Thursday, August 29, 2019

Amarin: Elucidating Bullish And Bearish Claims

The Vascepa recommendation as the standards of care by both the American Diabetes Association and American Heart Association are stellar developments that foretell robust growth ahead.
The upcoming supplemental new drug application decision for Vascepa is the ultimate catalyst that will catapult Vascepa sales by multiple folds.
Amid overwhelming odds of approval, the recent Prescription Drug User Fee Act delay still incites fear of a negative regulatory binary.
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Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic. - Warren Buffett
In bioscience investing, you are certain to encounter much volatility. Due to the notion that what went up must goes down, it seems to me that a rallied stock is more volatile than other equities. Facing the market's whim, it's important for shareholders to properly interpret the ongoing saga of your stocks. As such, you can avoid selling out prematurely on spectacular performers. Equally important, you can build shares in promising companies during opportunistic occasions.
The aforesaid phenomenon exemplifies the investment thesis on Amarin Corporation (AMRN). In light of a regulatory delay, the market sentiment now shifted out of favor for Amarin. Nonetheless, the development of the overall fundamentals is quite robust. By empowering yourself with market intelligence, you can make an informed decision rather than being victimized. In this research, I'll present a fundamental analysis of Amarin while dissecting bullish and bearish views.
Figure 1: Amarin chart (Source: StockCharts)

About The company

As usual, I'll provide a brief corporate overview for new investors. If you are familiar with the firm, I recommend that you skip to the subsequent section. Based in Bedminster New Jersey and Dublin Ireland, Amarin is focused on the innovation and commercialization of therapeutics to serve the strong unmet needs in cardiovascular health. Powered by its expertise in lipid science, Amarin successfully developed and commercialized icosapent ethyl (Vascepa) in the U.S. using an in-house sales force.
Figure 2: Therapeutic pipeline (Source: Amarin)
Since Amarin wishes to make Vascepa available worldwide, the company is collaborating with various global partners. Asides from the U.S., patients can obtain Vascepa in Lebanon and the United Arab Emirates. Approval in Canada, China, and the Middle East are the next destinations. And despite slow initial launch, Vascepa sales are ramping up drastically due to new study results and other paramount developments.
Figure 3: Vascepa commercial partners (Source: Amarin)

First Bullish Claim: American Diabetes Association's Standards Of Care

Shifting gears, I'll analyze various developments from both bullish and bearish stances. Without further ado, I'll jump into the first bullish argument which centers around the American Diabetes Association (ADA). Backed by robust Phase 3 REDUCE-IT results, the ADA endorsed Vascepa as the new standards of care for patients with diabetes. Keep in mind that these patients are already on a cholesterol-lowering drug (i.e. statin) yet having their triglyceride ("TG") level elevated. By taking Vascepa, their overall cardiovascular risk is substantially reduced. The ADA explicated,
Section 10 was updated based on the outcome of REDUCE-IT, which determined the addition of icosapent ethyl to statin therapy for patients with high triglyceride levels reduced cardiovascular events. The standards of care now include a recommendation that [Vascepa] be considered for patients with diabetes and atherosclerotic cardiovascular disease or other cardiac risk factors on a statin with controlled LDL-C [low-density lipoprotein cholesterol], but with elevated triglycerides (135-499) to reduce cardiovascular risk.
In my view, the recommendation is a medical necessity. After all, Vascepa demonstrated the 25% relative cardiovascular risk reduction that outshines all competing therapeutics. At that mark, Vascepa rivals the mega-blockbuster Lipitor. And, the strong data explicated the rapid revenues increase quarters after quarters. Sharing his view on the aforesaid developments, the Chief Medical Officer (Craig Granowitz, M.D., Ph.D.) enthused,
While we know that the benefits of Vascepa are not limited to people with diabetes, we are very pleased by ADA’s recognition of the importance of the REDUCE-IT study and its unprecedented outcomes by including Vascepa in the ADA standards of care. The prevalence of cardiovascular disease in people with diabetes is staggering, and we are encouraged by the ADA’s focus on reducing cardiovascular risk. It should be noted that data are lacking with other omega-3 fatty acids, and results of the REDUCE-IT trial should not be extrapolated to other products.

