Thursday, October 31, 2013

The Red Flags And Resulting Lessons From The Fall Of Amarin, Black Gold,

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
As most know, Amarin (AMRN) has had a wild downhill ride since the July 2012 approval of Vascepa. The story of AMRN and Vascepa is well documented and not my intention to discuss that in this article. AMRN stock briefly traded in the $15s after the approval. As of this writing, the stock currently sits around $1.75 a share. As a former long in AMRN, I know this pain first hand. I did not experience all of it, but a large chunk. For me, no longer being a shareholder with a vested interest was the first time that I could look back objectively and ask myself a few questions: What went so wrong for AMRN? What were the warning signs? What lessons can be learned?
I believe AMRN was purely a buyout/partnership play for most longs, especially around the Vascepa approval time. The first red flag for me should have been the rather large insider sales directly after approval of Vascepa. Why would insiders sell large stock positions if management truly had "more BP (big pharma) offers than employees?" They would be forfeiting rather large potential gains. I didn't really think too much of it at the time as my vision was clouded by quick riches of a buyout. Various articles and message boards simply dismissed these sales because of the fact that they were part of a pre planned trading plan. To that, I have to say, why would you plan sales near Vascepa approval if you are planning on a buyout or partnership in the near term?
Waiting months after approval before deciding on a way to go was the next red flag. AMRN investors were told in a conference call after Vascepa approval that the next 60-90 days would be exciting. Quite the opposite actually. You would have thought AMRN was in a 60-90 day quite period. AMRN dinked around until December before making a decision. Investors were duped into believing the premise that BP would not make any offers until NCE status was granted. Looking back, why would BP care about an extra two years of exclusivity with all of the patents AMRN has? Plus, it is likely that a BP salesforce would be able to take a large portion of Lovaza market share within three years, given the data on Vascepa. Those extra couple years wouldn't mean too much to big pharma. Ultimately, I think Joe Z's (CEO of AMRN) ego, once again, got in the way. He bluffed pocket aces when in fact he had nothing, and BP called his bluff. The go it alone strategy was likely cobbled together a few months after approval once the harsh reality of no BP offers set in. Fast forward to today and NCE status is still in limbo. Joe Z ended up wasting precious time and money that could have been used to better market Vascepa.
AMRN ultimately decided to market Vascepa by itself without the help of big pharma. This should have been another warning for longs to get out. How can small AMRN with only 275 sales reps compete against $130B market cap GSK (GSK) for the $1B Lovaza market? 275 sales reps is less than 6 per US state. How can AMRN be successful with small numbers like this? How were AMRN sales reps supposed to compete with the larger number of GSK reps who already have strong relationships with doctors? How would AMRN compete against generic Lovaza set to come to market rather soon? GSK obviously was not worried about $1B Lovaza sales as they didn't even try to make a run at AMRN. Like was said above, a partnership with big pharma likely would have rapidly increased Vascepa market penetration simply due to the size and connections of any big pharma salesforce. Another Joe Z mistake here. Go it alone, especially with only 275 reps, was doomed from the start.
Anemic sales were the next red flag. Everything we heard from analysts, message boards and articles was that Vascepa should completely replace Lovaza due to the fact that Vascepa does not raise LDL. Why were sales so anemic then? The product should have literally sold itself from what we were told. Obviously that hasn't happened. Sales have been on a slight incline, however they aren't anywhere they need to be for a company with only one drug and rapidly burning its cash.
In July 2013, AMRN announced a $121 million stock offering. This offering was done at the (then) 52-week low. Again, management strikes with extremely poor planning. An equity raise larger than the size of the debt they raised when they finally decided to go it alone back in December 2012. How could management miss their cash needed targets so badly? Why not raise enough cash back when the stock was in the double digits?
The canary in the coal mine for me was when the FDA briefing documents came out. It was apparent that something was wrong and that the FDA had something out for AMRN. No one had ever talked about REDUCE-IT being necessary for ANCHOR approval. These documents asking about whether or not Vascepa would reduce cardiovascular events was an eye opener for me. I decided to sell. As other articles on AMRN have alluded to, there was heavy volume leading up to the release of the documents, and extremely heavy volume after the documents were released. I have learned that the volume doesn't lie. Folks don't panic sell 40 million shares in one day. Lesson learned.
