It is well known that Amarin Corporation PLC (AMRN) management prefers a buyout as the path to commercialization of its anti-triglyceride drug Vascepa. Management has re-iterated this in conference calls and press releases for a while, and biotech speculators love to handicap which big pharma company would be a likely suitor. Recent events have some traders counting on a buyout announcement soon, while other explanations suggest no change in the status quo as we outline herein.
Merck - the Latest Rumor
Based on comments during AMRN's Q2 conference call and a story by Peter Loftus that appeared in the online edition of the Wall Street Journal, the latest speculation is that Merck (MRK) might have a deal in the works with AMRN.
Loftus reports that Merck has placed development of a combination cholesterol drug on hold.
Merck & Co. said it has placed on hold its development of a combination cholesterol drug, citing "business reasons." ...
[Merck] no longer plans to file for U.S. regulatory approval of the drug, code-named MK-0524B, in 2014 as it had previously planned. The combination drug was meant to help raise levels of good cholesterol while also lowering levels of bad cholesterol and a related substance implicated in heart disease.
MK-0524B was a combination of a generic cholesterol lowering statin with niacin, which is known to lower triglycerides, and a third compound, laropiprant, which helps alleviate some of the side effects of niacin.
Add to this the following question and response during Amarin's conference call:
Ritu Baral - Canaccord Genuity, Inc.
Great. And last question, and then I'll jump back in the queue. Your combination products, have you picked a final formulation for the combination product? And can you confirm that it's only one statin at a time that you're going to be moving forward with?
Joseph S. Zakrzewski - Chairman and Chief Executive Officer
Well, I can't confirm that we have a final formulation. We have a statin or statins picked out. We have the ability to do many things and we still expect to start that study by the end of the year.
From the above quotes it appears that Amarin has narrowed down its choice of a cholesterol lowering drug (statin) to run combination clinical trials and at the same time, Merck has put its combination drug trials on hold for business reasons. Putting the pieces together suggests that Merck may be in the running to acquire or partner with Amarin.
Furthermore, the CEO made the following comment at the end of the conference call:
Joseph S. Zakrzewski - Chairman and Chief Executive Officer
Thank you everyone and really appreciate all the support and I think as we continue to go forward here, we've got a lot of exciting times ahead over the next 60 to 90 days.
Amarin currently has the near-term catalyst of new chemical entity (NCE) status designation coming up, possibly on August 17th when the FDA orange book comes out. Certainly, the NCE status decision, as well as further details of its go-forward commercialization plan, will come out in the next 60 to 90 days. But given the other pieces in the puzzle, some traders are speculating that this mention of a two-to-three-month time-frame is related to a buyout announcement.
The Rumor Gains Traction
This past week, investors had a great buying opportunity when Amarin's share price briefly dipped below $11 on August 7. The Wall Street Journal article mentioned above was published at 3:57pm on Wednesday August 8, and the AMRN stock rallied more than $1.50 on Thursday, indicating that traders might be giving some credence to this rumor.
An Alternate Explanation
While the timing of the article in the Wall Street Journal right around the time of Amarin's Q2 conference call, and the comments by ARMN during that call seem to imply a strong correlation between these events, in reality, the article from Mr. Loftus relies upon disclosures Merck made in its own Q2 SEC filings that became public on July 27. Furthermore, as the article explains:
Investor expectations for Merck's niacin-based drugs were tempered by last year's halt to a government-funded study which found that adding niacin to cholesterol-lowering drugs known as statins didn't significantly improve cardiovascular outcomes versus statins alone.
This suggests an alternate, and more mundane reason for Merck's decision to terminate the program. If combination therapy with niacin and a statin has not demonstrated clinical benefit, why should it continue spending on clinical trials?
If NCE status is granted to Amarin, the buyout rumors will likely strengthen as will expectations of the takeout price. On the other hand, if NCE status is not granted, traders will likely take profits in the absence of further confirmation of a buyout. It is also possible that AMRN management would sell shares on the next trading day as part of its 10B5-1 pre-arranged stock trading plan. If they sold upon approval, they are likely to sell upon NCE status news. We view a sale by management upon NCE status, if it happens, as neutral to the long-term outlook for Amarin as long as the amount of stock sold is less than about 5% of management's total holdings. If management sells 10% or more of its holdings in aggregate, traders would do well to follow the lead.
Buyout Timing is a Rule-Breaker
One note of caution is in order here regarding buyout speculation. It is not the norm for a biotech company to be acquired right after approval. Large pharmaceutical companies historically have either partnered or acquired early-on well before approval in cases where they have a footprint in the therapeutic space, or they have waited for a few quarters of sales numbers to confirm an approved drug's value. In Vascepa's case, the success of Lovaza from GlaxoSmithKline (GSK) is a proxy indicating that the drug has blockbuster potential. As such, traders seem to be speculating that Amarin will be a rule breaker regarding the timing of a buyout.
We generally do not place much emphasis on buyout rumors because they are easy to start and difficult to confirm. As the present case shows, there usually is an equally likely mundane explanation for a series of events that are the stuff of buyout rumor. On the other hand, since it is well known that Amarin's management is open to a buyout, and since anti-triglyceride drugs have achieved blockbuster status in the past, the possibility of a buyout cannot be ignored.
Prior to Vascepa's approval, we recommended that those who were not already in AMRN should wait for a buying opportunity after approval. Investors who missed the buying opportunity when Amarin dipped below $11 on August 7 should consider scaling in to a position and be ready to buy on a future dip if they are looking to speculate on a potential buyout or partnership as the go-forward plan for Vascepa.
More conservative investors may wish to wait until further confirmation of the exact go-forward plan. Amarin has indicated that it will provide more clarity on its commercialization strategy for Vascepa by October. If it ends up announcing a go-it-alone strategy for Vascepa's launch, the stock price could take a large haircut. In the long term, we see Vascepa having excellent prospects in the marketplace and Amarin's progress in expanding its IP estate builds long-term value under all three of its proposed commercialization scenarios.