Can This Drive Growth for Amarin Corporation plc?

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Small-cap biopharmaceutical Amarin (NASDAQ: AMRN  ) has made it clear that the company is not giving up on Vascepa without a fight, several of them actually. In addition to challenging the FDA's decisions to rescind a Special Protocol Assessment (SPA) on the company's ANCHOR study and to refuse NCE status for the key ingredient in Vascepa, the company is now trying to augment its sales effort. A co-promotion agreement with Kowa Pharmaceuticals America will most likely cap the company's gross margin for the foreseeable future, but it adds nearly twice as many reps as Amarin has pushing the drug.

Hiring a sales force on commission
Amarin's deal with Kowa essentially adds 250 new reps in the U.S. to augment Amarin's 130-rep effort. Pharmaceutical reps are commonly paid through a "base plus" mechanism where a relatively modest base salary is supplemented with commissions or bonuses based on prescription levels, and this co-promotion agreement largely achieves the same result, though with Amarin shouldering more of the risk.

Kowa America's reps already call on many of the doctors Amarin wishes to target with Vascepa, with Kowa marketing its me-too statin Livalo. These reps will now promote, detail, and sample Vascepa as well, with Amarin recording any and all revenues and compensating Kowa with a percentage of the company's gross margin. Amarin will pay a "high single digit" percentage of gross margin in 2014, with that percentage rising into the "low twenty percent levels" in 2018.

A reasonable move at a reasonable cost
I believe this is a reasonable-to-good deal for Amarin. The company has recently returned to a level of around 3,000 new prescriptions per week, but as the $10 million in fourth quarter revenue showed, the company is not selling nearly enough Vascepa to drive meaningful earnings or continue funding its REDUCE-IT clinical trial without further capital.

This deal will basically cap the company's gross margin over the next four years. Looking at my model (and sell-side models), Amarin was likely to generate a gross margin in the mid-60%'s before this deal, with sales growth and expense management leading to a long-term margin in the 70%'s. Given the split to Kowa, Amarin will now likely be looking at gross margins capped in the 50%'s.

Playing around with the numbers, it does not seem as though Kowa has to add all that much to pay for this deal. Assuming that Amarin was going to generate a mid-60%'s gross margin in 2014, Kowa needs to add around 8% to 10% to Vascepa revenue this year, growing to around 25% to 35% in 2018 for Amarin to break even on the deal. Given that the Kowa co-promote takes the number of reps marketing the drug from 130 to 380 (Amarin's 130 today plus Kowa's 250), adding only one-third to revenue would strike me as a particularly disappointing outcome.

I don't expect that this deal is going to result in a one-for-one improvement in Vascepa sales. I do not know how Kowa will be incentivizing its own reps to market Vascepa (the company really isn't taking on all that much risk or incremental expense in this deal), but co-promotion arrangements are rarely as important to the new partner as they are to the owner of the drug. Even so the Kowa reps could be one-third as effective and still make this a value-additive deal for Amarin.

Too little, too late?
The real worry is that Amarin has taken too much time hoping that they could secure a major marketing partner or acquirer. Since Vascepa has come to the market, significant concerns have been raised regarding the relevance of lower cholesterol numbers and whether omega3 fatty acids and chemical cousins like Vascepa's ethyl eicosapentaenoic acid actually lead to meaningful reductions in adverse events like heart attacks or death from heart disease.

These concerns seem to be what's behind the FDA's decision to rescind the company's SPA for the ANCHOR study, a study designed to lead to approval of Vascepa for people with cholesterol levels between 200mg/dL and 500mg/dL. Vascepa is currently approved for people with cholesterol of 500mg/dL or higher, a market about one-ninth the size of the potential market represented by the ANCHOR study. The FDA's advisory committee recommended 9-2 against approval on the basis of the ANCHOR study, but the company is continuing its REDUCE-IT outcomes study and a positive result could lead to a more accommodating FDA position.

The company is fighting the FDA on this, but the history of winning appeals or legal challenges against the FDA does not favor Amarin. It's also worth noting that there is serious potential oncoming competition from the new PCSK9 class of inhibitors, including Sanofi  (NYSE: SNY  ) / Regeneron's  (NASDAQ: REGN  )  alirocumab, Amgen's  (NASDAQ: AMGN  )  evolocumab, and Pfizer's  (NYSE: PFE  )  bococizumab. These drugs have shown cholesterol reductions of up to 70% in some studies, and they are widely expected to be the next blockbuster category. These drugs are likely to be priced quite a bit higher than Vascepa and they require injections, but Sanofi/Regeneron, Amgen, and Pfizer are all running large outcomes studies that may establish a real reduction in negative outcomes from using these drugs.

There are also potential patent issues with Vascepa. As the company did not receive an NCE determination from the FDA (the company is fighting this too), it is conceivable that generic competition could hit the market before the end of this decade.

The bottom line
If Amarin is going to work as a company and a stock, it very much needs to accelerate adoption of Vascepa and get revenue coming into the company. The co-promotion deal with Kowa is a credible step in that direction and one that I believe allows the company to expand its effective sales force more quickly and more cost-effectively than it could have likely managed on its own. I am not particularly bullish on Amarin shares, even with the potential for successful appeals against the FDA and/or a company trying to take advantage of Amarin's tax-saving legal domicile in Ireland, but this move at least lends further credence to the idea that management is not going to go out without a fight.

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Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

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