Equity
Analysis: Amarin (AMRN)
Summary and investment decision
The
purpose of this report is to analyze and valuate Amarin stock ahead of an FDA
decision on its AMR101 clinical trial data on or before July 26. The phase III data presented by the Company
is impressive regarding the clinical benefits of reducing triglyceride (TG) and
LDL levels.
Based on
our research, it is highly probable (>95%) that the FDA will approve the
drug for its designated uses. Such an
approval will significantly enhance Amarin’s valuation. We have a price
target of $18 for Amarin by the end of 2012, assuming FDA approval on or
before July 26th with a market launch by Q4 2012 through partnership
with pharmaceutical companies (Baseline Scenario).
We also
present other scenarios that might affect company valuation. In the Optimistic Scenario, the assumption is
that FDA approves the use of AMR101 in patients on statin therapy in 2013, thus
expanding market size for the product. The
estimated stock price is $32.
The initial
market size for AMR 101 is approximately $1B, encompassing more than 3.8
million people with TG levels greater than 500 mg/dL in the United States
alone. Currently, only 3.6% patients are
treated with drugs. AMR101 also has the potential
to expand to 36 million adults in the U.S. who have medium to high
TG. Worldwide, patients in the high TG categories
are 2-3 times the US market. Amarin also
plans to market the drug globally.
Risks
associated with the stock include delayed approval by the FDA, management’s business
strategies, and patent positions. A
potential upside is that the company may be acquired by another pharmaceutical
company. Given its small number of
employees and no other drugs in the pipeline, merger and acquisition may be the
best strategy to expedite the commercialization of AMR101 and maximize
shareholder value. This may occur after
AMR101 is approved for a second indication in 2013, as its value will get a significant
boost from expanding its target population.
Business Summary
Amarin
is a small-cap biopharmaceutical company focused on reducing the risk of cardiovascular
disease through lowering triglyceride levels.
Its leading product candidate AMR101, a pure-form of Omega-3 (96% EPA (icosapent
ethyl)), is currently seeking FDA approval for treating patients with very high
triglyceride (PDUFA date 7/26/12).
Although
many fish-oil derived dietary supplements or health products contain Omega-3, their
impurity precludes them from being used as a prescription medicine. For a compound to be used in the US as a drug,
it must first meet purity standards as a New Chemical Entity before conducting
clinical trials. Furthermore, the drug must demonstrate
efficacy and safety to gain FDA approval before it can be marketed.
Current
FDA-approved treatments for patients with very high triglycerides (TG> 500
mg/dL) are fish-oil derived omega 3 (Lovaza, containing 84% EPA, 16% DHA) and
fibrates. However, these drugs also
increase LDL levels by 40%. (The LDL
elevating effect was due to the presence of DHA in Lovaza). Fibrates are frequently used as an add-on with
statin to mitigate its LDL effect. Lovaza
and fibrates have ~$1B sales each in 2011. AMR101
has clear competitive advantage over the existing drugs in that, while it
decreases TG level, it does not elevate the LDL level.
It
is important to note that Amarin is not the only company that produces
pure-form Omega-3. In fact, a Japanese
company, Mochida Pharmaceutical, was the first to launch a pure Omega-3
product, called Epadel, which was approved for hyperlipidemia in Japan in 1994. Mochida may not have conducted clinical
trials following FDA criteria, thus presenting an opportunity for Amarin to
conduct clinical trials in the U.S. The
fact that a pure EPA product has been approved as a prescription drug in Japan
and has been used by numerous patients for over 18 years is indicative of the
overall safety of AMR 101 and its high probability of receiving FDA
approval.
Clinical trial data
Amarin
has completed two Phase 3 clinical trials to evaluate AMR101. Both studies (MARINE, ANCHOR) showed that
AMR101 significantly lowered the TG levels without increasing LDL levels. In addition, both studies show safety profiles
similar to the placebo group. If approved, the drug will have an advantage
over Lovaza and fibrates as a single agent for treating patients with high TG
levels that have a high risk of developing cardiovascular disease.
