Amarin (NASDASQ:AMRN) stock has fallen a bit since my Dec. 20 article argued that the AMRN stock price already discounted all the future value of the recent good news about the company. The shares then sat at a year high level just above $24 and had arrived there from about $14 just two months earlier.
How’d that happen? The FDA had just approved an expanded cardiovascular claim for Vascepa, a drug produced by Amarin. Prior to this, patients with very high triglyceride levels were the only ones approved to use Vascepa.
The problem lies in the valuation of the company’s shares. They still trades for over 10 times forward-year sales. For example, the company is expected to reach close to $700 million in revenue for 2020. The market value for Amarin stock is worth $7.5 billion.
Reviewing Estimates for Vascepa Sales
I looked into this more carefully. It turns out that at least one analyst believes that “peak sales” could be as high as $2 billion by 2025. This is what Nathan Weinstein of Aegis Capital says about Vascepa sales.
He has a $23 price target on Amarin stock, or some 13.7% higher than today’s price. So even though the peak sales could be twice as high based on the analyst’s initial comments, AMRN stock has a limit.
On the other hand, other analysts are now saying that Vascepa sales could have much higher peak sales. Avisol Capital Partners believes that peak sales could reach $3 billion to $4 billion annually.
That research also argues that the company will benefit from two recent events. First, AstraZeneca (NYSE:AZN) recently dropped its Epanova drug trials for an expanded use that would compete with Vascepa.
Second, Acasti Pharma (NASDAQ:ACST) reported negative trials for its CaPre drug candidate. It was as Phase 3 trial related to CaPre as an (omega-3 phospholipid) treatment for severe hypertriglyceridemia. This means it was for people with super high triglycerides.
ACST stock fell 60% on that news and Amarin stock rose. Both of these events effectively leave Vascepa the only drug approved in the United States for lowering the risk of cardiovascular events in conjunction with statin therapy.
New Estimates for 2019 and 2020
On Jan. 7, Amarin issued new guidance for its sales in 2020 and updated its 2019 sales guidance. Moreover, the company said it planned on hiring 800 salespeople, instead of its prior plans of 400.
The company said it expects net sales revenue to be between $650 million and $700 million for 2020. It also said that it expects its eventual sales revenue to be “multiple of billions of dollars.”
However, Amarin warned that it expects to start 2020 with net cash flow outflows. The company said the last quarter of 2019 was negative $28 million in net cash outflow.
Moreover, break-even cash flow will only be reached during its ramp-up period once quarterly sales are over $200 million. To compare this, Amarin had sales of just $112.8 million in Q3.
The problem is two-fold. Amarin has to build its inventories of the drug in anticipation of the ramp-up in sales. In addition, most people visit their doctor only twice a year to get prescriptions and update recommendations for Vascepa. So in both cases, it will take time and money for the ramp-up in sales to take effect.
Amarin Stock will Likely Take Time to Rise
So it may be over a year or so before forward-looking sales and cash flow estimates will be adjusted higher. In fact, the costs for the higher salespeople and inventory build will have to be built into these forecasts.
In fact, there is no guarantee that these forecasts and the cash flow estimates by the company will even be accurate. For all intents and purposes, this is a one drug company. It is no other sales to fall back on if the estimates are too high.
All this means that at present Amarin stock is likely fairly priced — possibly even overpriced. It might take more time before analysts and the company actually raise their revenue and cash flow estimates based on patient uptake of the drug.
It seems reasonable that investors will watch developments before they push up Amarin stock with new purchases.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers a two-week free trial.
