Should Investors Toss in the Towel on Amarin Corp Plc?

Investing in biotech is a risky business, and investing in emerging clinical stage companies doubly so. Many investors have jumped on the enticing bandwagon of the next blockbuster drug, only to have their hopes dashed before the promise is fulfilled.

This health care edition of industry focus looks at one such case, discussing what investors hoped for, how the company's progress was derailed, and what potential still remains for the company and its drug to one day become the success story investors hoped they were buying into a decade ago.

A full transcript follows the video.

Michael Douglass: Amarin Corporation (AMRN -0.53%) A buy? A sell? A hold? This is Industry Focus.

[INTRO]

Hi Fools, health care analyst Michael Douglass here with you today, and I am on the phone with one of our best contributors, Todd Campbell, from New Hampshire. Todd, how are things going this week?

Todd Campbell: Everything's going really well. I appreciate you asking, Michael! How are you? 

Douglass: Pretty good! There's always something new and interesting going on. That's one of the things I always love about biotech.

Actually, today we got a question from a listener. Folks, be sure to send us an email -- [email protected] -- if you ever have anything on your mind. I don't dispense relationship advice, but aside from that we're always happy to talk about stocks!

One of our listeners, Jim, writes, "I wonder what you guys think about Amarin, my biggest loss to date. I would like to get your thoughts. I just want to understand the huge loss and the volatility in the last weeks, and any info would be greatly appreciated." Jim, thank you for your question. We'll go ahead and try and untangle the company a little bit.

Now, before anything else, I want to emphasize a couple things. First off, we don't give individual investment advice. I think we're always, as Foolish investors, interested in talking about the company and about a company's opportunities, and its competitors and its threats.

And of course we have our own personal opinions about whether a company is a great investment or is not a great investment. But we can't tell you what you should do.

The other piece that I want to highlight is that folks on this program and The Motley Fool may have positions in companies that we're talking about. They may be recommendations in the Fool newsletters, Todd and I may own them -- neither of us owns Amarin.

But you should never make an investment decision based just on what you hear. Always do your own due diligence. I think that's a really critical part of investing Foolishly, and investing intelligently for the long term.

With those caveats out of the way, Todd, let's talk about Amarin Corporation.

Campbell: Amarin is a great example of a stock that had so much promise. It was so enticing to investors a decade ago that it soared. It had the whole world out in front of it. It's the poster child of a high risk/high reward stock that went on the high risk side. As a result, the shares went from $30 about 9-10 years ago, to a low of about $1.

I feel the pain here. I think anyone who's invested in emerging clinical stage biotech stocks has had one of these in their portfolio; a company that has a lot of promise, but when push comes to shove, despite overcoming all of the hurdles in front of it -- getting an FDA approval, getting their fish oil drug, Vascepa, to market -- this has not been a winning stock.

There are a lot of reasons for that, but it's a great reminder of the risks that are inherent in this space, that face investors.

Douglass: Let's talk about Vascepa. I think I've put out this caveat before, but to everybody listening, pronouncing things in biotech is difficult. Is it Va-seppa? Is it Vis-keepa? Is it Vis-keppa? Not sure, so we're going to go ahead and run with Va-seppa, just for ease.

This is a fish oil pill, and it's for severe hypertriglyceridemia. Try saying that three times fast!

Campbell: Exactly. On the name game, it's tomato/tomahto!

Yes, basically what we're talking about here is a drug that was designed to help reduce the risk of heart disease. The thinking here was that if we can reduce triglycerides, maybe we have a better shot at reducing the number of people who end up eventually having either a stroke or heart attack or some other cardiovascular event.

The thinking here is pretty solid, if you look at the success that statins had. It's hard to blame investors for getting excited about this stock and wanting to own it 10 years ago, when at the time Pfizer's (PFE -0.19%) Lipitor was raking in $12 billion a year in sales as a statin for lowering cholesterol levels.

There were a lot of reasons to have high hopes that Vascepa would, once it got FDA approval, roll out and become a much more widely used drug than it is today.

A couple problems happened along the way, though. First off, the original approval for this drug was, as you said, in very high triglycerides. You're talking about I think 500 mg/dL or up. That's a very small patient population.

Douglass: Tiny.

Campbell: Yes. According to the company, there are about 3.5 million people that fall into that camp, and about 3.8% of them receive medical intervention or treatment. So, you're only talking about a total addressable market of 130,000-140,000 patients. It's not a big indication.

