Amarin (AMRN) has been a darling of biotech investors with one of the highest bullish sentiments that I have seen on a stock. I will not go into the details of the background of this stock since I assume you are familiar with it. Amarin's sole product Vascepa has a proprietary formulation of EPA (a component of fish oil). Vascepa has been in the U.S. market since 2013 to treat increased triglycerides with marginal sales. Sales have been unimpressive.
Amarin stock jumped earlier this year after a multi-year REDUCE-IT trial showed 25 pct reduction in mortality in patients with elevated cardiovascular risk and uncontrolled triglycerides. Vascepa became the darling of Wall street analysts with some of them calling it the next Lipitor. Some analysts have assigned $5 billion to $ 6 billion peak sales to the drug. Some other bulls are calling for sales approaching Lipitor, in the range of $10 billion plus. Rumors of a takeover by Pfizer, Merck or Novo Nordisk have been floating around last week. Calls have been active this week.
So, it was time to do some field research. I visited 5 large pharmacies in Andover/North Andover area, 30 miles north of Boston (CVS and Walgreens), two of these are open 24-H. This is a suburban affluent area. I requested to have a few minutes of talk with the pharmacist in charge saying that I was doing market research on this drug called Vascepa.
The results were surprising to me. A drug which is called the next aspirin or Lipitor was unfamiliar to the majority of pharmacists. These are pharmacists who handle hundreds of prescriptions daily and are well familiar with drugs and their brands. In short, if a drug is selling well and being prescribed, patients will come to get them filled at pharmacies and the pharmacist will know the drug.
Four of five pharmacists said that they had not heard of the drug called 'Vascepa'. They had to look up the drug in their system when I spelled out the name. One of them said that the pharmacy processes 4000 prescriptions per week and she has never heard of this drug. One of them had heard of the drug but said that she gets a prescription request maybe once a month. Remember that the drug has been around for 2013.
REDUCE-IT trial which raised the expectations for the drug results came in September, 4 months back. Cardiologists who are the primary targets to prescribe follow these new developments in their field closely and don't have to wait for the sNDA for reducing CV risk to start prescribing. Still, the prescriptions are not being written. Moreover, in November we had a new issue of doubts raised that the results may have been biased by an increase in LDL caused by the use of mineral oil as a placebo in some patients. Some cardiologists even suggested that a new trial with a better design may be necessary.
The company is putting out the prescription numbers which are increasing and says that they will have to approach the cardiologists 5-6 times to change the behavior of prescribing. Meanwhile, the company's stock is priced for perfection. Amarin trades at a market cap of $5.7 billion at present.
My bear thesis for Vascepa is based on the following points:
Biggest problems for prescribing doctors:
1. Hassle of getting preauthorization, takes 15-30 min on phone, no doc wants this headache.
2. High cost, $300/month if insurance does not cover and Medicaid is already not covering it. Docs faced a similar problem with Govocori. We all know what happened with Govocori, which faced competition from a cheaper alternative immediate release amantadine with just the promise that it was longer acting. The stock has fallen 75 pct from highs and the only people who made money in $ADMS were either shorts or the company's executives.
Vascepa has a similar situation as Govocori. Over the counter omega 3 fatty acid supplements derived from fish oil have been in the market for years and have been known to lower elevated triglycerides though the main modality to lower increased triglycerides is proper diet and exercise.
The older generation of OTC omega-3 fatty acids had a lower dose of EPA (the active ingredient in Vascepa though Amarin claims it is a new chemical entity and managed to get a patent for it). The older generation of omega 3 fatty acids had some issues: around 300mg-400 mg of EPA per capsule, not so pure, fish taste in the mouth with burps and no effect shown on cardiovascular mortality when elevated triglycerides are lowered in patients with high cardiovascular risk. REDUCE-IT trial for Vascepa tested 4 g/day of Vascpea (each capsule of Vascepa has 1 g EPA, so the dose is 2 capsules with meals twice daily).
