Monday, October 21, 2013

Is Amarin Going Belly-Up?, EnhydrisPECorp This article was published at 2:15pm ET on 21 October 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
I never quite understood the ultra-bullish sentiment over Amarin (AMRN). Management's only plan for success was to first get a fish oil pill approved by the FDA. Next, they expected a capricious FDA to bestow New Chemical Entity (NCE) status upon their fish oil pill known as Vascepa, which would have protected it from generic competition for an extended period. After that, they foolishly believed a Big Pharma was going to knock down their door to either partner, or buy them out. Finally, management sallied forth with this business plan in spite of the fact that the fish oil market was already being dominated by a major player, i.e. GlaxoSmithKline (GSK), as well as a number of private manufacturers for non-FDA approved therapies.
To date, the only part of this strategy that has gone according to plan is that the FDA has approved Vascepa for a limited indication, i.e., as a treatment for patients with severely high triglycerides (MARINE Indication).
The glaring problems with this fantasy land scenario were spelled out myriad times by a handful of writers. Yet, bulls eschewed their common sense advice in order to pump the stock to unholy valuations that were unsupported by fundamentals.
Unfortunately, retail investors looking for the next biotech lottery ticket weren't the only ones wearing rose-colored glasses. CEO Joseph Zakrzewski was so confident the company would find a marketing partner or a suitor that he delayed the commercial launch of Vascepa for four and a half months, wasting precious time and resources in the process.
Once Amarin failed to secure NCE status with the FDA or find a Big Pharma interested in the drug, bulls began pointing to the ANCHOR Indication's Advisory Committee as the day of redemption. Once Vascepa is approved for a bigger population, Big Pharma will certainly come our way!
At least that was the rallying cry...
Sadly, the FDA's Advisory Committee hammered the drug with a 9-2 NOvote last week. Most surprisingly is the fact that Amarin's representatives sounded ill-prepared for a meeting they spent millions in fees to attend. Or maybe that shouldn't be surprising given the ill-fated business plan they faithfully followed up until now, resulting in a 74% drop in the stock year-to-date. Ouch!
With all these missteps, one has to wonder, is Amarin going belly-up?
To answer this critical question, it's best to dig into Amarin's recent 10-Q. With that in mind, let's see what it says…
How much revenue does Vascepa need to generate to float the boat until REDUCE-IT concludes?
Although Amarin stated in their recent 10-Q that expenses are expected to drop in the second half of the year, they didn't spell out how much or where these cost-savings will come from. Looking at the mechanics of REDUCE-IT and the promotion of Vascepa's MARINE indication, I have a hard time believing expenses are going to drop significantly. If we generously estimate the company reduces expenses by $1.7 M a month without terminating REDUCE-IT, we still have a healthy burn rate of $18 M a month, excluding cost of goods. Amarin management has also stated that the gross margin for Vascepa is 48% and some back of the envelope calculations support their arithmetic. Using these numbers, we can now plug and chug to find out the answer.
Answer: Vascepa gross sales for MARINE need to be around $410 M per year to carry the company's current expenses. Current sales are on track for around $35 M, although this figure does include promos and discounts to be fair. Simply put, Vascepa is nowhere near on track to carry a significant burden of the company's cash requirements.
Will terminating REDUCE-IT help?
The REDUCE-IT trial has been costing the company over $6 M a month so far this year due to increasing enrollment. So a year's worth of savings would be roughly $72 M if they terminated the trial. This is a ballpark estimate because some months the trial costs less, whereas others it costs more. My main objective, however, is to figure out if it makes financial sense to scuttle REDUCE-IT.
By scuttling REDUCE-IT, Amarin could reduce their yearly operating expenses to about $144 M (all-else-being-equal).
Or does it?
The straw that could break Amarin's back
Starting next month, Amarin is expected to start paying back interest to BioPharma for a $100 M financing agreement consummated last December. According to the agreement, the first payment of $2.5 M is due this November, with another $2.5 M due in the first quarter of 2014. After that, the payments dramatically escalate up to $8.0 M per quarter over the next year, $10 M per quarter for the subsequent year, $15 M per quarter, and so on and so forth. There is some wiggle room for Amarin to defer payments based on Vascepa sales, but Amarin will have to pay BioPharma a total of $150 M over the next few years.
Bottom line: By April 2014, Amarin could be paying $2.6 M a month to BioPharma. If they don't scuttle REDUCE-IT, costs could thus soar to nearly $21 M a month because of these outstanding financial obligations. There is some leeway under the agreement, but not much.
What does this all mean?
Management has dug a financial grave betting on Vascepa's prospects, and failed to hedge accordingly. I don't see how the company can advance REDUCE-IT without sinking the stock into pennyland via dilutive financing. At this point further dilutive financing will likely force the company to seek a reverse split in order to meet NASDAQ's listing requirements. Overall, Vascepa sales simply cannot ramp up fast enough to stave off significant dilution.
So forget profitability, Amarin is now in a struggle for its very existence and the options are limited.
What about a White Knight coming to the rescue?
Don't bet on it. Big Pharma is well aware that generic Lovaza is likely to hit the market as early as 2015, adding even more competition to an already saturated market place.
Should I believe Amarin Management's Fable anymore?
Well, that's up to you. But you should remember that management did state the following in their 10-Q prior to the recent Advisory Committee Meeting:
"We do not believe the final results of the REDUCE-IT study will be required for FDA approval of Vascepa for the ANCHOR indication"…
That sort of says it all...
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