What happened
Shares of Amarin (AMRN -0.53%) fell as much as 16% today after investors digested a bearish report from Wall Street.
Oppenheimer analyst Leland Gershell issued a note arguing that Amarin's Vascepa, widely expected to earn broad supplemental approval for reducing major adverse cardiovascular events (MACEs) in certain at-risk individuals, is going to fall short of sky-high expectations. While the arguments in the report are far from the popular opinion, they're important for investors to consider, especially given the company's $7 billion market cap.
As of 2:38 p.m. EST, the pharma stock had settled to a 12.8% loss.
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So what
The analyst report by Gershell makes a few intriguing arguments and predictions. First, he pegged his price target for Amarin shares at $7 apiece, which implies a market valuation of about $2.4 billion. The stock was recently near $24 per share and the current market valuation is just under $7 billion.
Second, even as the company drops in value, the report argues that the likelihood of Amarin being acquired, as some have suspected, will decrease as time goes on.
Third, while that scenario would increase the importance of Vascepa product revenue growth, Gershell argues that the widely expected supplemental approval won't provide the needed sales boost. The report assumes that Amarin's current valuation pencils in annual revenue of $2 billion no later than 2024, but argues that upcoming data readouts from competing late-stage drug candidates will chip away at Vascepa's market share.
The analyst report has spooked investors, and may rightfully argue for more caution until Vascepa proves it can live up to the hype. But it's important to consider a few things.
First, doctors and patients are likely to appreciate the simplicity of Vascepa, which can also help Amarin to reduce selling prices and still generate healthy margins should competition arise. An advisory committee recently voted 16-0 in favor of approving the supplemental label, which leaves little room for doubt concerning the enthusiasm for the drug from a broad coalition of stakeholders, including doctors and patient advocacy groups.
Second, Vascepa is on track to generate close to $400 million in revenue in 2019 -- and that's without any direct boost from the expected expanded approval.
Third, Amarin exited September with $673 million in cash. While operating expenses will surge as the company hits the ground running with an army of sales representatives, the business shouldn't struggle to generate operating profits in the near term.
Now what
Has Amarin earned its $7 billion market valuation? Absolutely not. But there are good reasons to remain optimistic about the long-term potential of Vascepa.
The expected expanded approval seems likely to grow product revenue on top of currently approved indications (already generating about $400 million in annual sales), which makes achieving $1 billion in total annual revenue seem like a relatively easy near-term target. That would value the company -- at its current lofty valuation -- at about 7 times sales, which is quite reasonable for a profitable pharma company.
That said, shares are likely to remain volatile as investors await regulatory approval in the final days of 2019, and then look to the first few quarters of sales data in 2020. Therein lies the value of adopting a long-term mindset.
