Buying a stock when it's dipped in value can be a great way to secure a low price and strong return, assuming that it recovers. Amarin's (NASDAQ:AMRN) stock didn't just dip in March; it crashed more than 70%.
When news broke on March 30 that a district judge in Nevada invalidated patents that protected its Vascepa drug on the grounds of "obviousness", its share price fell off a steep cliff. Vascepa is a fish-oil derivative pill that helps patients with high triglyceride levels and can reduce their risk of heart attack and stroke. The drug is a significant piece of the company's business, and Amarin is appealing the judge's decision. The big question is whether the stock can recover from this and if it's too risky to buy today. Let's take a closer look to find out.
What if Amarin loses its appeal?
If Amarin is unsuccessful in defending its patent, it will face competition from other drug companies in the U.S. market. No company is ready to launch a generic competitor to the market just yet, but the possibility is a huge uncertainty for the stock and several companies have generic versions in their pipelines. While it'll still control the international market, that's minimal consolation for the company, which depends on strong sales in the U.S.
There's no denying the issue here -- Amarin's sales will take a big hit. In 2019, the company recorded product revenue of $427.4 million. That was up more than 87% from the prior year when sales were $228.4 million. It's an impressive level of growth and it primarily comes from Vascepa, and in particular, the U.S. market. Outside of the U.S., Vascepa's sales totaled just $0.7 million in 2019. Although that's up from $0.1 million in the prior year, that's a small fraction of the company's overall sales. The company's licensing revenue of $2.4 million during the year was also mainly from Vascepa licensing agreements.
The company provided an update in January that said its revenue guidance for the year would be within a range of $650 million and $700 million. Amarin stated this would be "mostly from sales of Vascepa in the United States."
The company needs diversification
If Amarin wins its appeal, then obviously all's well and everything will go back to normal for the stock. However, it's impossible to know how that will play out. And without strong sales from Vascepa, there may not be a good reason to invest in Amarin.
In 2019, the company reported a loss of $22.6 million. Although it was an improvement from 2018's loss of $116.4 million, the company's impressive sales growth still wasn't enough to get Amarin out of the red. And if revenue falters as a result of an increase in competition, profits may become even more elusive in the future. The good news for investors is that as of Dec. 31, 2019, Amarin had $644.6 million in cash and cash equivalents. And during the past year, the company burned through just $11.8 million to fund its operating and investing activities. It's in a strong position moving forward as it battles this adversity.
Amarin isn't in a dire situation, but it also needs something to fall back on if competition chips away at its Vascepa sales. This is where diversification is important, and unfortunately, Amarin doesn't have much of it, with the bulk of its sales coming from one drug and in one key market -- the U.S.
Investors should steer clear of Amarin
There's certainly hope that Amarin can turn things around if its patent appeal is successful. The stock will almost certainly soar in value if that does happen. However, that's going to depend on the court's decision, which is impossible to predict.
But the stock is still risky even if the company's patents remain intact, as it won't mean that Amarin's problems will disappear. There's no guarantee there won't be more challenges to the patent in the future. The company was also unprofitable in 2019 and generating negative cash flow from its operations despite achieving significant revenue growth. Prior to the crash in price, investors were paying 13 times its book value, and the multiple was over 90 at one point last year. It's a hefty price tag to pay for a stock that has all its eggs in one basket -- Vascepa.
The volatility surrounding this stock makes it a very risky investment. And given all the healthcare stocks investors can choose from, Amarin's just not one that's worth the risk, even if it wins its appeal.