Since the results of the REDUCE-IT study came in September, manufacturers of OTC supplements have also evolved. They increased the dose of EPA to 3 times of the previous (the highest EPA dose per capsule in an OTC omega 3 fatty acid now is 1.2 gm, even higher than 1 g/capsule for Vascepa, so Amarin's claims of 'high dose EPA' are false. On its website, Amarin compares Vascepa with the older generation omega-3 fatty acid supplements with one-third dose of the highly potent ones available now.
On my visits to the pharmacies, I found these highly potent (3x EPA) OTC omega 3 fatty acid brands prominently displayed close to pharmacy counters and other parts of the aisle with high traffic where they are easily noticeable. It was obvious that some of these new OTC brands, especially MegaRed krill are leaving no efforts left to take advantage of the hype of reduced cardiovascular mortality after the results of REDUCE-IT trial. MegaRed especially seems to be marketing itself aggressively and was positioned right next to the pharmacy counters at one of the large pharmacies (Walgreens) that I visited (see image below).
At other pharmacies also, OTC omega 3 fatty acid supplements derived from fish oil as well as krill oil were prominently displayed. See images below. Most had offers of buying one and buy free.
See another image taken at one of the pharmacies where this brand was proudly displayed right next to the aisle where a lot of foot traffic is.
Oh yes, Megared was also there,
Please notice, the 3x potent krill oil derived formulation of Megared above.
Is Vascepa really that potent in terms of EPA dose?
The answer is no.
I searched Amazon and there are several highly potent formulations of omega-3 fatty acids which are available. These newer generation formulations are 3x more potent than the older versions and have 1.2 grams of EPA per capsule (higher than Vascepa).
image above: BioSchwartz: High concentration and bioavailability omega-3 supplement available OTC on Amazon. Has 1200 mg EPA, higher than per capsule of Vascepa. Vascepa's claims of 'high concentration EPA' are overblown. There are OTC supplements with higher EPA/capsule and much cheaper.
Here is a second brand with a same high dose of EPA per capsule, higher than Vascepa.
Thus, Amarin's claim on its website where they compare Vascepa with the older generation omega 3 fatty acid derivatives is false. They are not disclosing that there are already highly potent OTC supplements available which have a higher dose of EPA per capsule than Vascepa.
Newer high concentration OTC omega-3 fatty acid supplements are using newer molecular distillation techniques to increase purity, have proprietary techniques to ensure higher bioavailability, have no fish taste and are 90 pct cheaper than Vascepa. Also, no doctor visit, no copay. An don't forget they have higher EPA per capsule than Vascepa.
Krill oil is derived from a crustacean similar to shrimp. It also has same components as found in the fish oil but also has other advantages. There is no fish taste. Krill oil formulations like the one shown below also have same 3x potency, and 1.2 grams of EPA per capsule, higher than Vascepa. Krill oil is also 2.5 x easier absorbed than fish oil.
In addition, krill oil also has other constituents like astaxanthin whose antioxidant properties to be up to 500x more effective than vitamin E, up to 10x beta-carotene and up to 10x more than lutein in various measures of antioxidant potential. See details here.
The issue of increase in LDL with DHA: which is why Amarin decided to test only EPA:
Concerns of LDL elevation with DHA are overblown, two well known cardiologists from this medscape article say that this increase is clinically insignificant and LDL levels may be low to start with in these patients anyway. No position at present.
- Dr. William Harris, University of South Dakota, Sioux Falls), Re DHA and LDL: It (LDL increase) It often looks like a large relative increase, but nevertheless, I'm not too concerned about it.
- Dr Roger Blumenthal (Johns Hopkins University School of Medicine, Baltimore, MD) from same article: he is not clinically concerned about the increase in LDL cholesterol with omega-3 fatty acids. Most patients are on statins anyway.
Link to this Medscape article for those who do not have access.
Amarin bulls argue that Lovaza has able to gain $ 1 billion in peak sales even without showing cardiovascular benefit. Let us assume that Vascepa can exceed Lovaza's sales and reach $1.5 billion in peak sales. At a price/sales of 4 at the peak (2025) and discounting it by 15% cost of capital, I get a fair enterprise value of $2.6 billion. Amarin is currently trading at an enterprise value of $4.3 billion.
Lofty price targets and dreamy peak sales estimates for Vascepa are being floated around since the company is clearly trying to sell itself while the share price is high.
