After the market closed on Friday, the FDA announced that it had approved Amarin’s (NASDAQ:ARMN) fish oil drug, Vascepa, for new indications. The AMRN stock price rose on the news initially, but has since tumbled. In all likelihood, many short sellers, using their typical “short on downward momentum” approach, have jumped into Amarin stock.
I believe that the decline of Amarin stock is completely unjustified and advise longer-term investors to buy AMRN on its current weakness.
The FDA approved Vascepa for the treatment of patients with high triglyceride (blood sugar) levels who are taking statins (cholesterol-lowering drugs) and have heart disease. The drugs watchdog also approved the treatement for patients who have diabetes and two other risk factors for heart disease.
Previously, the agency had only approved Vascepa for the treatment of patients with triglyceride levels of more than 500 mg per deciliters of blood. On Friday, the agency agreed to allow the company to market Vascepa for the treatment of patients who have more than 150 mg deciliters of triglycerides in their blood and meet the criteria described above. The Cleveland Clinic notes that levels higher than 200 mg are associated with an increase in the risk of heart attack, stroke and death.
After the FDA’s approval was announced on Friday, AMRN stock price jumped about 10% in after-hours trading, raising AMRN stock price to around $26.50.
Since then, Amarin stock has plummeted more than 25%. AMRN stock price is currently trading around $20.80.
Bearish analysts and pundits have made several assertions that have contributed to the plunge of AMRN stock price. Specifically, they have said that Vascepa will not be prescribed to that many patients, that the company faces legal threats, and that the valuation of Amarin stock currently reflects its opportunity. I’ll attempt to refute each of these assertions in order.
Amarin Won’t Be Prescribed to That Many Patients
According to MarketWatch, Oppenheimer analyst Leland Gershell estimates between 5 million and 8 million patients in the U.S. “can now be prescribed Vascepa.”
But in 2009, the Centers of Disease Control found that “one in five Americans has high levels of blood fats called triglycerides,” Reuters reported. Unfortunately, our obesity crisis has not improved appreciably over the last decade.
And in 2017, there were 250 million Americans over the age of 18. Let’s say 50% of those, or 125 million, get tested for heart issues or diabetes. According to the CDC study, 20% of them, or 25 million people, would have high triglyceride levels. If half of those people have heart disease or diabetes (not an unreasonable assumption, since high triglycerides are a key risk factor for both conditions), Vascepa could be prescribed to 12.5 million people.
I am assuming that nearly all people with diabetes and high triglycerides have at least two other risk factors for heart disease. I don’t think that’s a big leap, since unhealthy lifestyles are the key factors behind most cases of diabetes and most cases of heart disease.
Also importantly, Oppenheimer’s Gershell (and potentially other analysts) appear to have forgotten about the issue of “off-label” prescribing. In the U.S., doctors are allowed to prescribe FDA-approved medicine for the treatment of conditions not specified by the FDA. (Companies are, however, prohibited from marketing drugs as effective treatments for conditions that have not been approved by the FDA. But it appears that Amarin’s sales team can legally tell doctors that Vascepa reduces the risk of cardiovascular disease.)
If a doctor has patients who don’t like or can’t tolerate the side effects of statins, which are typically used to treat high cholesterol and high triglycerides, they can prescribe Vascepa to any of those patients instead. Additionally, many patients who don’t like the idea of putting chemicals into their bodies might find a fish oil derivative much more acceptable than statins. I think many millions of patients will be given so-called “off label” prescriptions of Vascepa. I predict close to 20 million prescriptions for the drug will be written annually in the U.S. That’s more than double the upper end of Gershell’s estimate range.
Litigation and Valuation
Some of those who are bearish on Amarin stock have raised the issue of lawsuits that have been filed by generic drug makers seeking to market versions of Vascepa. But what some investors (and short sellers) may not have known is that Teva (NYSE:TEVA), the largest generic drug maker in the world with a pretty big market cap of $11 billion, settled its lawsuit against Amarin in 2018. Under the deal, Teva will not be able to begin selling a generic version of Vascepa until August 2029. It’s hard to see how smaller generic drug makers are going to get a better deal from Amarin.
In a related development, Stifel analyst Derek Archila, who likely helped start the short-trading deluge by downgrading Amarin stock to “hold” from “buy,” cited Vascepa’s “relatively short” exclusivity period as a reason for his downgrade, according to The Fly. (Interestingly, Archila raised his price target on Amarin stock to $28, way above the current AMRN stock price.)
But the nine-year exclusivity period is plenty of time for AMRN to use its profits from Vascepa to develop new drugs or acquire new, promising companies. Additionally, most investors don’t worry about what’s going to happen nine years from now. Finally, many potential acquirers would still pay well above the current value of AMRN for nine years of billions of dollars of annual revenue from Vascepa.
Speaking of annual revenue, I will try to estimate the fair valuation of Amarin stock.
Roth Capital is estimating peak annual U.S. sales for the drug of $3.2 billion. Let’s conservatively say that Vascepa averages annual sales of $2.5 billion, including its revenue from overseas markets. The mid-sized (not tiny, not huge) pharma companies, like Regenron (NASDAQ:REGN), Vertex (NASDAQ:VRTX), Biogen (NASDAQ:BIIB) and Incyte (NASDAQ:INCY) trade at an average price-sales ratio of around 6 or 7.
Let’s conservatively give Amarin stock a P/S ratio of 5 because of its reliance (for now) on a single product whose U.S. exclusivity ends in nine years. Multiplying 5 by our earlier annual sales figure of $2.5 billion, we get a valuation of $12.5 billion. The current market cap of Amarin stock is just over $7 billion. Of course, in any takeover, AMRN would probably command a much higher P/S ratio.
Bottom Line on Amarin Stock
Some on the Street seem to be greatly underestimating Vascepa’s potential and meaningfully exaggerating its legal threats. As a result, short sellers have targeted Amarin stock and Amarin stock price is quite undervalued, making the shares quite attractive for long-term investors.
As of this writing, Larry Ramer owned shares of Amarin stock.