The hope was to win approval in this, and then continue some studies, and then go and try and get a label expansion that would broaden this drug to a much wider audience.

Unfortunately the game plan went as it should, if you will, until late 2013 when the advisory committee for the FDA was evaluating expanding the label to this larger population, and voted 9-2 against doing it until it had ... we'll call it "unequivocal efficacy data" from that trial.

Basically, Amarin was hoping that they could get the FDA to approve it on a first look at the data. Instead, the FDA said, "No, we want to see the full data set," and that's not going to happen until 2018.

So you went from a potential to expand your patient population by 10 times -- it would have been about 1.4 million people that this drug could have reached -- to now saying, "We don't even know if we can get it approved, and it's going to be at least five years before we can even find out."

Obviously, that's frustrating to investors. It means a tremendous amount of operating expenses have to get spent on these trials, without having any corresponding income coming in.

Vascepa's not a bad selling drug. It's growing. It did $16.5 million in sales last quarter; that's a 70 million run rate, roughly. Analysts think that this drug could do $90 million in 2015. It could do $190 million by the end of '16, maybe even more.

You've got a drug that is going to bring in revenue for the company, but the expenses for these trials are just so high that there's no sign of profitability ahead.

Douglass: Right, and when you look at cash burn, if I'm looking at their balance sheet correctly, they burned $72 million in cash from operations in the 12 months leading up to December 31, 2014, and they ended 2014 with $120 million, I think, in cash and short-term investments.

You do the math there and that runway seems to indicate that they might have to do a capital raise or something like that moving forward, which usually means dilution for shareholders; not exactly a great position to be in when you're a company without any real positive catalysts incoming.

Campbell: Right. We've seen this before. Dendreon's (NASDAQ: DNDN) Provenge jumps to mind. You've got a commercial product which that the market doesn't quite deliver on. Lofty expectations, the company's saddled with a lot of debt. Eventually it becomes hard to keep going in its current form.

I'm not saying that that's going to happen here with Amarin. They have money in the bank. Yes, they have a lot of debt and if you look at cash, as you said it's about $120 million. The debt's about $227, but they can handle that debt for now, and the revenue is increasing.

But there's just a tremendous amount of risk in this stock. It's become incredibly volatile over the course of the last few months, as people start saying, "Yes, but what's the real value?" and "Shouldn't it trade up ahead of the potential data release?" and "What if it can get that expanded label in 2018?"

This is a very ... I'd call it a "gamey" stock. Investors, for the most part, should avoid those kinds of games because they could just as easily one day walk in and have it up 50%, as walk in the next day and have it down 50%.

Douglass: Right, and as you mentioned with the past, Amarin's been trending on the downside.

This is the kind of stock that I would personally only be confident investing in if I knew and trusted the science, and if I was very sure that it would outdo competitors -- in the case of competitors.

Preferably, you'd have even a drug that has none, and has none on the horizon, and that's really not so much the case with Amarin and with Vascepa. For me, it's definitely the sort of stock that doesn't fit in my brand of investing.

Campbell: Yes. We get $147 million -- just to correct myself earlier -- in analysts, for sales, looking ahead for 2016. That's not horrible, but it's a far cry from the blockbuster numbers that people were hoping for back when the stock was trading in the $20s and $30s.

I think that it's a great opportunity for us to just remind everyone; we've all been there and we've all done that. You have opportunity costs. You get into a trade, it doesn't work out, the stock falls, you've lost money.

You don't want to admit the mistake, but you have to realize too that there are a lot of opportunities out there from here. You have to say, "Okay, from today, is this the place that gives me the best opportunity for the future?"

You have to look at that saying, "That's sunk cost for me. Maybe now I need to look at it and say, 'What can I do going forward?' instead of 'Where have I been?'"

Douglass: Sure. I think, Todd, sometime you and I are just going to have to sit down here and chat about some of our failed past investments. It would probably be useful for folks to hear about them. Cool.

Well Todd, that's all the time we've got for today, but thanks for your thoughts. I think this is definitely a stock that we would both tend to stay away from. It doesn't really fit in with our general framework, particularly for new biotech investors.

Folks, as always, thanks for listening. Feel free to shoot us an email: [email protected], if you have any questions or any thoughts, or just want to give us some feedback on the show. We're always glad to hear that.

Stay tuned for Industry Focus tomorrow, and Fool on!