Monday, October 28, 2013

Amarin: Game Over For Current Shareholders Until Further Notice, George Kesarios,....

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
When it comes to biotech stocks, I first look at the numbers (the balance sheet) before looking further. Before I even begin to dig into the product pipeline, I want to make sure the company has enough capital to burn for it to have a chance to bring its products to market.
There is no use in buying any stock that will run out of money and dilute you to death in their effort to secure funding. Even if eventually the company does succeed, it might be several years away and after several reverse stock splits. And before you even realize what happened, your initial investment is probably close to zero.
Another thing I look at is market cap. There is no use in buying any biotech stock that has a valuation of several billion dollars, when the company does not even have a product to market yet. Why do investors buy stocks that have already discounted the success of their pipeline is beyond me.
Having said all this, let's look at the numbers for Amarin Corporation (AMRN).
AMRN Shares Outstanding Chart
(Click to enlarge)
AMRN Shares Outstanding data by YCharts
As you can see from the above chart, Amarin's management is not shy about issuing shares. In fact, over the past 3 years the total number of shares has increased by almost sixfold.
For example, just recently on July 12 2013, the company sold in a public offering 21.7 million shares (ADSs) for $5.6 a share resulting in net proceeds of $121 million after expenses. On January 11 2011, the company successfully completed an offering of 13.8 million shares (ADSs) at $7.6 a share, for net proceeds of $100.2 million after expenses. The chart above is self evident of the dilutive practices of management.
For me this is a very negative first impression. If I was looking into buying Amarin, I would get a cold shoulder from the first minute of financial investigation.
Over the past several years the company has managed to issue shares when the company's stock was at much higher levels. If however the company needs to issue more shares, at today's prices, then current shareholders can expect nothing less than a dilutive death.
Now let's look at the balance sheet. Over the past 4 quarters, the company has lost cumulatively about $119 million. That comes out to about $29 million per quarter. So I will use this figure to see how much time the company has left, before it runs out of money.
Currently the company has about $184 million in current assets and about $35 million in current liabilities. That means the company has about $150 million in working capital, which also means the company can continue as a going concern for about five more quarters, before it runs out of money, if sales of its products do not pick up.
However, the company also has $272 million in long-term debt. While it is theoretically possible for the company to produce enough sales before this debt comes due, the fact that the market has marked the stock down by a lot recently, might mean that the market does not see this as a viable prospect.
This is where I stop my investigation of Amarin, or any other stock with similar balance sheet figures.
As I see it, this stock is dead for current shareholders. Anyone buying the stock at current levels faces biblical dilution in the future (if not shortly), even if we assume that the market is even interested in participating in another offering.
Bottom line
Without even getting into the product pipeline of the company, my conclusion is that this stock is not something that long-term investors would want to bother with. While there is a small chance that some sort of miracle can happen and current shareholders might be spared more dilution, the mark down of the stock suggests that the market thinks otherwise.
Unless you are a trader, or an investor with a stomach for very high risk speculative stocks, or someone who has a very good biotechnology background, and can place a very high value on the company's product pipeline, you should not even bother with Amarin.

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