Investing in pharmaceutical stocks like Amarin (NASDAQ:AMRN) often is a high-reward, high-risk endeavor. Amarin stock itself has proven that over the years, with peaks and valleys going back some twenty years — including being as high as $281 in late November of 2001.
Of late, though, it has been much more reward. AMRN was one of the best stocks of 2018, rising over 600% in just over a month beginning in September. The catalyst was a hugely impressive result from the company’s Reduce-It study for its cardiovascular treatment, Vascepa.
That study has significantly lowered the risk here, and clearly showed a real market for Vascepa. Amarin now is a takeover candidate, with Pfizer (NYSE:PFE) among the rumored acquirers. But while the risks are lower, the key question at this point is how big the rewards will be. That being said, there’s some evidence to suggest they might not be quite what bulls hope.
Peak Sales for Vascepa
The recent rally in Amarin stock shares has come after a positive decision from an advisory panel to the U.S. Food and Drug Administration. By a 16-0 vote, the panel recommended that Vascepa’s label be expanded.
Currently, Vascepa only is approved for patients with a high level of triglycerides, a blood fat. The expanded label, assuming the FDA agrees with the panel, could dramatically expand the treatable population — and Vascepa sales. Analyst opinions differ, but population estimates range from five million to 15 million, against a current 600,000. Being that, peak sales for Amarin could clear $4 billion annually against roughly $410 million estimated this year.
That said, last month’s decision still leaves some uncertainty. The biggest question appears to be whether the label will be expanded to include so-called “primary prevention” candidates. That expansion would make Vascepa part of a regimen for most patients, and drive peak sales even higher. Members of the advisory panel appear split on that point, and the FDA may require additional studies before giving that approval.
Still, the advisory committee vote unquestionably is good news for Amarin stock. But, the question at the moment is how good.
Amarin Stock Has Been Here Before
After all, positive news still is priced in here. At Tuesday’s close of $23.23, AMRN has a market capitalization just over $8.3 billion.
If peak sales do reach $3 billion or higher, there’s likely still some upside to the stock. Most major pharmaceutical stocks trade at 4x revenue or higher, meaning an Amarin acquisition could add value — even given that average annual sales will be below peak levels. Still, there are legitimate valuation concerns here.
After all, Amarin stock shares have been here before; the recent rally above $20 is the fifth since last year’s parabolic move higher. Despite some slight oscillation in early 2019, the last three moves have eventually reversed, often as takeover hopes have dimmed. The average analyst price target does sit above $27, but Wall Street historically is quite optimistic toward smaller drug manufacturers.
Meanwhile, a buyout isn’t guaranteed. One key reason why is that cardiovascular drugs aren’t necessarily huge sources of revenue. The best-selling drug in the category, Eliquis, generated nearly $10 billion last year, split between Pfizer and Bristol-Myers Squibb (NYSE:BMY). But that drug aside, blockbusters in the category are relatively rare.
As a result, major drug manufacturers have focused much more on acquisitions in markets like oncology and CAR-T than on cardiovascular health. Given Vascepa’s potential, Amarin would be an attractive takeover target. However, it’s not the type of company for which the majors have shown they will break the proverbial bank.
The Competitive Risk
That’s particularly true given that Vascepa faces significant competitive risk. As bears long have argued, the product essentially is just pharmaceutical-grade fish oil. Patients, in theory, could get similar benefits from supplements; though that argument likely falters in practice. Smaller companies Acasti Pharma (NASDAQ:ACST) and Matinas BioPharma Holdings (NYSE:MTNB) are developing their own similar treatments. As Bloomberg noted, both stocks also rose on the panel’s decision regarding Vascepa’s labeling.
And Amarin is a one-drug company at this point — and perhaps for good. Indeed, the company last decade was trying to commercialize Miraxion, a treatment for Huntington’s disease. That product failed its Phase III trials, leading to the pivot to Vascepa. There’s really nothing else of note in the company’s pipeline at the moment.
So, Amarin stock shares basically come down to an argument over the profit potential of Vascepa; And that’s a legitimate argument to have. There’s a huge distinction between primary and secondary prevention. There’s also an enormous difference between $1.5 billion and $4 billion in peak sales — and a takeover of Amarin is far from guaranteed.
Again, there’s real good news here — and the FDA panel only strengthens the case. But a market capitalization just over $8 billion incorporates at least some of that news. Put another way, it does seem like the easy money has been made.
As of this writing, Vince Martin has no positions in any securities mentioned.
