Amarin (AMRN 1.64%) 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 (GSK -0.56%) 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 (TEVA 0.03%). 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.
