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Wednesday, August 1, 2012

Musings On Amarin

By Jason Napodano, CFA

Yesterday I decided to post a Tweet on some of my random Amarin thoughts given the significant sell off in the stock since approval last week. Amarin stock is down 25% since gaining approval for Vascepa, a consensus blockbuster drug.

What's Hurting The Stock?

There are three concerns as I see it driving the stock price down.

1 - The fear of not gaining New Chemical Entity (NCE) status. I'm not going to spend a lot of time on outlining the issues for or against. There is a very good blog on the subject by Dr. Andrew Goodwin (HERE).  Dr. Goodwin (@BioDueDiligence) believes that Vascepa does not qualify for NCE status, which grants 5 years of market exclusivity (actually 7.5 years when you consider Hatch-Waxman extension), but does qualify for the lesser New Molecular Entity (NME) exclusivity that grants 3 years.

I respect Dr. Goodwin's opinion, but for the sake of doing some additional due diligence, I spoke with Dr. John Alan Tucker (@JohnTuckerPhD). Dr. Tucker believes, similar to Dr. Goodwin, that the odds do not favor Amarin. Dr. Tucker posted some thoughts on the subjected (HERE). Essentially, he believes that the active molecule in Vascepa (ethyl EPA) is already present in Glaxo's Lovaza, so it cannot be designated new again for Amarin. Dr. Tucker predicts 3-1 against NCE.

I agree with the two good doctors. I think the odds are against Amarin winning NCE. Adam Feuerstein (@adamfeuerstein) pointed out last month that the fate may have been determined at a face-to-face meeting between Amarin and the FDA in June 2012. I have no insight into how this meeting went. I do find it interesting that Amarin requested the meeting with the FDA to lobby its case. I'm thinking management knows the odds are stacked up against them.

2 - To partner or not to partner? Based on comments made by CEO, Joe Zakrzewski on the company's approval conference call (listen HERE), it sounds to me like Amarin is gearing up to launch the drug themselves. I actually think that's a good thing. I ran two separate DCF models, one assuming Amarin markets the drug themselves and one assuming they partner with a big pharmaceutical company for milestones and royalties. As I suspected, going alone provides significantly more upside to shareholders, albeit at a higher risk and slower initial cash flow ramp. It's risk / reward people!

Investors seem obsessed with the idea of a buy-out. Yes, that is one of the three options Mr. Jakrzewski put on the table last week. However, having been a pharmaceutical and biotech stock analyst since 1999, I can tell you that is the least likely option over the near-term. Pharma-biotech M&A is rare, despite what investors would like to believe. There are maybe 20 deals a year? There are over 300 publicly trading biotech companies! Even with a partnership, M&A takes time - look at Lilly/ICOS, Lilly/Bristol/Amylin, Bristol/ImClone, Roche/Genentech. I think Amarin presents too much risk at this stage for a big pharma takeout. But as noted above, if you are a long-term Amarin shareholder you want them to keep the drug. They make more in the long-run by retaining full control.

3 - Insiders are dumping. Following approval, Amarin insiders rushed to dump shares. Adam Feuerstein posted a story summing up the shareholder angst on the insider selling (HERE). With all due respect to Adam, I think he sensationalized the situation a little. I'm a long-term Amarin bull, but I sold half my shares on Tuesday (at $15.70) before PDUFA. I did it to lower my risk and pocket gains. Half the investors I speak to regularly had the same plan - either sell a little before or sell on the approval pop. Amarin executives were just doing the same. Hey, yacht fuel is expensive! But in all seriousness, these were pre-arranged 10b5-1 sales. And my guess is that Amarin executives expected approval, and the stock to be a lot higher when they put the plan in place. They obviously have never heard of the BioRunDown!

What's Amarin Worth?

So with the basics covered above and the stock now trading at less than $12 per share, investors want to know what the stock is worth. I've built a quick DCF model (posted below) to try to explain what I think Amarin is worth. I apologize for the crudeness of the model, but despite its lack of flare, I think its a very fair assessment.

However, as with any DCF model, it's only as good as the assumptions its built on. So that being said, below are my key assumptions.

1 - Amarin is not granted NCE, but is granted NME. As a result, generic companies file paragraph-4 (active patent challenges) shortly after launch. Let's say Q2-2013. I think Amarin will clearly file an injunction under Hatch-Waxman, and thus the earliest we could see a generic Vascepa would be Q4-2015. But I don't think that will happen. I do not think a generic company will launch "at risk" before winning in court. Based on Amarin's growing IP estate, which is outlined by a twitter-friend, Ross Klosterma (@RossKlos) (HERE) I think Amarin can keep a generic Vascepa off the market until 2023. Why 2023? I don't know - sounded like a good year (10 years exclusive).

I think there are very few generic companies that have the financial capabilities to handle the massive liability of an "at risk" launch of Vascepa. Basically, if you launch at risk and you end up losing in court, you would owe damages to Amarin. Damages on a $2.5 billion drug with modeled free cash flow of $1 billion in 2018 would bankrupt most generic firms. There will clearly be a rush to file. The first filer gets the 180 days of market exclusivity. Some small generic company, with limited pockets, will file the first ANDA. That company will then look to partner with someone larger, like Teva. Amarin will file an injunction. They will go into arbitration, and they will settle. Look at the similar situation now with Glaxo and Lovaza. The small generic company and its partner will be allowed to launch an authorized generic in 2023. That's my prediction.

2 - Amarin goes it alone in the U.S. Sorry, but I just do not see a buy-out, and I think Mr. Jakrzewski, having already sold Reliant to Glaxo, wants to take Vascepa to the market himself.

3 - The Vascepa label is excellent, even without ANCHOR. I see it as superior to Lovaza based on better TG lowering, LDL-C neutrality, clean safety, and reductions in ApoB. The current "fish oil" market is all Lovaza, with U.S. sales at around $1.1 billion on around 450K TRx per month. Vascepa will expand the market by 50% initially (my prediction), then more once ANCHOR is added to the label. I think based on the superior label, Vascepa eventually takes >70% of the NRx (>95% of the $ value once Lovaza goes generic). Amarin plans to file the sNDA for ANCHOR later this year and has guided to FDA action mid-2013. I think ANCHOR gets approved. All that gets me to peak sales of $2.5 billion in 2020.

4 - The company has given some pretty clear guidance on what would be necessary to sell Vascepa in the U.S. Gross margin is around 90%. They would need to continue the R&D to pay for the ongoing outcome study, REDUCE-IT. They need around 250 dedicated primary-care reps, maybe 300 if they really want to go all in. I'm expecting a full tax rate of 20% (Amarin is based in Ireland) by 2015.

5 - I'm using a discount rate of 11.25% (1.5% Rf + 6.5% Erp x beta of 1.5). The current fully-diluted share count is around 175 million. I added in 25 million for a secondary offering later in 2012 seeking to raise around $300 million in cash to pay for the launch.

Those are my assumptions. All that gets me to $21.25 and that's why I own the stock. The model is below. I think if they can get NCE, the stock might be worth $23-24 on longer exclusivity. I think if REDUCE-IT hits, which there is precedence to believe it might, then my peak sales estimate of $2.5 billion is low - way low. Vascepa might do north of $4 billion in that case. That would put the stock above $30. But we will not know the outcome of REDUCE-IT for several years. With ANCHOR approved and REDUCE-IT looking good, I think then you might see a take-out. As I noted in my Tweet, I love the idea of AstraZeneca taking Amarin over. It just makes the most sense to me. Others like Lilly, Pfizer, Sanofi, Bristol, and Abbott also make sense.

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