What happened

Shares of Amarin (AMRN -6.18%) tumbled over 67% in the first six months of the year, according to data provided by S&P Global Market Intelligence. The stock slid from the beginning of the year through most of the first quarter, but the precipitous drop was the result of an unfavorable ruling on the company's intellectual property at the end of March. 

The United States District Court for the District of Nevada ruled in favor of two generic companies seeking to market generic formulations of Amarin's all-important product, Vascepa. The ruling only applies to product sales in the United States, and is being appealed by Amarin, but Wall Street began to acknowledge a future in which Vascepa would generate billions of dollars less in revenue than previously expected. Has the pharma stock been unfairly punished?

A clenched fist pounding a table as a declining stock chart is displayed on a tablet.

Image source: Getty Images.

So what

In December 2019, the U.S. Food and Drug Administration (FDA) approved claims that Vascepa can reduce cardiovascular risks in specific patient populations. It's officially approved for use in individuals with elevated triglyceride levels who are taking statins and in individuals with severely elevated triglyceride levels when combined with dietary changes. The reality is the drug, based on a concentrated molecule found in fish oils, will be broadly prescribed by doctors both as intended and off label to patients at elevated risk of cardiometabolic disorders.

That real-world use scenario had Wall Street analysts tripping over themselves trying to estimate peak annual sales for Vascepa. There was a wide variance in projections, but all agreed the drug would generate billions in annual revenue. 

That rosy future took a big hit following the legal ruling in March. Hikma Pharmaceuticals and Dr. Reddy's Laboratories scored a victory allowing them to proceed with plans to file for marketing approval for generic versions of Vascepa. The legal ruling could undercut agreements Amarin reached with two other generic drug manufacturers, Teva Pharmaceuticals and Apotex, that forbids them from marketing generic versions of Vascepa until August 2029. 

If Amarin's appeal of the Nevada ruling fails, then the agreements with Teva Pharmaceuticals and Apotex would be unenforceable. Likewise, if the appeal succeeds, then Amarin would likely seek to reach an agreement with Hikma Pharmaceuticals and Dr. Reddy's Laboratories. 

Either scenario is expensive for Amarin, which will have to pay litigation costs, payouts to generic manufacturers to not compete with Vascepa until 2029, or a combination of both.

Now what

The intellectual property dispute is far from ideal for investors. It could prove costly and casts a cloud of uncertainty over what was supposed to be a historic drug launch and sales ramp. That said, even with generic competition, Vascepa is capable of impressive revenue growth and generating operating income for Amarin. 

In the first quarter of 2020 alone, the drug produced $152 million in revenue. Given the massive market opportunity, Vascepa could generate significant revenue this decade even if selling prices are pressured by competitors sooner than Wall Street originally expected.

Therefore, even in a worst-case scenario, investors could argue Amarin's current market valuation of $2.5 billion is a bit undervalued.