The
MARINE studies evaluated AMR101 in patients with very high TG levels (>500
mg/dL). The trials were conducted on 229
subjects from 2009 to 2010. At a 4 gram
dose of AMR101, a statistically significant reduction in triglyceride levels (-33%,
p<0.0001) was achieved without increasing LDL levels.
Other favorable benefits of AMR101 include
statistically-significant reduction in other lipid and inflammatory biomarkers,
including Apo-B (-8.5%), non-HDL-C (-18%), Total-Cholesterol (-16.3%), VLDL-C
(-28.6%), Lp-PLA2 (-13.6%), and hs-CRP (-36%).
The
ANCHOR studies evaluated AMR101 in patients defined as high TG/mixed
dyslipidemia (TG level between 200-500 mg/dL) who are under statin
treatment. The trials started in 2010
and ended in 2011, involving 702 study subjects.
In
the study group taking AMR101 and statin, there was a statistically significant decrease in TG level (-21.5%, p<0.0001) and
a further reduction of LDL-C levels (-6.2%, p<0.0067) compared to the
placebo group (statin alone). The 4 gram dose was also associated with
statistically significant reductions in non-HDL-C (-13.6%, p<0.0001), Apo B
(-9.3%, p<0.0001), Lp-PLA2 (-19%, p<0.0001) and high-sensitivity
C-reactive protein (hsCRP) (-22%, p<0.001), at week 12 compared to placebo.
AMR101 also appears to be rather safe: its safety profile is
comparable to a placebo. The superior
efficacy, its safety profile, and other beneficial effects, are the primary
determining factors that we believe the drug has greater than 95% probability
of receiving FDA approval by July 26, 2012.
In December
2011, Amarin started enrolling patients in a preventive clinical
trial, titled REDUCE-IT (Reduction of Cardiovascular Events with EPA— Intervention Trial). It is
designed to evaluate the efficacy of AMR101 in reducing major cardiovascular
events in a high risk patient population on statin therapy. This will be a
multi-year program involving tens of thousands study subjects. Since the outcome of this program is years
away, we do not factor this into our valuation model.
Nonetheless, it is interesting to note that Mochida
Pharmaceutical has already conducted similar clinical trials (JELIS) in Japan
to evaluate the use of Epadel (pure EPA) as preventive medicine for coronary
diseases. In November 2006, Mochida
reported two studies on pure EPA plus statin vs statin alone with over 18,000
enrolled patients. The studies show that
the
combination of EPA+statin reduced 19% CV disease over five-year period. Among a subgroup of study subjects with very
high TG levels and low HDL, there was a 53% reduction in CV disease. We will follow up on future updates on the
trial results to gauge its potential as preventive therapy.
Market size information
There
are 3.8 million people in the U.S. with TG level greater than 500 mg/dL. Currently, only 3.6% patients are treated
with pharmaceutical medicines. This
suggests that if AMR101 is approved, it could have potentially larger market
share than the current $1B in LOVAZA sales.
Worldwide, patients in this very high TG category are 2-3 times the U.S.
market. Amarin also plans to market the
drug globally. The NDA for the first
indication was submitted in Q4 2011 and will receive an FDA response on
7/26/12. If approved, the Company plans
to launch the product before Q1 2013.
AMR101
may also be used in people with medium-high TG level (< 500 mg/dL, >200
mg/dL). This was evaluated in the ANCHOR
studies. There are 36 million adults in
US in this category. Less than 4% of
people in this category are currently treated with fibrates, which had $1B
sales in 2011. Therefore, if AMR101 is
approved, it could compete with fibrates and potentially expand the market
size. Amarin has submitted a
supplemental NDA (sNDA) for the second indication in June 2012 (check the
date). FDA decision is pending till next
year.
The
preliminary data from the REDUCE-IT study group in Japan looked encouraging. More updated data will be reported toward the
end of 2012. Since the trial is still
years away, its potential impact is not factored into stock valuation.
Risk
Below are risks that
could affect the AMRN stock price estimate.
