs. AMR101 also has the potential to expand to 36 million adults in the U.S. who have medium to high TG. Worldwide, patients in the high TG categories are 2-3 times the US market. Amarin also plans to market the drug globally.
Risks associated with the stock include delayed approval by the FDA, management's business strategies, and patent positions. A potential upside is that the company may be acquired by another pharmaceutical company. Given its small number of employees and no other drugs in the pipeline, a merger and acquisition may be the best strategy to expedite the commercialization of AMR101 and maximize shareholder value. This may occur after AMR101 is approved for a second indication in 2013, as its value will get a significant boost from expanding its target population.
Amarin is a small-cap biopharmaceutical company focused on reducing the risk of cardiovascular disease through lowering triglyceride levels. Its leading product candidate AMR101, a pure-form of Omega-3 (96% EPA (icosapent ethyl)), is currently seeking FDA approval for treating patients with very high triglyceride (PDUFA date 7/26/12).
Although many fish-oil derived dietary supplements or health products contain Omega-3, their impurity precludes them from being used as a prescription medicine. For a compound to be used in the US as a drug, it must first meet purity standards as a New Chemical Entity before conducting clinical trials. Furthermore, the drug must demonstrate efficacy and safety to gain FDA approval before it can be marketed.
Current FDA-approved treatments for patients with very high triglycerides (TG> 500 mg/dL) are fish-oil derived omega 3 (Lovaza, containing 84% EPA, 16% DHA) and fibrates. However, these drugs also increase LDL levels by 40%. (The LDL elevating effect was due to the presence of DHA in Lovaza. Jefferies 2012 global healthcare conference). Fibrates are frequently used as an add-on with statin to mitigate its LDL effect. Lovaza and fibrates have ~$1B sales each in 2011. AMR101 has clear competitive advantage over the existing drugs in that, while it decreases TG level, it does not elevate the LDL level.
It is important to note that Amarin is not the only company that produces pure-form Omega-3. In fact, a Japanese company, Mochida Pharmaceutical, was the first to launch a pure Omega-3 product, called Epadel, which was approved for hyperlipidemia in Japan in 1994 (Mochida's company history). Mochida may not have conducted clinical trials following FDA criteria, thus presenting an opportunity for Amarin to conduct clinical trials in the U.S. The fact that a pure EPA product has been approved as a prescription drug in Japan and has been used by numerous patients for over 18 years is indicative of the overall safety of AMR 101 and its high probability of receiving FDA approval.
Clinical trial data
Amarin has completed two Phase 3 clinical trials to evaluate AMR101. Both studies (MARINE, ANCHOR) showed that AMR101 significantly lowered the TG levels without increasing LDL levels (AMRN 2011 10K). In addition, both studies show safety profiles similar to the placebo group. If approved, the drug will have an advantage over Lovaza and fibrates as a single agent for treating patients with high TG levels that have a high risk of developing cardiovascular disease.
The MARINE studies evaluated AMR101 in patients with very high TG levels (>500 mg/dL). The trials were conducted on 229 subjects from 2009 to 2010. At a 4 gram dose of AMR101, a statistically significant reduction in triglyceride levels (-33%, p<0.0001) was achieved without increasing LDL levels.
Other favorable benefits of AMR101 include statistically-significant reduction in other lipid and inflammatory biomarkers, including Apo-B (-8.5%), non-HDL-C (-18%), Total-Cholesterol (-16.3%), VLDL-C (-28.6%), Lp-PLA2 (-13.6%), and hs-CRP (-36%).
The ANCHOR studies evaluated AMR101 in patients defined as high TG/mixed dyslipidemia (TG level between 200-500 mg/dL) who are under statin treatment. The trials started in 2010 and ended in 2011, involving 702 study subjects.
In the study group taking AMR101 and statin, there was a statistically significant decrease in TG level (-21.5%, p<0.0001) and a further reduction of LDL-C levels (-6.2%, p<0.0067) compared to the placebo group (statin alone). The 4 gram dose was also associated with statistically significant reductions in non-HDL-C (-13.6%, p<0.0001), Apo B (-9.3%, p<0.0001), Lp-PLA2 (-19%, p<0.0001) and high-sensitivity C-reactive protein (hsCRP) (-22%, p<0.001), at week 12 compared to placebo.
AMR101 also appears to be rather safe: its safety profile is comparable to a placebo. The superior efficacy, its safety profile, and other beneficial effects, are the primary determining factors that we believe the drug has greater than 95% probability of receiving FDA approval by July 26, 2012.
In December 2011, Amarin started enrolling patients in a preventive clinical trial, titled REDUCE-IT (Reduction of Cardiovascular Events with EPA- Intervention Trial). It is designed to evaluate the efficacy of AMR101 in reducing major cardiovascular events in a high risk patient population on statin therapy. This will be a multi-year program involving tens of thousands study subjects. Since the outcome of this program is years away, we do not factor this into our valuation model.
Nonetheless, it is interesting to note that Mochida Pharmaceutical has already conducted similar clinical trials (JELIS) in Japan to evaluate the use of Epadel (pure EPA) as preventive medicine for coronary diseases. In November 2006, Mochida reported two studies on pure EPA plus statin vs statin alone with over 18,000 enrolled patients (Mochida JELIS data 2006). The studies show that the combination of EPA+statin reduced 19% CV disease over five-year period. Among a subgroup of study subjects with very high TG levels and low HDL, there was a 53% reduction in CV disease. We will follow up on future updates on the trial results to gauge its potential as preventive therapy.
