The FDA recently gave Amarin (NASDAQ:AMRN) stock owners great news. The company’s primary drug, Vascepa, used to have FDA approval for use only in adults with extremely elevated triglyceride levels.
Now the FDA has granted the company permission to market the drug to a much larger group of adults with high triglyceride levels with the aim of reducing harm from heart disease. This may have been a bit of a surprise; clinical data had appeared mixed and some analysts weren’t sure the FDA would give it the green light.
The AMRN stock price spiked to $26 on the news, hitting its highest stock price since 2007. However, Amarin stock quickly fell back below the long-running technical resistance at $24 and further slumped to $21 in recent days. Why have people been so quick to dump Amarin on the seemingly positive news?
Growing Revenues but Profits Haven’t Picked Up
Interestingly, since 2014, Amarin has run an operating loss of between $45 million and $110 million each and every year. Over that same span, Amarin managed to grow revenues from $54 million to $364 million. Despite the seven-fold increase in revenues, it made essentially no impact to the bottom line.
What went wrong? The company’s sales, general, and administrative costs quadrupled over the same span, rising from less than $80 million in 2014 to more than $300 million now. It’s not hard to see that if your revenues are $364 million, spending more than $300 million on overhead is not going to leave you with a very economical business. Once you pay other costs, such as research and development and interest expenses, you end up running more red ink.
In theory, with the new FDA marketing approval, Amarin will be able to ramp up Vascepa to a blockbuster drug and finally start bringing in serious profits. But the market seems unconvinced. And that’s with good reason. The company is already pulling more than $350 million a year in revenues and still loses money. It’s not exactly in start-up mode anymore.
Amarin Stock Challenges
Our Chris Markoch recently argued that Amarin might need a buyout. As he notes, Amarin has had challenges as it has grown, and the recent FDA decision may exacerbate these. From manufacturing to marketing to doctors and on through protecting the company’s intellectual property, Amarin faces some real obstacles.
The intellectual property argument is an interesting one in particular. For one, Amarin is selling what is effectively a pharmaceutical grade version of fish oil, which has been available over the counter for many years. Amarin needs to figure out how to keep out generics and rivals that would try to commercialize slightly different products. At the same time, it needs to convince doctors and patients to pay up for Vascepa rather than buying the widely available OTC products.
What a Buyout Looks Like
Analysts have flamed the buyout rumors in recent weeks. FiercePharma, for example, suggested that Amarin could sell itself for as much as $20 billion, which would be a nearly 150% premium from its recent stock price. Pfizer (NYSE:PFE) and Amgen (NASDAQ:AMGN) may be potential suitors.
Some folks have expressed skepticism that a major pharma company would pay that sort of money for a one-drug company whose intellectual property isn’t necessarily rock solid. It’d be one thing to take a large write-off on a pioneering cancer drug that didn’t pan out. Losing billions on a fish oil product that didn’t deliver the goods would be significantly harder to explain to shareholders.
Amarin’s Bottom Line
I personally tend to avoid these sorts of stocks. A large part of the potential bullish case here is that someone acquires Amarin outright. And more power to shareholders if it happens. But the market capitalization is already $8 billion up here, the potential reward is already well-priced into the stock.
And it’s risky to pin your bull thesis on the possibility of someone acquiring your company. Generally, bad things tend to happen if a company can’t make it as an independent entity. And so far, despite massive revenue growth in recent years, Amarin has shown little ability to ramp up its bottom-line results.
Amarin has an interesting product, and I think bears betting against the company are taking a huge risk. But until the company can turn more of its revenues into bottom line results, it’s hard to get fully onboard with Amarin stock either.
At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.