We all know the FDA panel voted against ANCHOR expansion. The stock cratered and yet some longs on message boards and SA articles were still sticking to the small hope that the FDA would still approve ANCHOR in December. This is a classic case of becoming married to your stock. Don't let emotion get in the way. The FDA requested this panel to consider whether or not approval of ANCHOR should be given before REDUCE-IT was complete. The panel vote was 9-2 against AMRN. Be realistic. The FDA isn't going against a 9-2 panel when it was clear that the FDA was trying to push the panel in this direction. This glimmer of hope was further crushed when the FDA rescinded the SPA a few days ago.
Although I was already out of the stock, I listened to the conference call after the panel vote. That is, if you can call it a conference call. AMRN management took 4 or 5 callers and the call lasted a total of less than a half hour. Less than a half an hour for a binary event that sees the stock cut by 60%? Appalling. This is all management can give to shareholders who are about to take a 60% haircut? The most common answer given to questions was that they are exploring options. Clearly management had not even given a single thought to the fact that the panel vote might go bad, even when the market was saying it probably would. This is unacceptable for a management team of a company this size going into a rather significant binary event.
The latest move by management sees the Vascepa salesforce cut by 50%. How do they plan to continue to take market share from GSK by cutting their salesforce? Granted, they are cutting the poor performers, but why not replace those with folks who will perform? Selling Vascepa under the MARINE indication is all AMRN has left as it is all but certain that they will receive a CRL in December and be forced to wait for REDUCE-IT before ANCHOR is approved.
In the end, I believe AMRN management is the primary cause for the rapid decline in stock price. Big egos and poor decisions have taken precedent over reality. As an investor, it is disappointing that it took so long to see the writing on the wall, however I have learned quite a bit from the roller coaster investment known as AMRN:
  • Make sure management is competent and continually reevaluate this. If there are any doubts, get out! Management is one of the most important things to a biotech.
  • Insider stock sales are extremely important. Money talks.
  • Poor management decisions can haunt the company for a long time. Be wary on extravagant management claims.
  • People who make poor decisions usually make more poor decisions. Poor decisions also breed more poor decisions.
  • Valuation matters. AMRN had a market cap of a few billion without even selling a single dose of Vascepa.
  • Don't be afraid to take a small loss to avoid a larger one down the road. Don't keep a loser just because you are down big and you think it might come back. If the facts change, change your investment thesis.
  • Don't get married to the stock. Don't get caught up in the hype. You need to be able to look at the stock objectively and make decisions based on logic and facts.
  • Follow the volume. The folks trading heavy volume are usually the most informed. After the briefing Friday it traded 40MM shares or so. There was definitely something wrong.
  • Don't buy into the claims that shorts are just driving the price down for fun. Shorts are some of the most informed investors. They have to be, especially in biotechs where large upside pops are not uncommon. Their profit is capped at 100% with an unlimited downside. Shorts typically do the most research on their stock choices. Look at the Muddy Waters Chinese fraud cases.
  • Don't automatically discount Adam Feuerstein because you think he works for the shorts. Maybe he does, maybe he doesn't...I don't know, but it appears that he knows his stuff when it comes to biotechs. That being said, he is by no means the biotech god and I have seen him get things wrong. He called the AMRN FDA panel result. His live blog coverage of the panel was rather balanced. He is one of the reasons I sold on Briefing Doc Friday (thanks Adam). Use his twitter account for an additional resource of information.
  • Analyst estimates and price targets are a joke. Most of them appear to have no clue and are usually unreasonable optimists.
These are just some things I have learned while investing/speculating in AMRN. My hopes are that this article will help some AMRN investors take a breather from the hype. Step back and take an objective look at the past and the future. Make your decisions based on that, not the hype you hear from SA articles, management or message boards. Ultimately, hopefully that will help everyone make better investing decisions in the land of biotechs.

Sent by Seeking Alpha, 345 7th Ave. Suite 1400 New York, NY 10001

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