The past few weeks appear to have been nothing but positive for Amarin (NASDAQ:AMRN). Competition has faltered, Amarin passed a key regulatory milestone and the company’s initial outlook for 2020 looks strong. But in response to that good news, investors have sold off Amarin stock.
Indeed, AMRN stock has declined 18% from intra-day highs on Dec. 10. And that seems like a problem, at least looking to the rest of 2020. Despite the good news, investors have mostly shrugged. That suggests that Amarin stock might have run too far at those December highs — and, without a catalyst, it may have more downside ahead.
Again, the last few weeks seem particularly bullish for AMRN shares. On Dec. 13, the U.S. Food & Drug Administration approved a cardiovascular benefit claim for the company’s Vascepa, derived from fish oil.
The approval was expected, but was good news regardless. Amarin also guided for 2020 revenue between $650 million and $700 million, up from an expected range between $410 million and $425 million in 2019. Amarin stock closed up 4.9% on the news — and promptly fell 14% over the next three sessions.
Shares held up from there, getting a small boost after receiving a similar approval from Canadian regulators on Dec. 31. On Jan. 7, Amarin updated its 2019 outlook, pointing investors at or near the high end of the previous range. The company also reiterated its belief that annual sales eventually would reach “multiple billions of dollars.” Shares declined 5.4% regardless.
To top if off, Amarin saw two competitors fall by the wayside this week. Both AstraZeneca (NYSE:AZN) and Acasti Pharma (NASDAQ:ACST) announced setbacks in trials of competing products. AMRN stock at one point Monday was up over 10%. By the end of the session, the gains had shrunk to barely 4%, about half of which were given back in trading Tuesday.
As a result, Amarin stock now sits just above a two-month low. In fact, it’s given back nearly all of the rally that began in November after a positive initial vote from the FDA. No doubt more than a few investors are asking why.
Is Amarin Stock Overvalued?
One possible, if not likely, reason is that Amarin stock simply had run too far to begin with. That was the case I made last month, just ahead of the FDA’s approval.
After all, Vascepa is an exceedingly attractive product. But it’s also Amarin’s only product. And even after the recent declines, Amarin still has a market capitalization almost $7 billion, with an enterprise value around $6.4 billion.
If peak sales do ramp to $2 billion or more, Amarin probably can generate enough profit from Vascepa alone to support that valuation. The company expects to be modestly cash-flow negative in 2020 as it ramps inventory purchases and doubles its sales force. From there, however, profits and cash flow should grow nicely.
That said, $2 billion-plus in revenue isn’t guaranteed, even with competition falling away. And generic versions will be available at some point, even if the patents covering the currently approved population don’t expire until “2033 or later,” according to the most recent 10-K filing. With substantial earnings still several years out, it’s possible to both model impressive success in terms of Vascepa sales while also seeing present fair value around the current $19 share price.
That appears to be the argument the market is making right now. And it’s akin to the argument I made in December. As I wrote then, FDA approval lowered the risk in AMRN stock. But there’s still a real question as to how much reward remains.
The Catalyst Problem
In the meantime, Amarin stock appears to have a potential catalyst problem. There’s simply nothing left that can materially change the story in the near term.
Strong initial sales certainly can help. But with 2019 guidance updated, no real news is likely to arrive before first-quarter earnings in May. From a profit standpoint, AMRN looks like a 2021 story at the earliest.
The biggest potential upside would come in a sale. AstraZeneca has been rumored as a suitor in the past. The likes of Merck (NYSE:MRK) and Pfizer (NYSE:PFE) could make sense as well. But will those giants pay in the range of $10 billion for a single product, given the majors are focusing on faster-growing categories like oncology and CAR-T? And will they do so before Vascepa has a chance to prove itself with the newly enlarged sales force?
Amarin stock has been a subject of fierce debate since it exploded higher in September 2018 on the back of positive study results. That debate hasn’t been settled — and basically has been a stalemate. In fact, shares are down modestly over the past 15 months. I expect that debate will continue to rage — and can’t help but wonder what bulls have left in their arsenal.
As of this writing, Vince Martin has no positions in any securities mentioned.