On Friday, Dec. 13, 2019, the FDA approved an expanded cardiovascular claim for Vascepa, a drug produced by Amarin (NASDAQ:AMRN). Prior to this patients with very high triglyceride levels were only ones approved to use Vascepa.
Now those with lower levels and other signs of heart or diabetes issues can use it. This vastly expands the population to whom Amarin can sell Vascepa. Those with greater than 150 milligrams per deciliter can now use the drug. Amarin estimates that “millions” (with no specific number associated with that noun) can benefit from its drug.
A previous advisory committee had unanimously recommended that the drug be approved. There was a high likelihood that the FDA would approve Vascepa for expanded cardiovascular treatment.
Amarin Stock Includes a Lot of Good News
Analysts have already argued that Amarin’s Vascepa, its only drug, will bring in greater than $1 billion annually in sales, with peak sales above that. One analyst, Nathan Weinstein, at Aegis believes the drug could hit $2 billion in sales by 2025. His peak price target was $23 per share.
The problem is Amarin stock is already very close to that target price, at $21.36 per share. In other words, a lot of the good news is already implied in the valuation of AMRN stock. Another analyst, at Stifel, has put a hold recommendation on Amarin stock. His price target is $28 per share.
Amarin announced that it expects its 2020 U.S. sales to be between $650 million to $700 million from sales of Vascepa. Seeking Alpha’s database of eight analysts have an average estimate of $692 million in revenue for 2020.
That puts Amarin stock on a forward price-to-sales ratio of 11.9 times. That is an extremely high valuation metric. It would normally be the number for a conservative stock’s price-to-earnings ratio.
It implies that a bidder for all of AMRN stock would have to wait almost 12 years before their investment would equal the sales achieved, not earnings. Not too many companies would be willing to do that.
Clearly the market expects that sales will climb significantly over the next 12 years. There are tw0 problems with that theory: competition and patent issues.
Problems With the Valuation
The FDA is also looking at similar drug studies from: AstraZeneca (NYSE:AZN), whose drug is called Epanova; Acasti Pharma (NASDAQ:ACST), with CaPre; and, Matinas BioPharma (NYSEAMERICAN:MTNB), with its MAT900i drug.
A recent analyst article in Seeking Alpha assessed these three competitors and the state of play of their drug applications. The analysts considered these companies competitive threats to Amarin and its Vascepa drug.
In addition, Amarin is facing patent lawsuits from several companies. These include Dr. Reddy’s Laboratories (NYSE:RDY), an Indian pharmaceutical company, and Hikma Pharmaceuticals (OTCMKTS:HKMPY), a generic pharma company. However, bullish analysts point out that Teva (NYSE:TEVA) has already settled with Amarin.
Most of these suits, including one that begins in January, concern the validity of the core of Amarin’s patent family. It is called “Methods for treating hypertriglyceridemia.” Another patent for “Stable pharmaceutical composition and methods of using same” family is also in litigation.
If Amarin loses these cases, it could lose all patent protection. Other drug companies could use their ideas.
As it stands the patents give Amarin protection until 2029, or 10 years. This is Amarin’s only product, so it has to make hay during that period with Vascepa.
What Should Investors Do?
AMRN is a high-risk, high-return stock. As always, I recommend only buying on dips and during bad news with these kinds of stocks. They are essentially a mild form of gambling, although some risks can be minimalized with probability analysis.
Given that a prior panel recommended for Vascepa, the AMRN stock price already discounted last week’s FDA good news. Analysts seem to agree. Their target values are not significantly higher than the present price.
Investors should look for an opportune time to jump in. Analysts will likely scrutinize the patent protection litigation closely in January. Look for an opportunity then to consider investing in Amarin stock.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