Jefferies who is projecting $4B-$5B peak sales for Vascepa and 100 pct upside potential got $8 million in underwriting fees (at 4 pct rate) in Amarin's $200 million November offering. Pump and dump anyone?...
Thus, I am bearish on Amarin common stock with a timeframe on 1 year with a first price target of $10. In 2 year timeframe, I expect the stock could reach $5 level. There could some increased upward momentum in the next few weeks due to M&A speculation and sNDA speculation but the long-term case remains bearish with the same situation as Adamas's Govocori.
In brief, the main points of the bear thesis for Amarin's common stock are:
1. Prescribing doctors will have to go through the hassle of getting preauthorization for Vascepa since there are OTC highly potent omega-3 fatty acid supplements available. They don't want to spend 15 min-30 min on the phone getting preauthorization or filling out forms when they can just ask the patient to buy OTC high dose EPA krill oil. This was the same problem why Govocori is not selling.
2. High cost, $300/month if insurance does not cover and Medicaid is already not covering it. Cheaper highly potent Viva Naturals Antarctic Krill Oil with 1.2 g EPA per capsule is just $40 for two bottles at the same dose as used in REDUCE-IT trial.
3. Insiders have been selling the stock heavily. $18 million of the stock was sold in January by insiders who are probably buying penthouses and yachts while the common investors are about to get ripped off.
4. Mineral oil issue in placebo arm anyone....Are we all convinced about the REDUCE-IT data? What if it is not replicated in the real world scenario?
Investors in the company have been tracking the Vascepa scripts closely. That reminds me of Synergy Pharmaceuticals (SGYP) where the Trulance scripts were being tracked in a similar fashion. Trulance also had a well-established alternative Linzess and had the claim of just a marginal benefit. I was right above Synergy Pharmaceuticals a year back when I was bearish and said that diarrhea-related discontinuations are important, not just diarrhea. Many of these IBS-constipation patients may, in fact, find some diarrhea as a relief, not a side effect. Synergy failed to compete against the marketing muscle of Allergan (NYSE:AGN) and went bankrupt due to poor sales of Trulance which could not keep up with the high-interest payments of the debt taken to launch expensive commercials. Another similar situation is Adamas Pharmaceuticals' (ADMS) Govocori which failed to gain sales due to the availability of cheaper and easily available immediate release amantadine.
Of course, we have not factored in hundreds of millions of dollars yet needed to approach the cardiologists 6-7 times to change their prescribing habits, the shares will be diluted like water in the next two years, putting further downward pressure on the stock price. This has Synergy written all over it.
In conclusion, a long case in Amarin has red flags written all over it, heavy insider selling, pumping by the same investment bank that helped it to raise capital, easily available cheaper, fewer hassle alternatives (where krill oil may even have additional strong antioxidant effects) and doubts about the data. I fail to understand why a doctor would bother to spend half an hour on the phone with insurance trying to convince them that Vascepa is better than OTC alternative which is cheaper and equally potent. I expect a slow sales ramp and the stock to then start a downtrend after sNDA approval (similar to what we have seen with Flexion Therapeutics, Achaogen, Paratek Pharmaceuticals, Portola Pharmaceuticals, something we call the post-approval curse in the biotech/pharma investment circles).
Initiating coverage on Amarin Corp common stock with Sell rating and first price target of $10 (one-year timeframe), 43 percent downside and 2-year timeframe price target of $5 (70% downside). Any large pharmaceutical company which buys Amarin at these overinflated, investment bank-pumped price will have a liability on their books.
(Top reasons why M&A deals often fail, number one cause is improper/incorrect due diligence)
This article represents my own opinion and is not a substitute for professional investment advice. It does not represent a solicitation to buy or sell any security. Investors should do their own research and consult their financial adviser before making any investment. Investing in equities, especially biotech stocks has the risk of significant losses and may not be suitable for all investors. While the sources of information and data in this article have been checked, their accuracy cannot be completely guaranteed.
I plan to initiate a short position in AMRN at the open today and will hold it for at least 2 years.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in AMRN over the next 72 hours.