What Might Amarin Be Worth to GlaxoSmithKline or Others?

Amarin (NASDAQ: AMRN  ) shares have been beaten to a pulp, down more than 80% since getting Food and Drug Administration approval for its fish oil drug Vascepa back in July 2012. An FDA advisory panel recently gave the drug a thumbs-down recommendation for an approval that would further expand its marketing ability. Meanwhile, Amarin continues to rapidly grow sales. The low market cap may be an opportunity for GlaxoSmithKline (NYSE: GSK  )  or similar company to acquire Amarin on the cheap.

GlaxoSmithKline makes an arguably inferior fish-oil drug called Lovaza. A generic version of Lovaza will soon be available and will be sold by Teva Pharmaceutical Industries (NYSE: TEVA  ) . Teva will flood the market with this cheap generic. As always with generics, it will create a huge decline in the sales of Lovaza. This is a drug that has fetched annual sales of around $1 billion. Teva won't spend much on marketing, and GlaxoSmithKline will likely cut much of its marketing budget for Lovaza. Marketing-wise, this leaves Amarin's Vascepa wide open.

Amarin by itself is not doing well. It's burning large amounts of cash of more than $50 million last quarter and by its own admission expects to burn $80 million next year. On the face of it, Amarin's future appears bleak.

Why Vascepa might be worth more to Glaxo
The average analyst estimate for 2014 is $100 million in sales. This is around 400% higher than the annualized growth of the second quarter. GlaxoSmithKline has a much longer reaching marketing arm and experience, having successfully brought Lovaza to $1 billion in sales annually. Between GlaxoSmithKline's might and the momentum the drug is already experiencing, it's not inconceivable that the $100 million estimate will eventually grow to a conservative $200 million.

Amarin last quarter had 48% gross profit margins. In its quarterly conference call, VP of Finance Fred Ahlholm explained that this was number was unusually low. He explained that due to new feedstock sourcing and increased production, investors should look for gross profit margins to reach "the high 70s to low 80s." Let's use the midpoint of 80%. This means $200 million in sales would have $160 million in gross profit.

A quick peek at Amarin's financials reveals that selling, general, and administrative, or SG&A, expenses are obscenely high compared to its small sales. If a company like GlaxoSmithKline were to acquire it, much of those expenses can be entirely eliminated. For example, much of the millions of dollars the top executives make can be clipped. GlaxoSmithKline doesn't need Amarin's CFO; it has its own CFO, etc.

GlaxoSmithKline in the last four quarters averaged SG&A expenses running at around a third of its revenues. Subtracting 33% for SG&A from an 80% profit margin leaves an operating profit margin target of 47% for GlaxoSmithKline. 47% operating profit on $200 million is $94 million.

GlaxoSmithKline trades with a P/E ratio of around 15. Multiplying 15 by $94 million in profit equals $1.41 billion. Amarin has a market cap of under $400 million currently. The difference between market value of $400 million and the $1.41 million Vascepa could be worth to GlaxoSmithKline is the potential range a buyout could fetch. It leaves plenty of room in the middle (250%) for GlaxoSmithKline to negotiate a bargain for itself and a premium for Amarin shareholders compared to the current price.

Follow Amarin's sales and margins to see if they reveal metrics that make it an attractive acquisition. If Amarin is able to achieve its sales and margin goals, it could fetch a hefty buyout premium.

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  • Report this Comment On October 26, 2013, at 4:03 PM, vic929 wrote:

    Nickey,

    Do your homework before writing an article. Calling Vascepa fish oil is like calling a diamond coal. Vascepa is made up entirely of EPA which is found in fish oil, and is not the fish oil itself. Your article is misleading due to that fact.

  • Report this Comment On October 26, 2013, at 5:45 PM, frankposting wrote:

    Nice point, vic.

    If Amarin is not on the BK line, i.e. without BK burden, why they sell themselves now as a bargain. Just as FDA wanted: waiting for REDUCE-IT outcomes. If success, the company may worth ten times higher, and, potentially, billions HTG patients over the world will take Vascepa (a placebo-like safe treatment) in preventing their hearts. If REDUCE-IT fails, then a bargain makes sense.

  • Report this Comment On October 26, 2013, at 5:55 PM, frankposting wrote:

    BTW, as I estimated an interim review on REDUCE-IT may happen in 2015, and if death elevates (HTG patients w/o treatment could die by CHD correlated with HTG progressing), an early termination of REDUCE-IT is possible (and a review on available data will be conducted).

  • Report this Comment On October 26, 2013, at 10:19 PM, CappinQ wrote:

    Excuse me while I rant............

    What makes up the majority of their cash burn for this year and next year and the year after that?

    REDUCE-IT

    The study that was once thought to be an acceptable risk/expense by Amarin due to the Special Protocol Assessment Agreement:

    "Once REDUCE-IT is substantially underway, the Company believes that it will have met all of the requirements to request approval of AMR101 for treating the mixed dyslipidemia patient population studied in the ANCHOR trial. AMR101 is positioned to be the first drug in its class approved for treatment of this indication."

    The REDUCE-IT study is being conducted under Amarin's previously announced Special Protocol Assessment (SPA) agreement with the U.S. Food and Drug Administration (FDA). An SPA agreement is an agreement with the FDA that the Phase 3 trial protocol design, clinical endpoints, and planned statistical analyses are acceptable to support regulatory approval. An SPA agreement is generally considered binding upon the FDA unless public health concerns unrecognized at the time of protocol assessment are evident.

