2019 was a spectacular year for Amarin (NASDAQ:AMRN). The same has not been true of 2020, at least looking at Amarin stock.
After a 7% decline on Wednesday, AMRN now has dropped 24% so far this year. Truthfully, it’s difficult to see why.
There really hasn’t been any bad news to explain the decline. In fact, there hasn’t been much in the way of news at all.
Broad markets have plunged in recent sessions, but Amarin stock shouldn’t have that much exposure to those movements. Pharmaceutical stocks on the whole admittedly have been weak. Yet AMRN’s year-to-date decline is almost five times that of the iShares U.S. Pharmaceuticals ETF (NYSE:IHE), which has fallen less than 5%.
Simply put, trading in AMRN has been odd. And it has offset the valuation concerns I’ve detailed toward Amarin stock since late last year. At these lower levels, shares look too cheap — assuming Amarin can clear one last hurdle.
No News Is … Bad News?
At the end of 2019, Amarin seemed to be in excellent shape. Cardiovascular treatment Vascepa was approved by the U.S. Food & Drug Administration on Dec. 13. That approval wasn’t necessarily a surprise after strong results from clinical trials. But it provided the certainty needed for Amarin to build out its sales force and ramp its marketing spend behind the product.
After approval, Vascepa looked like a blockbuster. Then the news got better. Both AstraZeneca (NYSE:AZN) and Acasti Pharma (NASDAQ:ACST) saw competing drugs fail their trials. Vascepa thus seemed to have the market to itself. That both raised estimates of peak sales — which in some cases clear $5 billion — and gave Amarin more potential pricing power for the drug.
And yet, since Vascepa received FDA approval, Amarin stock has continued to fade. Shares now are down 38% from intraday highs on Dec. 13. In fact, shares trade below where they did only days after initial trial results led AMRN to quadruple in a single day back in September 2018.
There’s seemingly little reason why shares have pulled back so sharply this year. There has been little news, and what news there has been looked positive.
The news from Acasti and AstraZeneca came last month. Amarin earnings this week beat analyst estimates. That report doesn’t necessarily change the case: Amarin already had given 2020 guidance, and reiterated that outlook along with fourth quarter results.
There are some modest concerns, perhaps. Amarin was planning on launching Vascepa in China. Some investors might worry that the coronavirus might impede those plans, though chief executive officer John Thero said on this week’s earnings call that would not be the case.
The market has struggled; investors may be exiting equities of all kinds, even AMRN, and rotating into bonds or cash. But, again, AMRN has badly underperformed its sector. And, again, it’s not clear why.
Valuation Improves
To be sure, I didn’t necessarily think AMRN stock was attractive above $20. Even with the pullback, Amarin still has a market capitalization nearing $6 billion. If peak sales are closer to $2-3 billion, as some analysts believe, that valuation may still be stretched.
Vascepa does have exclusivity for now, but generic competition will arrive. A legal settlement with Teva Pharmaceutical (NASDAQ:TEVA) in 2018 allows Teva to launch its generic in 2029. Big profits from Vascepa likely won’t arrive until 2022 as Amarin builds out its sales force and ramps its marketing spending. Vascepa needs to generate a lot of cash relatively quickly to support even the current valuation.
That said, it’s not as if sales necessarily go to zero in 2029. A larger pharma company may see Amarin as an acquisition target. (Pfizer (NYSE:PFE) is among the majors rumored to be interested.) And Wall Street analysts see upside, with the average price target above $30, suggesting 85% upside.
There’s a legitimate debate to be had over valuation. But it’s certainly much easier for bulls to make their case after the pullback. That’s doubly true given the apparent lack of catalysts for the decline.
Watch the Risks
As always, there are risks. Small-cap Matinas BioPharma (NASDAQ:MTNB) has its own drug derived from fish oil, which could see trial results toward the end of this year. The roughly doubling of the sales force not only will add costs, but complexity, to the business.
But the biggest risk comes from patent litigation. Amarin is suing generic drugmakers Dr. Reddy’s Laboratories (NYSE:RDY) and Hikma Pharmaceuticals (OTCMKTS:HKMPF) for patent infringement. The results of the case will be of enormous consequence to Amarin stock.
As one analyst wrote last month, the trial will be a “key make-or-break event” for Amarin. A loss would significantly lower peak sales estimates and likely send Amarin stock plunging. A win, however, removes perhaps the last major overhang on AMRN, and continues the string of good news that goes back to 2018.
It does seem like Amarin has a strong case, as one legal observer noted in December. And it’s worth noting that the Teva settlement covers basically the same issues. And so the resolution of the case — likely in late March — could be an upside catalyst for Amarin stock, if the news is positive.
That’s still an ‘if,’ however, and it’s possible the market of late is pricing in an increasing chance of an adverse verdict. Beyond that, the decline in AMRN is odd, and seemingly unjustified. If Amarin can clear the final hurdle for Vascepa, that decline should reverse.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.