Second Bullish Claim: American Heart Association Recommendation

In an article published on August 19, 2019, the American Heart Association (AHA) featured an advisory on the management of high TG (i.e. hypertriglyceridemia) using Omega-3 fatty acid. As follows, the AHA cited that obesity and diabetes raised the prevalence of hypertriglyceridemia. Among various Omega-3 fatty acids, only pure molecule improves overall cardiovascular health. According to the AHA,
In treatment of very high triglycerides with 4 g/day, EPA [eicosapentaenoic acid]+DHA [docosahexaenoic acid] agents reduce triglycerides by ≥30% with concurrent increases in LDL-C, whereas EPA-only [Vascepa] did not raise LDL-C in very high triglycerides.
Of note, LDL-C is the so-called bad cholesterol that forms atherosclerotic plaques, thus leading to coronary disease. Based on the aforesaid advisory, I strongly believe that Vascepa sales will climb more rapidly. Since the EPA/DHA combinations (i.e. other Omega-3 products like Lovaza) raises LDL-C, physicians will reduce their prescription. Due to its reach, the AHA catalyst will galvanize Vascepa sales as much as the ADA recommendation. And, shareholders can enjoy that low hanging fruit (i.e. strong sales increase) as soon as next quarter.

Third Bullish Claim: Supplemental New Drug Application

Asides from the ADA and AHA development, I believe that the best is yet to come with the upcoming supplemental new drug application ("sNDA") approval for Vascepa. If granted, the label expansion will propel Vascepa sales by leaps and bounds. Therefore, it'll enable Vascepa to reach the Promised Land of mega-blockbuster within the next several years. Based on the latest earnings report, Vascepa is nearly half-way to blockbuster status (i.e. >$400M in revenues projected for Fiscal 2019).
Figure 4: Vascepa sales projection without sNDA (Source: Amarin)
As Vascepa is on the runway toward approval, the biggest concern is the surprising delayed approval decision. Initially, Amarin announced investors that the FDA doesn't need an advisory meeting (ADCOM). Moreover, the Prescription Drugs User Fee Act (PDUFA) date is set for September 28, 2019. In giving the market an unpleasant surprise, the company recently disclosed that the agency will entertain an ADCOM on Nov 14 and the PDUFDA is now shifted to December. In my observation, the market despises negative surprise and thereby exacerbates its effects to an unrealistic proportion. The reality is that Vascepa encounters a setback of several months yet the market reacted as if Amarin is suffering from a devastating catastrophe.
Though there are always risks associated with regulatory forecasting, I strongly believe that Vascepa will clear this regulatory hurdle by yearend. After all, Vascepa has neither safety nor efficacy issue. Therefore, I ascribed the 70% (i.e. strongly favorable) chances of approval. Perhaps, the FDA and Amarin were overly optimistic that they got ahead of themselves. Since the ADA already endorsed Vascepa, I can imagine the motivation for the FDA and Amarin to rush ahead.

First Bearish Argument: Competition From Over The Counter Omega-3

Going deeper into the bear territory, let's analyze the claim that Vascepa will suffer from competition related to over-the-counter (OTC) Omega-3 supplements ("OOS"). On the surface level, this argument makes sense. Notwithstanding, there is no strong footing for this claim as you dig deeper into the analysis. For instance, supplements are not regulated by the FDA. Due to the lack of regulatory overseeing, OOS do not have the same quality, safety, and efficacy as Vascepa.
As a ramification, "subpar purity" is an important issue for supplements. For instance, nearly all OOS harbor DHA that, in and of itself, raises LDL-C. In lowering one bad lipid, OOS elevates another bad molecule which altogether negates their health benefits. As such, there is no true comparison between OOS and Vascepa. Accordingly, I view Vascepa as an Olympic wrestler whereas OOS resembles a "weekend warrior." There's a huge difference in purity and quality. After all, Vascepa is 100% pure EPA while OTC supplements are adulterated with DHA and fillers.
Figure 5: Omega-3 supplement (Source: BiPri)
Another ramification of regulatory laxity is that you can easily get a labeling company to launch your OOS in a month. As presented below, the regulatory restraint is easily unfastened with a simple disclaimer. Consequently, patients cannot demand quality medicine without adequate oversight. The supplement industry is the Wild West but the folks in Utah managed to push for policy in their favor.
Figure 6: OOS disclaimer (Source: FDA)
That aside, OOS do not undergo rigorous clinical trials as required for Vascepa. Consequently, there is no way to ascertain a supplement's clinical benefits and safety. Notably, regulatory laxity comes with a cost. Due to the rising health concerns, the FDA now requires supplement companies like General Nutrition Center (GNC) to report adverse events. Nonetheless, that's a far cry from a comparable regulatory standard of pharmaceutical drugs. Hence, competent doctors are highly unlikely to prescribe OOS over Vascepa because physicians practice evidence-based medicine. As such, this explicates the fact that amid the wide availability of OOS, Vascepa sales still ramp up drastically.

