Amarin: ‘The Future Ain’t What It Used To Be’ (NASDAQ:AMRN)

Background

If unaware, the title is a quote from Yogi Berra, that great baseball player and common-man philosopher. So, when the U.S. Court of Appeals affirmed the decision of the U.S. District Court for the district of Nevada and ruled Amarin’s (AMRN) patents for Vascepa obvious and, thus, invalid, it seemed to perfectly capture the moment for the company. As was stated by one observer, “the court’s decision paved the way for Amarin’s multi-year exclusive selling window to vanish overnight” and with it the expectation of Vascepa becoming a blockbuster drug.

In response to the many investor suggestions, beliefs, hopes, and some expectations that Amarin was a target for acquisition by a big pharma firm, my previous article on the company was penned following its first patent litigation loss in the U.S. District Court for the district of Nevada, and my premise was the company needed to work its way out of its troubles, as no bigger pharma firm would be interested in acquiring a company that had lost patent litigation on its only drug. Although the comments to the article “suggested” I was deluded or driven by some malevolent intent, they paled in comparison to the vilification aimed at Judge Miranda Du, the U.S. District Court judge, who ruled that the patents on Vascepa were obvious and, thus invalid. This decision led to Amarin’s appeal to the U.S. Court of Appeals for the Federal Circuit. A reasonable legal appeal that many believed should lead to the lower court decision being overturned.

In the interim between the two court rulings, adding angst to Amarin investors, was that Hikma (OTCPK:HKMPF) had a generic version of Vascepa approved by the FDA in May 2020.



This approval created a dialogue as to whether Hikma would launch “at risk” – meaning the company would be financially vulnerable if the pending appeal is decided in Amarin’s favor. Hikma did not.

Litigation

With Judge Du’s legal qualifications and capabilities among those attacked by outsiders and her decision judged a gross mistake, the belief was the appeals court would remedy the problem. This belief was seemingly made stronger – at least in the minds of investors and, perhaps, some analysts – when Amarin brought in new legal counsel to handle the appeal.

Many comments on various boards including Yahoo found investors expressing confidence, some even suggesting a 90 percent certainty that Judge Du would be overturned and others giving it a 75-80 percent chance. Still, others sought to be more “realistic” and suggested the decision being overturned was likely a 50/50 coin flip.

Pardon the pun, but the “certainty” of the decision being overturned seemed flippant when considering a salient fact that would speak to the legal knowledge and capabilities of Judge Du – the percentage of her decisions that were overturned on appeal. Owning an understanding of business and statistical probabilities, I suggested that the odds were relative to how often Judge Du had been overturned on appeal. While the answer was not one investors wanted to hear, it remained a factual basis for assessing the probability of the decision being overturned. As I previously stated

In her years on the federal bench, Judge Du has presided over a large number of complex cases and seems to have a sound grasp of the law. I say that because she has a relatively low reversal rate. According to research by others, there reportedly have been 246 appeals of her decisions since 2013. Of those, only 18 have resulted in her decision being overturned. If I got the math right, that is a paltry 7.3% reversal rate. So, the number to consider when trying to assess Amarin’s potential for winning the appeal is not 90% or even 50%…it is…7.3%!

Fast forward to September 2, 2020, and, given the chance to weigh in on Judge Du’s decision to invalidate Amarin’s patents for Vascepa, the three-judge panel does not equivocate when ruling on the lower court decision by Judge Du – they upheld the ruling, throwing a 3-0 shutout at Amarin. And, while one should be cautious about interpreting those proceedings, as it could lead to an attribution error, it appears only one judge had questions for Amarin’s counsel and none for the two defendants – Hikma and Dr. Reddy’s (RDY).

For investors, the reaction was that the appeal hearing seemed to suggest lack of any real effort by the judges. Since we have heard the first decision to render the Amarin patents invalid was because Judge Du lacked the requisite knowledge, now the appeals court judges seemingly did not work hard enough to understand some undefined legal nuances clearly grasped by outsiders. The appeals court judges just mailed it in. Right!

This error in thinking fails to recognize that, beyond the jurists’ education and experience, outside observers would have no idea how much time the judges actually spent reviewing, researching, and discussing the legal issues of the Amarin case.

I understand the need to never stop “beating a dead horse” until someone administers the burial; at least someone you agree with. So understandably, Amarin will continue to try any and all legal remedies. It is, in truth, what the company should do. To that end, their CEO has indicated the company is currently reviewing its legal options and, within 30 days, expects to file a petition for an en banc review of the current appeal panel decision by a full panel of 12 active judges at the U.S. Court of Appeals for the Federal Circuit.

