My last article on Amarin (AMRN) was written on Friday, October 5th, where I argued that the stock was undervalued relative to the potential of its flagship product Vascepa (known as AMR-101 back in the day). I also thought of a catchy motto that can describe the general feeling that us bulls share:
"Stay long, stay strong."
Recapping The Recent Struggle On AMRN
AMRN got more attractive since mid-September, where shares were hovering around $14/share. Now, the stock has dropped a good 20% - knife-catchers will start to weigh the ~$330 million decline in AMRN's market cap with the fresh round of bad news.
Basically all of the recent bearishness associated with Amarin is related to the NCE (New Chemical Entity) status Vascepa, which is determined by the FDA. Designation as a New Chemical Entity means 5 years of exclusivity for Vascepa, as opposed to 3 years. Seemingly ignored by the market is the fact that Vascepa finally got its '889 patent in early September, which gives it protection until 2030 for treatment of high triglycerides.
Despite this, it seems that Wall Street just wants to know about the NCE status so that M&A speculation on AMRN can continue. To review the situation, here is the chronological string of some of the news that managed to bring AMRN to a lowly $11.09/share:
-September 10, Amarin investors start to get curious when the company discloses that the FDA hasn't made a decision on the terms of exclusivity of Vascepa. This is usually fully revealed via the FDA's Approved Drug Products with monthly updated Therapeutic Equivalence Evaluations (also known as the Orange Book, since it's orange)
-Webush downgrades the stock on October 3rd, lowers price target to $15/share (from $22) citing lower chances of an acquisition due to the FDA's indecision over Vascepa's NCE status
-Cannacord Genuity, on October 5th, gives ultra-bullish statements that barely sparks any bullishness in the stock. Ritu Baral says we could see a crazy $78.26/share if AMRN is bought considering 2030 patent exclusivity
-Also bucking the trend on October 9, Roth Capital reaffirms a buy rating on the blockbuster potential of Vascepa
-October 10, still no Vascepa clarity expected in the FDA's upcoming Orange Book publication, according to the company's recent 8-K filing. A detailed analysis by Red Acre Investments points to wording that points to a lack of confidence by Amarin itself on the NCE status
-On October 11, we get more analyst bearishness from MKM Partners, which cuts their AMRN price target from $21.50 to $15 expecting a "no" on Vascepa's designation as a NCE
Although we saw some bullishness from Cannacord Genuity and Roth, the general market sentiment is far more bearish relative to September. Certain articles have been especially discouraging with their wording, like Adam Feuerstein's Amarin NCE Delay is Bad News For Fish-Oil Pill which makes some bearish attacks like this:
Amarin bulls counter with two arguments: 1) NCE status is irrelevant because Amarin's recent Vascepa patents wins are more important; or 2) the recent Vascepa patent wins will persuade FDA to grant the drug NCE status.
If NCE status isn't important, why is everyone so keenly focused on it? And why are Amarin shares still trading at a discount to where the stock stood on the day of Vascepa's approval?
These points were countered with the fact that the market is indeed obsessed with the NCE status. However, we have to realize that the market is an irrational beast. I don't want to get into the philosophy/psychology of mob mentality, but let's just say that people can get quite irrational in certain circumstances.
The Efficient Market Hypothesis
Here's the definition by Investopedia:
"An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information."
If this were true, it would be impossible for anyone to beat the market with due diligence. It's folly, and anyone who thinks that the stock market is a perfect entity with no undervalued (and overvalued) tickers should ask Warren Buffett where he got his money.
If we want to see weird behavior that disproves the efficient market hypothesis in biotech stocks, we don't have to look far. Take the other hot biotech company Vivus (VVUS) for example. Their flagship drug Qsymia was approved on July 17, 2012 and was able to hit the prescription obesity drug market before its competitor Arena Pharmaceuticals ( ARNA), which is waiting on DEA clearance for its own obesity drug Belviq (ARNA actually dropped roughly 40% after FDA approval too).
Last time I checked, FDA approvals are confirmations of a drug's value that should cause the stock to skyrocket. We actually saw the reverse for Vivus, since traders were "selling the news". We also saw discrepancies with Arena's stock, which displayed huge ups and downs close to the FDA approval date and was clearly riding on nothing but market speculation.
While Amarin is not a player in the obesity drug market, it is seeing a similar situation. There is great uncertainty in its future, although there is a lot of evidence to support its potential as a blockbuster drug (acquisition or not). Vivus and Arena, with Qsymia and Belviq, have similar stories. We're not entirely sure just how big the obesity drug market will be, but most predictions provide sales figures that would justify much higher share price in VVUS and ARNA.
While Wall Street is currently saying that Vascepa/Amarin is worth $1.65 billion, I'd be more inclined to believe the argument provided by Roth Capital and Cannacord Genuity. Lovaza, the drug that Vascepa will replace, brings over $1 billion in revenue for GlaxoSmithKline (GSK).
How poorly would Vascepa have to perform with its (at least 3 year long) period of exclusivity? What about its potential in the preventative treatment of cardiac events? Is Wall Street not aware that this drug reduces bad cholesterol on top of patient triglyceride levels? Does this not make the drug superior to Lovaza, which increases bad cholesterol?
At about $11/share (or $1.65 billion as a whole), Amarin is basically priced for a "no" on the NCE and no acquisition of the company (meaning the company would have to market Vascepa itself). Any lower, and AMRN becomes a deep value play that is far less speculative than you might think.
I'm Having Lots Of Fun With My Own AMRN Trades
I bought AMRN on October 5th on the NCE uncertainty, when shares were near $12.50. However, I will admit that the bearishness over Vascepa was (and is) overwhelming and I thought there was a high chance that AMRN was going to decline some more in the short run. In anticipation, I sold October $12.00 in-the-money covered calls to someone for $1.15.
After the AMRN position declined by 12% (in yesterday's trading), I bought the calls back at $.29 each making a very substantial, and lucky, profit that would've yielded something even the stock managed to stay above $12. (Read more about the wonderful world of covered calls here) These gains partially offset AMRN declines, bringing losses to about 6%
Why did I buy them back? Only because Wall Street's bearishness on AMRN has become unsustainable and largely unfounded. I'd also like to keep my shares in the event that AMRN drives past $12 in the near future. Timing is hard, but the consensus (even amongst bearish analysts) is that AMRN is undervalued. Patience is a virtue in value investing, especially in the strange world of biotech trading.
The Conclusion & The Takeaway
Even if Amarin only gets 3 years of exclusivity on Vascepa, their patent protection prevents competition. If Amarin doesn't get bought out anytime soon, I am willing to be patient while the smaller company attempts an invasion of GlaxoSmithKline's hypertriglyceridemia market share via Lovaza (and cardiovascular health, way later).
Bulls who are underwater will have to wait, assuming that they believe in Vascepa. If anything, it's troubled times like these that require extra buying. Those who are on the sidelines are presented with a great opportunity to start a value play on AMRN. Those who are short AMRN (last measured at a total of 20 million shares, or 13.5% of float) got a really nice run, and ought to take the money and run.
In the event that AMRN gets good news, I expect a rapid recovery. This is a pretty straightforward assumption, given that bad news has been factored in - to the point where the stock is undervalued even if the bears are right about the NCE decision.
"Stay long, stay strong."