Second Bearish Argument: Mineral Oil

The second issue raised is that REDUCE-IT results are potentially invalidated due to the application of mineral oil for the placebo arm. In other words, it's argued that mineral oil somehow converts to TG and thereby reduces the absorption of statin. Consequently, this raises LDL-C, thus increasing cardiovascular risk. I'm not deterred by this argument.
After running my chemical analysis, I concluded that mineral oil, though not conducive to one's health, doesn't lead to an increase in triglyceride. For instance, there is no conclusive evidence proving that polyalkanes (i.e. the composition of mineral oil) raises TG (i.e. glycerol backbone plus three esterified fatty acids). In my view, it takes tremendous Gibbs free energy in an extreme PH environment to convert an Sp3 hybridized carbon of mineral oil to Sp2 of TG. Molecular analysis supports the notion that such a transition is unlikely in the buffered environment of the blood.
Figure 7: Chemical analysis of mineral oil versus triglyceride (Source: IBI)

Financials Assessment

Financials Assessment

Just as you would get an annual physical for your well-being, it's important to check up on the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll assess the 2Q2019 earnings report for the period that concluded on June 30. Accordingly, Amarin procured $100.4M in product revenues thus, representing a 91.2% increase from $52.5M for the same period a year prior.
Additionally, the research and development (R&D) registered at $7.1M and $18.1M for the corresponding quarters. REDUCE-IT completion accounted for the lower R&D. That aside, there was $1.8M ($0.01 per share) net loss compared to $34.2M ($0.12 per share) decline for the same comparison. On a per-share basis, the bottom line improved by 91.6% year over year. Regarding the balance sheet, there was $221.7M in cash and equivalents. Due to the recent $400 capital raise, the cash is now tallied over $621.7M. Against the $80.5M quarterly operating expense (OpEx) rate, there should be adequate capital to fund operations until 2Q2021 before needing to raise money.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the potential setback for Amarin is if the FDA will approve Vascepa sNDA. I believe there are 30% chances of regulatory failure. Since the sNDA is paramount to Vascepa's growth prospect, a negative decision can cause the stock to depreciate by 50% and vice versa.
The other concern is if Amarin can continue to reduce operational expenses to procure a net profit. The high "short interest" can also dampen Amarin's rally. Though not a significant concern, the FDA might give Amarin a difficult time with the mineral oil issue. Moreover, OOS can also reduce Vascepa's sales prospect.

Final Remarks

In all, I maintain my buy recommendation on Amarin with the five out of five stars rating. Even without an sNDA approval for Vascepa, Amarin is enjoying gargantuan revenues growth due to the ADA and AHA endorsement. Nevertheless, the chances are strongly in favor of the upcoming ADCOM on Nov 14 and the PDUFA in the subsequent month. As the ADCOM comprises of cardiologists and endocrinologists, the ADA and AHA support bodes well for the aforesaid meeting. And if the sNDA is approved, Vascepa will become the first prescription medicine of its kind to deliver cardiovascular risk reduction. Stellar sales growth will follow suit.
As usual, I'd like to remind you that the decision to buy, sell or hold is ultimately yours to make. In my view, it's prudent to build more stakes in Amarin to anticipate Vascepa approval and upcoming sales growth. Last but not least, an acquisition is in play because a replacement is needed for Lipitor.
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