With more than $623 million in cash and investments, over $400 million in annual revenue (growing at double- to triple-digit percentages every year), and a $2.68 billion market cap, biotech company Amarin (AMRN -1.35%) looks to be in a great position. You may be wondering whether shares might be a steal right now.
As it turns out, if something seems too good to be true, it usually is: All U.S. patents covering Amarin's one and only commercialized product, Vascepa, were invalidated by a Nevada judge in March. When a branded drug loses patent protection and copycat drugs enter the market, its price can decline by more than 80% to 90% within a few years because of fierce competition.
Is Amarin about to endure a devastating business mishap? Let's find out.
The battle to save Vascepa
The intellectual property in dispute is Vascepa, a fish-oil derivative shown by clinical studies to produce a 25% relative risk reduction in patients with cardiovascular illness and a 33% benefit in lowering triglyceride levels. The drug was approved in 2012.
Vascepa's patents were originally scheduled to expire in the U.S. in 2030. However, generic-drug companies Hikma Pharmaceuticals (HIK -0.29%) and Dr Reddy's Laboratories (RDY 0.28%) challenged the drug's patents as being obvious and therefore invalid, and they prevailed in litigation. In May, though, Amarin won a preliminary injunction allowing it to continue promoting Vascepa as the litigation continues. However, it's important to note that under the Hatch-Waxman Act, Amarin can still file an injunction to block competition from generic manufacturers for up to 30 months.
Furthermore, another generic company, Apotex, announced in May that it was submitting an Abbreviated New Drug Application for a generic version of Vascepa, albeit without the indication for cardiovascular risk reduction. For Amarin, there looks to be no clear path to victory.
Why the company is in an uphill battle
In the lawsuit, Amarin relied on this key defense claim: In 2008, when it first filed its patent, a skilled worker in the fish-oil sector would not have expected the compound in Vascepa (which is extracted from fish oil) not to increase "bad" cholesterol in patients with high levels of triglyceride.
If this defense sounds convoluted and ambiguous ... it really is. An independent law firm that studies this issue found there was substantial evidence on both sides of the argument. This makes the path forward much less clear for Amarin's appeal, which is set to be decided by a panel of judges this year or next.
Unfortunately, the loss of patent protection has set a dangerous precedent for the company. There isn't really anything preventing global generic-pharmaceutical companies from challenging Vascepa's patents in other parts of the world (such as in the EU or China), where the drug is currently pending approval by administrative bodies. Also, the potential loss of most of its U.S. revenue won't be realistically offset by sales in other parts of the world, as drug prices in the U.S. are the highest among developed nations.
Are there any other risks involved?
Another thing investors should watch: What, exactly, is driving the company's growth? In the most recent quarter, Amarin recognized over $150 million in Vascepa product revenue, which is more than double what it brought in during the same quarter last year. On the other hand, the company's sales and marketing expenses relating to Vascepa also nearly doubled, from $54.7 million to $102.5 million.
So while rocketing sales may seem impressive at first, they lose their charm when you realize the company is spending a great deal of money just to make money. Amarin isn't profitable, either, indicating that a return on advertising spend of 48.6% just isn't good enough to handle the company's other expenses.
If you're interested in biotech stocks, you're better off looking for other opportunities in the sector. The possibility that Amarin could lose its bread and butter due to generic competition and litigation uncertainty, combined with its sales-intensive business model, far outweigh the possibility of share appreciation. At a minimum, wait for an appeal judgement to be made, this year or next, before initiating a position.