Amarin (AMRN -2.11%) received Food and Drug Administration approval in July for Vascepa, its first drug to market. The treatment for severely high triglyceride levels has proven to be more effective than an existing competitor marketed domestically by GlaxoSmithKline (GSK 0.12%) and has blockbuster potential. It should be a time for celebration, but share prices continue to wobble as investors put too much stock into a protracted regulatory hang up.

The subject of whether Vascepa will receive new chemical entity, or NCE, status -- and whether that matters -- has been tossed back and forth more than a beach ball in an Annette Funicello movie. Zooming in on the NCE issue diminishes Vascepa's market potential and clouds the periphery. That's where the most important potential catalyst resides: a possible buyout from AstraZeneca (AZN 5.38%).

Vascepa's market potential
Vascepa is an omega3 fatty acid for the treatment of hypertriglyceridemia, or severely high triglycerides. Amarin estimates that about 4 million patients in the United States suffer from this condition. Vascepa enters the market as a competitor for Lovaza, formerly known as Omacor, which was licensed to GlaxoSmithKline in the United States. Lovaza brought in $916 million for GlaxoSmithKline last year.

Vascepa's clinical trials  showed no raise in levels of LDL-C, or "bad cholesterol," and a 9% reduction of the building block responsible for LDL-C. Lovaza's clinical trials showed elevated LDL-C levels in some cases, and the difference could lead doctors to prefer prescribing Vascepa.

Vascepa will have to fight off more than Lovaza. There's the future potential for generic competition, which is where the NCE debate comes in.

What's NCE? Does it matter?
The new drug application, or NDA, process automatically involves the FDA's process for determining how long the drug should receive market exclusivity, a basic protection from generic competition. Five years of protection are awarded for a new chemical entity if the drug contains an active ingredient that has never been approved by the FDA either alone or in combination.

The FDA has dawdled with Vascepa's marketing exclusivity decision, perhaps because the administration is trying to find a way to allow the NCE status but is trapped in wording. Vascepa's active ingredient, an ethyl ester of eicosapentaenoic acid has never been approved on its own before, but it has appeared as a component in the active ingredients of Lovaza. There are arguments to be made on both sides as to whether the status will be granted.

The reason that NCE status isn't a huge issue is that Vascepa can attain exclusivity with or without NCE. The drug would still get the three years of exclusivity that's awarded to active ingredients that have been previously approved individually but appear in the new drug. There are various regulatory ways to stretch out those three years, including a six-month pediatric extension. Patents are also in place that will provide additional protections for Vascepa up to 2030, and Amarin is in the process of applying for more in order to shield the drug from generic competitors.

The NCE status consideration and patents are all fairly standard operations for a new drug preparing for market. That's not to say investors should ignore the NCE status completely. It is important, but for another reason: the potential to sweeten a buyout deal.

Buyout potential
Amarin's CEO Joseph Zakrzewski said last year that he'd agree to a buyout if the minimum offering was $30 per share. That's three times where Amarin is trading currently, but not unreasonable considering the Vascepa's potential.

The top name floated as a buyer is AstraZeneca, a company facing a patent cliff that will cause it to lose a group of drugs that accounted for 40% of last year's revenues. The drop-off doesn't happen until 2014, and that would give AstraZeneca time to acquire Amarin and benefit from Vascepa's market buildup. New CEO Pascal Soriot is going to need to take actions to prepare for that cliff and to recover from a dismal third quarter, which featured a 15% overall sales decline.

Foolish bottom line
It is buyout time for Amarin. Zakrzewski needs to continue flirtations with potential suitors and get a deal in place that won't undervalue Vascepa's potential. On the investor side of things, Amarin is currently trading in the $10 range, down from a 52-week high of $15.96. Expect price fluctuations to continue until the NCE matter is decided.