    Now the FDA appears to WANT to claim that some unrecognized health concerns are now known (that were not known at the time of the agreement terms). What exactly do they think has changed for Amarin's Vascepa?

    At the Advisory Meeting, the FDA stated (on more than one occasion) that the results of recent studies demonstrating no CV benefits with use of omega 3s is enough to back out of their Special Protocol Assessment agreement with Amarin.

    Seriously?

    Ok, what studies?

    Oh well, there were two studies that looked at various mixtures of dha/epa given at very low doses in patient populations that do not overlap with Vascepa's ANCHOR indication. Yes, you read correctly, the ingredient, the dose and the patient population had nothing to do with Vascepa's ingredient, dose and patient population. Nothing close to Vascepa ingredients, dose and indication yet the FDA thinks this is new AND RELEVANT to Vascepa's ANCHOR indication???? Come on man, seriously?

    If there was any overlap at all, one would need to dig and dig and filter out all of the irrelevant data (which is most of it) to find any data that MIGHT have some relevance to VASCEPA's effect on CV events. But nobody did that. They just looked at the broad overview of the results showing - insignificant doses of dha/epa substances in patients that have triglycerides far lower than the ANCHOR indication generally did not show any CV benefits. Oh boy, that should really change things for Amarin.

    So what about that third study? Didn't that deal with anything close to Vascepa and measured effect on CV events?

    The third study referenced by the FDA was a "meta" analysis of other old studies. Oh great, thanks for that OVERVIEW of studies that don't really have much overlap with Vascepa (ingredient/dose/patient population). All of the data has been known for years and years and years. Is there any relevance to Vascepa?

    Any relevant data from those studies included in the meta analysis would need to be found by digging through all of the useless and irrelevant data offered in order to find specific patient populations, indications and EPA dosages that might actually have SOMETHING to do with Vascepa. Instead, we get ingredients, dosages and patient populations that have nothing to do with Vascepa polluting any possible relevant data.

    Should the FDA maybe have checked out the Japanese study called JELIS which is the closest study relating to VASCEPA? Maybe you consider this study as a major source instead of studies that looked at various other dha/epa combo substances given to patients unrelated to Vascepa's patient population and given in doses considered irrelevant levels?

    Why not give JELIS FAR more weight for being light years closer to being relevant to Vascepa?

    JELIS showed reduced CV events in patient populations similar to Vascepa's. ANCHOR studied almost the same dose (2gm) and also studied 4gm dose. 4gm dose performed better than 2gm. JELIS only studied (just under) 2gm dose. It also studied patients who had a far higher intake of fish. So, I tend to think the higher dose given to a more (diet) needy patient population is going to demonstrate even better resuts than JELIS. And JELIS results are great!

    So FDA.......FU and approve Vascepa - ANCHOR and stop any black ops and realize that when you break from your normal duties, you mess with companies and products and patients and investors. Just do what you are supposed to do, that is all people want. Open, honest, transparent and consistent. Can you do that?

  • Report this Comment On October 26, 2013, at 10:40 PM, nickeyfriedman wrote:

    Vascepa is a fish oil drug. While I agree it would be wrong to say it's just fish oil, it is correct to say it's a fish oil drug. It is derived from fish oil.

    Vascepa doesn't use an entire fish with its fish oil pills, and only the EPA, but chicken McNuggets doesn't stuff an entire chicken into their nuggets either. It's okay to describe an organic substance by what it is derived from.

  • Report this Comment On October 27, 2013, at 8:29 PM, CappinQ wrote:

    nickeyfriedman

    Most object to "fish oil" as a way to describe Vascepa because of the association/confusion with the common, ordinary, unregulated "fish oil" supplements available to consumers.

    Because the words "fish oil" are so strongly associated with these unregulated products (which suffer from lack of standards in content, quality and freshness and receive no oversight or required inspections), products that have standards much higher hate being lumped in with those unregulated typical health food fish oils.

    Highly refined, regulated and inspected products that are FDA approved prefer to be distinguished from all the mess of "fish oil" products out there, that is all. They are held to much higher (and specific) standards which demand a distinction from other miscellaneous products that are made up of/from "fish oil" but have not been inspected, tested or regulated in any sense. Anybody can put out a "fish oil" capsule and call it "fish oil" with dha/epa.

    In addition to the association issue,

    Vascepa is technically no longer an oil (as EPA and DHA are).

    Ethyl ester of eicosapentaenoic acid is technically no longer a "fat/oil" so it seems if you wanted to get super geeky, you could insist that Vascepa is not an "oil" at all anymore, but an ethyl ester of eicosapentaenoic acid.

    This does not alter your intent to describe Vascepa as being derived from "fish oil."

    But you certainly can see how associating Vascepa with "Fish Oil" can cause unnecessary confusion and affect attitudes and opinions of those who don't know any more than "fish oil" comes from fish.

    So do everyone a favor and please help distinguish Vascepa from all the unregulated, unrefined, untested, unproven pseudo health supplement products out there that call themselves "fish oil."

    Thanks!

  • Report this Comment On October 28, 2013, at 9:58 AM, nickeyfriedman wrote:

    I understand, and that's why it would be improper to call Vascepa just "fish oil." However, calling it a fish oil drug distinguishes it from over-the-counter fish oil supplements. None of the OTC supplements can call themselves a drug.

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