Amarin: Potential For Gains From Possible Buyout

| About: Amarin Corporation (AMRN)


For any branded drug maker, exclusivity and patent protection for its drugs is critical. Amarin (NASDAQ:AMRN) has developed an innovative and effective drug, Vascepa, and gained FDA approval. Though market demand is high, the company may not be able to profit substantially from this breakthrough, as others companies rush to come in and duplicate the drug. Unless of course, FDA provides Amarin the five year exclusivity patent which it is seeking. Over the past five months, Amarin stock has experienced heavy trading in the market. In this analysis, I evaluate how things bode for the company's future.

Company Profile

Amarin Corporation is a biopharmaceutical company based in Ireland. It focuses on the development of treatments to improve cardiovascular health utilizing its experience in lipid science and capitalizing on the potential medical benefits of polyunsaturated fatty acids. Vascepa (icosapent ethyl) capsules are Amarin's first FDA approved product. This patented drug is an ultrapure omega-3 fatty acid capsule made from fish oils. Simply put, this is a lipid regulator for the treatment of high levels of triglycerides. The drug is appropriate for adults with severe hypertriglyceridemia; the formulation aims to help them control the condition by reducing their triglyceride levels. To put the potential of this drug into perspective, GlaxoSmithKline's (NYSE:GSK) Lovaza is the only other prescription fish oil formulation, and it generates approximately $1 billion in annual sales.

Tracking Financials

In the Q2 2012 filings taken from company's official website, Amarin has not declared revenues. Focus has been on its expenses; Q2 2011 expenses were $15.2 million while in Q2 2012 expenses stood at $27.7 million, an 82% year-on-year increase. Since there was no revenue, all expenses were recorded as operating losses. Loss per share was reported at $1.58 for Q2 2011, and at $0.38 in Q2 2012. As the company's first drug was approved by the FDA in July 2012, revenues can be expected to start coming in when the drug is launched next year. By the end of Q2, Amarin had cash on hand of $250.3 mil.

As of October 15, 2012, Amarin's stock price 52-week range is from $5.99 to $15.96. Since the company has not yet generated revenue or profit, or provided shareholders an EPS, measuring ROE or margins is not relevant. However, Amarin's debt/equity ratio of 24.0 is alarming when compared to the industry average of 3.1.

Stock Performance

At the time of this writing, the company's stock has an open price of about $11 and a market capitalization of $1.7 billion.

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Compared to the S&P and the Dow Jones Industrial Average, Amarin's stock has grown at a faster pace than these indexes since 2011. The company's relatively small size has allowed a rapid growth and gains in value. The driving force has mainly been speculation about Vascepa getting approval from the FDA. Later, reports emerged that insiders sold large blocks of stock, post FDA approval. More recently, expectations of Vascepa being granted New Chemical Entity (NCE) status by the FDA has increased market speculation. However, the FDA has shown reluctance to grant the company NCE status, claiming that the drug is not unique enough.

What Does the Future Hold?

Amarin stands at a crossroads at the moment, as many compelling reasons suggest that the company is expecting a buyout, rather than entering a partnership or launching its product all by itself. Large pharmaceutical companies such as Merck (NYSE:MRK), AstraZeneca (NYSE:AZN), Pfizer (NYSE:PFE) and Abbott (NYSE:ABT) have been associated with Amarin. All the signs suggest that the company is also heading towards a buyout and not a partnership. Let's have a look at why a buyout seems to be the next logical step in Amarin's timeline.

With any biotech company, its upcoming products in the pipeline are pivotal for the future, since research and development plays a large part in keeping continued products on the shelf. In Amarin's case, only Vascepa is being launched in the near future. Furthermore, no details on the marketing of the product have been made available, which would add credibility to the company's ambitions for launching the product. So far, the company has not hired its own sales force which makes it appear that it would be relying on a buyout. Amarin appears to be waiting for a large pharmaceutical company, with a substantial cardiovascular or diabetes sales force, to come and snap it up.

The prospect of Vascepa's high demand is a virtual certainty, as one third of Americans have high triglycerides. Vascepa has a competitive advantage over its primary peer Lovaza, as Vascepa does not raise bad cholesterol in patients. Based on this advantage alone, Vascepa may capture much of Lovaza's $1 billion annual revenue generation. As patent and exclusivity rights for drug companies run out, the pipelining and launching of new products become essential. Since Amarin is a relatively small company, it cannot overtake Lovaza as quickly as a large and established pharmaceutical company might.

All these ideas are linked to Vascepa having the NCE status. If such a scenario does take place, a bidding war between two to three pharmaceutical companies will be the best outcome for investors.

Make or Break for Investors

With the obvious demand for Vascepa in the market, Amarin's stock price is dependent on three things. First, how quickly can the company introduce its product in the market and through which channels? Secondly, if the company maintains its stance of the product being valid and suitable for a NCE status, then it remains a question of whether the FDA grants Amarin the decision. Lastly and most importantly, just how serious are successful pharmaceutical companies about buying Amarin out; with the product expected to launch in start of 2013, surely we will see a takeover before then. Regardless of which option becomes available first, Amarin's stock price is likely to increase in any case. The two analysts estimating Amarin's value on Morningstar have indicated a "Buy" rating, which is consistent with my optimistic projection for the stock's future.

Bottom Line

The company's fortunes are dependent on one drug, Vascepa, which is superior to its competitor, Lovaza, and is ready for market launch in 2013. At this point I consider Amarin a "Buy" with gains from a large pharmaceutical takeover a likely possibility.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.