There are 3.8 million people in the U.S. with TG levels greater than 500 mg/dL. Currently, only 3.6% of patients are treated with pharmaceutical medicines. This suggests that if AMR101 is approved, it could have a potentially larger market share than the current $1B in LOVAZA sales. Worldwide, patients in this very high TG category are 2-3 times the U.S. market. Amarin also plans to market the drug globally. The NDA for the first indication was submitted in Q4 2011 and will receive an FDA response on 7/26/12. If approved, the company plans to launch the product before Q1 2013.
AMR101 may also be used in people with medium-high TG level (< 500 mg/dL, >200 mg/dL). This was evaluated in the ANCHOR studies. There are 36 million adults in the US in this category. Less than 4% of people in this category are currently treated with fibrates, which had $1B in sales in 2011. Therefore, if AMR101 is approved, it could compete with fibrates and potentially expand the market size. Amarin has submitted a supplemental NDA (SNDA) for the second indication in June 2013 (check the date). The FDA decision is pending till next year.
The preliminary data from the REDUCE-IT study group in Japan looked encouraging. More updated data will be reported toward the end of 2012. Since the trial is still years away, its potential impact is not factored into stock valuation.
Below are the risks that could affect the AMRN stock price estimate.
(1) FDA approval status. A delayed approval or even a rejection (a remote possibility) could make the stock price decline.
(2) Marketing and commercialization strategy. At the Jefferies 2012 Global Healthcare conference, CEO Joseph Zakrzewski stated that the company would commercialize the AMR101 on its own or partner with pharmaceutical companies and that the company has received significant amount of interest from pharmaceutical companies (Jefferies 2012 global healthcare conference). With only 30+ employees, it will be extremely challenging if the company does not seek pharmaceutical partners to commercialize its product.
(3) Patent position and barrier to entry. Amarin has filed 25 patent applications. It is extremely important that the company seeks patent protection to exclude competition. According to CEO, the compound is not easy to manufacture, thus creating an effective barrier to entry. Nonetheless, patent protection is an integral part of the company's profit and valuation. In Q3 2011, when the USPTO rejected one of its patents, the stock tumbled 20% in one day and continued to slide over several months. The company appealed the decision and the patent was finally awarded in March 2012 for the use of AMR-101 for treating high TG levels. The stock price jumped 14% in one day on that news.
(4) Competition: Amarin competitors include GSK and Provona, who market and hold the patents for Lovaza. Abbott Laboratories (ABT) currently markets Tricor and Trilipix for the treatment of very high TG and mixed dyslipidemia. Several biotech companies are also developing omega-3-based products, some in phase 3 clinical trials. The products, if approved, could compete with AMR101 for market share. However, these threats would be 3-4 years away.
(5) Business risks: At present, AMR101 is the only lead product of the company. In the 2011 annual report, the company disclosed that Amarin completed a private placement of $70 million (with private equity and venture funds) in 2009 (AMRN 2011 10K). The proceeds were used primarily to fund the AMR101 clinical trials. In connection with the agreement, Amarin has essentially ceased the development for other programs, including Huntington's, Parkinson disease, and Myasthenia gravis. This suggests that AMR101 is the sole product of the company in the foreseeable future. The success or failure of this product determines the fate of this company.
We used the FCFE valuation as the primary model for estimating stock price. We used median gross profit margin and net profit margin from comparable companies, e.g. Human Genome Sciences (HGSI), Seattle Genetics (SGEN), Dendreon (DNDN), Vertex (VRTX), Regeneron (RGEN), or Bristol-Myers Scribb (BMY) as a guide to estimate revenue growth, gross profit, net income, and free cash to equity for a five-year period (2012 to 2016). Based on FEFE model with 15% discount rate, the estimated stock price is $18 and $32, respectively, for two scenarios (baseline, optimistic).
Baseline Scenario: This assumes that the FDA approves AMR101 for very high TG patients on 7/26/2012 and the company is able to launch the product in Q4 2012. Revenue growth reflects market penetration rate of ~0.6%, 3.6%, 9%, 16%, and 26%, respectively from 2012 to 2016, in a total global market size $3B for very high TG patients. We also assume a linear decline of revenue growth from high growth stage to a normalized 8% over a 4-year time after 2016. The slower growth rate after 2016 reflects competition from other products entering the market with similar benefit. Estimated stock price: $18.
Optimistic Scenario: This assumes that the FDA approves AMR101 for very high TG patients on 7/26/2012 and the company is able to launch the product in Q4 2012. Furthermore, the FDA approves the use of AMR101 for second indication in mid 2013. The approval enables the expansion of the drug to a larger patient population. Revenue growth reflects market penetration rate of ~0.3%, 2%, 6%, 12%, and 18%, respectively from 2012 to 2016, in a total global market size $6B. Estimated stock price: $32.
Other possible outcomes include a delayed response from the FDA on the approval or an outright rejection. This will be a major setback for the stock and company's value.
On the other extreme, a potential unexpected surprise is that the company may be acquired by another pharmaceutical company. This may represent the best scenario as the merger and acquisition will expedite the commercialization of AMR101 and maximize shareholder value. The takeover may occur after AMR101 is approved for the second indication in 2013, as its value will get a significant boost from an expanding target population.
Disclosure: I am long AMRN.