Why You Shouldn’t Bet On This Product Launch Yet
Sherrie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For the last few weeks, there has been a heated debate regarding the success or lack thereof from biotechnology company Amarin's (NASDAQ: AMRN) new product launch. Those who are bullish note encouraging month-over-month script growth in the thousands for the cardiovascular drug Vascepa. However, as the company issues even more shares to fund Vascepa's marketing, is it still worth an investment?
You can change, magnify, or twist these numbers however you’d like, but the truth is that Amarin is (currently) failing in its drug launch. June's lack of progress is a large reason that Amarin's stock is trading lower by 8.5% on Tuesday. Well, that and the fact that Amarin announced yet another public offering to fund Vascepa's sales and marketing.
This Launch Ain't Cheap!
Amarin's latest public offering could generate up to $150 million in proceeds if all options are exercised. Conveniently, this comes just eight months after the company raised $100 million, and shot down any speculation that a purchase or partnership could happen.
Since December, the company’s last offering, Amarin’s stock has fallen 55%, and many longs are devastated at the implications of this latest round of financing, since it shows that the costs associated with the launch of this (so far) failing drug are excessively higher than many had predicted.
The Unspoken Risk Of Self-Marketing
There’s no doubt that Amarin is blowing a lot of money to sell a drug that is not producing great month-over-month sales growth. This is a drug that was once heralded as a multi-billion dollar product. While this may all look bearish right now, it also shows the risks associated with companies who have no choice but to self-market their own drugs.
As a person who worked decades in both R&D and selling/general/administrative expense segments of Big Pharma, I know all too well the costs associated with launching and developing a product. Back in the year 2000, a $400 million budget wasn’t uncommon to develop a new therapeutic. Today, those costs sit closer to $800 million; and that’s just to develop and bring to market.
Then, to promote and market a newly approved drug, pharmaceutical companies adjust their spending to the potential demand and market competition. Most budgets for product launch sit around $500 million in the first year, or as a formal rule you can expect a $2 cost for every $1 earned.
Why Is The Spending So High?
Dendreon (NASDAQ: DNDN) is a classic example of a clinical drug company that was overwhelmed with the "potential" of a billion-dollar product, but was unable to market efficiently and live up to the high expectations.
Dendreon’s prostate cancer drug Provenge faces competition from Bristol-Myers’ Yervoy and Johnson & Johnson’s Zytiga. Thus, Provenge not only requires a minute-to-minute manufacturing process where Provenge has to be shipped, created, shipped again, and then given in a day’s time, but Dendreon also spends $320 million annually in selling and general marketing purposes to compete with products from Big Pharma.
Amarin does not face other FDA-approved medications for high triglycerides, but it does face competition from over-the-counter fish oil products. Thus, during the company’s last quarter, it reported an operating loss of $62.39 million, and spent $40 million in selling and marketing the drug.
Moreover, Amarin Corporation might soon face the even greater threat of Big Pharma competition that Dendreon has had to endure. Back in May, AstraZeneca purchased Omthera Pharmaceuticals for about $323 million, whose main product Epanova contains fish oil and is used for cardiovascular disorders.
If Epanova is FDA-approved, Amarin Corporation would have to increase its spending to compete with a company such as AstraZeneca. Hence, this spells trouble all around for Amarin Corporation -- a company that can’t seem to live up to its high expectations, and is failing to penetrate this supposedly massive market of patients with high triglycerides.
For investors, we often discuss the high budgets for R&D, but few consider the massive amounts of money that is spent on selling and marketing a product. With Amarin and Dendreon, we are seeing this process firsthand, and it highlights much of the risks associated with making an investment in this space.
So far, with Amarin spending just $40 million in marketing costs, it is still far short of the $400 million on average that is spent on a successful product launch. With that said, I don’t see upside in its shares, not even at $5.60 a share.
So, why shouldn’t you bet on Amarin? This is an $850 million company that is facing slowed growth, has no prior marketing experience, and still needs to spend a significant amount of capital to make Vascepa a success. Basically, the market is no longer responding well to Amarin’s mishaps, and I see no reason to believe that these mishaps are over.
Sherrie Stone has no position in any stocks mentioned. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!