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Why Amarin's Latest News Caused Shares to Crash 13% Today

By Todd Campbell – Nov 27, 2018 at 4:20PM

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The company's diluting existing shareholders to finance expenses ahead of an expected increase in demand.

What happened

After the company announced a $200 million secondary offering of its American Depository Shares (ADS), Amarin Corporation plc (AMRN -0.91%) shares tumbled 13% on Tuesday.

So what

Amarin delivered welcome news to investors in September when it reported that a cardiovascular outcomes trial showed its only commercial drug, Vascepa, reduces the risk of heart attack, stroke, and cardiovascular-related deaths. 

A woman shrugs in front of a blackboard covered by question marks.

IMAGE SOURCE: GETTY IMAGES.

Vascepa's ability to decrease the risk of these events by an additional 25% when used alongside statins clears the way for Amarin to file for supplemental approval of the triglyceride-lowering drug in more people next year. If it's approved for more widespread use, Vascepa's sales could surge, so the company is taking important steps to bulk up its sales force and related infrastructure ahead of the FDA's decision.

Unfortunately, those efforts aren't going to come cheap, so management has decided to tap equity investors in the U.S. by issuing more shares. The offering is expected to produce about $200 million for the company, gross of fees, but it could generate $230 million before fees if underwriters exercise the entirety of an overallotment option. Those funds will dramatically improve Amarin's balance sheet given the company finished September with $82 million in cash on the books.

Now what

It's common for biotechnology companies to issue shares to raise money to support the commercial launch of their products, so management shouldn't be blamed too much for tapping equity investors. After all, equity financing is preferable to borrowing money and the interest payments that come with loans. 

The big question for me isn't if the company should raise money ahead of an approval but instead whether Vascepa will deliver on what have become high-expectations for an increase in revenue following an approval. The drug's been on the market since 2012 for use in patients with very high triglyceride levels, but its sales were only $55 million in the third quarter, and its operating expenses ahead of the expected ramp-up in spending were already tracking at $64 million per quarter.

The potential for a boost in sales is supported by the fact that tens of millions of patients currently taking statins could benefit from Vascepa's use, but recently, some have questioned if Vascepa's benefits were enhanced by the trial's use of mineral oil in the placebo arm of the study, because mineral oil can increase bad cholesterol levels. Therefore, until the FDA weighs in with its thoughts on the study's results, some investor caution is appropriate. 

 

 

Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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