(1)
FDA approval status. A delayed approval or even a rejection (a remote
possibility) could make the stock price decline.
(2)
Marketing and commercialization strategy. At the Jefferies 2012 Global Healthcare
conference, CEO Joseph Zakrzewski stated that the company would commercialize
the AMR101 on its own or partner with pharmaceutical companies and that the
company has received significant amount of interest from pharmaceutical
companies. With only 30+ employees, it
will be extremely challenging if the company does not seek pharmaceutical
partners to commercialize its product.
(3)
Patent
position and barrier to entry. Amarin
has filed 25 patent applications. It is
extremely important that the company seeks patent protection to exclude
competition. According to CEO, the
compound is not easy to manufacture, thus creating an effective barrier to
entry. Nonetheless, patent protection is
an integral part of the company’s profit and valuation. In Q3 2011, when the USPTO rejected one of
its patents, the stock tumbled 20% in one day and continued to slide over
several months. The company appealed the
decision and the patent was finally awarded in March 2012 for the use of AMR-101
for treating high TG levels. The stock price
jumped 14% in one day on that news.
(4)
Competition: Amarin competitors include
GSK and Provona, who market and hold the patents for Lovaza. Abbott Laboratories currently markets Tricor
and Trilipix for the treatment of very high TG and mixed dyslipidemia. Several biotech companies are also
developing omega-3-based products, some in phase 3 clinical trials. The products, if approved, could compete with
AMR101 for market share. However, these
threats would be 3-4 years away.
(5)
Business risks: At present, AMR101 is the only lead product of
the company. In the 2011 annual report,
the company disclosed that Amarin completed a private placement of $70 million
(with private equity and venture funds) in 2009. The proceeds were used primarily to fund the
AMR101 clinical trials. In connection
with the agreement, Amarin has essentially ceased the development for other
programs, including Huntington’s, Parkinson disease, and Myasthenia gravis.
This suggests that AMR101 is the sole product of the company in the foreseeable
future. The success or failure of this
product determines the fate of this company.
Valuation
We
used the FCFE valuation as the primary model for estimating stock price. We used median gross profit margin and net
profit margin from comparable companies (e.g. HGSI, SGEN, DNDN, VRTX, RGEN, or
BMY) as a guide to estimate revenue growth, gross profit, net income, and free
cash to equity for a five-year period (2012 to 2016). Based on FEFE model, the estimated stock
price is $18 and $32, respectively, for two
scenarios (baseline, optimistic).
Baseline
Scenario: This assumes that FDA approves AMR101 for very high TG patients on
7/26/2012 and the company is able to launch the product in Q4 2012. Revenue growth reflects market penetration
rate of ~0.6%, 3.6%, 9%, 16%, and 26%, respectively from 2012 to 2016, in a
total global market size $3B for very high TG patients. We also assume a linear decline of revenue
growth from high growth stage to a normalized 8% over a 4-year time after 2016.
The slower growth rate after 2016
reflects competition from other products entering the market with similar
benefit. Estimated
stock price: $18.
Optimistic
Scenario: This assumes that FDA approves AMR101 for very
high TG patients on 7/26/2012 and the company is able to launch the product in Q4
2012. Furthermore, FDA approves the use
of AMR101 for second indication (sNDA) in mid 2013. The approval enables the expansion of the
drug to a larger patient population. Revenue growth reflects market penetration
rate of ~0.3%, 2%, 6%, 12%, and 18%, respectively from 2012 to 2016, in a total
global market size $6B. Estimated stock price: $32.
Other
possible outcomes include a delayed response from FDA on the approval or an
outright rejection. This will be a major
setback for stock and company value.
On
the other extreme, a potential unexpected surprise is that the
company may be acquired by other pharmaceutical company. This may represent the best scenario as the
merger and acquisition will expedite the commercialization of AMR101 and
maximize shareholder value. The takeover
may occur after AMR101 is approved for the second indication in 2013, as its
value will get significant boost from an expanding target population.
