Is Amarin Still a Buy?

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amarin (NASDAQ: AMRN) announced earlier this month that it planned to commercialize Vascepa. The stock tanked as investors were hoping that Amarin would find a buyer soon and therefore were considering Amarin a short-term investment. The primary hurdle in the acquisition of Amarin has been the NCE status. The FDA has still not classified if Amarin will get 5-year or 3-year exclusivity for Vascepa. This makes it very difficult for potential buyers to value the drug and thus the company. I am optimistic that a buyout would occur, as soon as NCE status is declared. However, regardless of the buyout I believe the stock is still a buy either way.

Company Description

Amarin is a biopharmaceutical company that leverages its experience in lipid science and therapeutic uses of polyunsaturated fatty acids, to develop therapeutics aimed at improving cardiovascular health. The company has recently started putting together resources to start commercialization activities for its star drug Vascepa. It is Amarin’s only FDA approved drug to date and is an ultra-pure omega-3 fatty acid product, comprising not less than 96% EPA.

Vascepa

Vascepa is a grade Omega-3 fatty acid drug which is used for the treatment of cardiovascular ailments. The company has an edge over its closest competitor Lovaza, as is shown by Vascepa’s MARINE study. The results of this study showed that Vascepa was able to successfully reduce triglyceride levels. The drug also did not increase LDL-C levels, which give it a huge edge on Lovaza that increases LDL-C levels by 40-50%. The ANCHOR study was further able to stamp Vascepa’s authority, by proving effective for patients with high triglycerides, i.e. between 200 and 500 mg/dL; Lovaza is not approved for this patient class.

Thesis & Catalyst

Amarin shares tanked earlier this month when the company announced its intention to commercialize Vascepa in-house. The stock has depreciated approximately 32%, since the initial announcement. Investors had been hoping for an acquisition and there had been rumors that TEVA Pharmaceuticals (NYSE: TEVA) was interested in acquiring Amarin. TEVA has been facing problems of expiring patent, especially Copaxone and it seemed logical that it would try to replenish its patent pool with an Amarin acquisition. However recent developments show that this deal didn’t go through.

The investor disappointment on Amarin's commercialization announcement is due to two basic reservations:

i) Investors perception that only big Pharma has the required financial muscle and distribution to maximize the sales of Vascepa.

ii) The belief that Amarin management is not capable enough to commercialize a drug, primarily because Amarin has never been involved in commercialization efforts.

I believe both these reservations are misplaced. The main competitor to Amarin’s Vascepa is GlaxoSmithKline’s (NYSE: GSK) Lovaza and the upcoming Epanova from Omthera Pharmaceuticals. Lovaza was already being commercialized by Reliant Pharmaceuticals, before they sold the company to GSK. The company had already reported $367 million (9 months) in sales, before Glaxo took over in 2007. Therefore, the concern that Amarin cannot commercialize an Omega-3 fatty acid because only Big Pharma has the capability to do so is invalid. Let’s look at the team and commercialization activities of Amarin so far, to assess its direction.

Amarin recently announced the inclusion of David Stack to the BOD. Mr. Stack enriches the Amarin board with his 25 years of experience; you can read his detailed profile here. The company is currently being spearheaded by the CEO Joseph S. Zakrzewski, who has more than 20 years of experience. He was previously the COO of Reliant Pharmaceutical. As a Chief Operating Officer, he was overseeing directly, the highly successful launch of Lovaza. Therefore, he has firsthand operational experience in the management and launch of Omega 3 fatty acid products. Mr. Zakrzewski has been able to successfully garner support of a consortium of companies led by Slanmhor Pharmaceutical. According to the CEO:

".. this exclusive Slanmhor consortium rounds out our global diversity and expands our potential capacity to meet the anticipated market demand for Vascepa….. the resources of four of the world's leading omega-3 API manufacturers supports the commercial potential of Vascepa by providing for additional scalability and reliability to Amarin's supply chain.”

A major reason small pharmaceutical companies struggle to successfully commercialize their drugs is an efficient sales force capable of marketing new drugs. The healthcare industry is reaching a patent cliff and this can be an opportunity for Amarin. Next year, leading pharmaceutical companies will continue to face expiries of their patents, resulting in major layoff. Pfizer (NYSE: PFE) announced yesterday that it was cutting its primary care sales force down 2400, due to the expiring patents of its top seller Lipitor. AstraZeneca (NYSE: AZN) had already cut down its sales force by almost 4000, due to generic competition for Seroquel. This gives Amarin a golden opportunity to get highly qualified sales reps at very reasonable compensation.

Valuation

The consensus analyst price target for the stock is $20; 150% upside at current levels. The leading competitor to Vascepa, i.e. Lovaza, has annual sales north of $1 billion. If we assume Vascepa can garner 100% of Lovaza sales by 2016-2017; due to better efficacy and lower LDL-C levels. We can reach the price target calculated in the table below using $200 million sales in the first year and a 60% growth rate (taken from Lovaza growth before acquisition). I have also assumed that net margins would improve as the company matures. Using a P/E of 20x for 2015 and 2016 earnings, we can get a price target of $13.68 and $24 respectively. Therefore, I believe Amarin has a huge upside at these levels and is a must buy.

$ million (except per share)

2013

2014

2015

2016

2017

Sales

200

320

512

820

1300

Average Industry Net Margin

15%

17%

20%

22%

22%

Net Income

30

54

102

180

286

Shares Outstanding

150

150

150

150

150

EPS

0.20

0.36

0.68

1.20

1.91

 Next Catalyst and Bearish Thesis

The are a number of catalysts approaching for Amarin which can move the stock price. The results of Anchor and Reduce-IT studies can be the next major catalyst. If these results are positive, the stock will see significant appreciation; however, negative results especially in the Reduce-IT trials would raise doubts about the long term prospects of Amarin. 


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