Still, this process offers no assurances the petition will be granted and, even so, it will take months, likely until early 2021. However, the odds do not appear favorable, as this comment suggests –

Amarin’s briefly-held fish oil empire has slipped from its grasp, and now appears gone for good.

Nonetheless, I would be remiss if not mentioning there are analysts who believe that Amarin will prevail. SVB Leerink analysts forecast to clients noted that two of the judges (in the appeal) wouldn’t be in the upper half of the 12 possible active judges most likely to side with Amarin. And, Cantor analyst Louise Chen – a notable bull for Vascepa’s appeals chances – called the panel’s composition a “net neutral” for Amarin.

While hope springs eternal, as Yogi Berra would say –

It’s like déjà vu all over again.

Reaction of the Generics Challenge to Vascepa in the U.S.

It has been argued that, while competitive drugs have shown bioequivalency and received FDA approval, their inability to access API, compound the drug, arrange manufacturing capacity, and set up commercialization capability will delay market access and enable Vascepa to further increase revenues, as patients see the value of Vascepa and will want to have it prescribed. Perhaps, perhaps not.

Threat of Substitutes

Many of the patients needing cardiovascular drugs are older and on fixed income. The cost of drugs matters and the patients will gravitate toward the cheaper generic drugs. Moreover, should the doctor write a prescription for Vascepa, insurance programs will require the default to a generic if available. And, a reputable pharmacist will let the consumer know a cheaper drug is available and that it works the same way as the prescribed brand name drug.

Large generic competitors hold effective resources and capabilities

Amarin’s CEO argued, even if generic competitors are successful, they would likely only capture a small share of the market, given limited manufacturing capacity. This error in judgment fails to recognize that Hikma and Dr Reddy’s are sizable generic producers and their ability to access API and free up manufacturing capacity might find a short delay, but it is not a forever delay. With an ability to be first to market in the U.S., the ability to enter the market with a generic is likely to happen before Amarin gets approval in the EU.

The argument that there is insufficient quality API for generics to ramp up the manufacturing process is an argument that lacks a certain grasp of reality when considering the five forces of competition. Specifically, big generics companies have scale and, thus, buyer power and with it greater access to lower-priced API because its sellers are bargaining for access to a larger market for their products. With lower pricing for API, bigger generics companies can offer API suppliers better terms and with little concern the “check will bounce.”

As to manufacturing, there is rarely if ever a 100 percent capacity utilization in manufacturing; thus, there is always some spare capacity a company can find. Then, when considering the value of being first or even second to market with a new generic, management will do its own form of substitution and create capacity to manufacture those drugs that offer the best financial return. This is flexible manufacturing capable of being executed when a company thinks they have a hot new idea or product. So, it will adapt operations to seize first-mover advantage and gain market share.

The key to being “first-to-market” is not necessarily about being the first to launch a new product; rather, to capture market share, it is the ability of a company to gain consumer confidence. For generics it also means pricing and the best way to ensure low prices is to have a cost-focused value chain – fundamental to any generic drug maker. Born of the learning curve and various product markets, big generic companies also bring economies of scale to the market, which helps with pricing products lower.

It is these competitive resources and capabilities that affirm the notable threat of generics to Amarin.

Finally, let me repeat what was said in my previous article about Amarin’s competitive weaknesses:

  1. Amarin’s product portfolio consists of a single product – Vascepa.
  2. Amarin lost the patent litigation to Hikma Pharma and Dr. Reddy’s – now twice (which influences the above points – 3, 4, 5).
  3. For a deep-pocketed competitor, the pioneering of new drugs is not cost-prohibitive, as fast-paced changes to technology and science offer the opportunity to more quickly and capably develop competing products.
  4. Roughly 80 percent of Vascepa sales are through primary care physicians/healthcare whose patients are sensitive to price, as they often are older and on fixed incomes.
  5. Generics offer a cheaper solution (costing 30-50 percent less than Vascepa) and if a script is written for Vascepa, the existence of a generic means the patient can have the script filled for the generic even if written for Vascepa.
  6. Customer loyalty to Vascepa, as a branded drug, is low and switching to emergent substitutes, whether OTC products, generics, or new competitive drugs, is easy.

Once again, Yogi offers a worthy observation –

We made too many wrong mistakes.

The Strategy for Generics is Different

Vascepa is a novel drug and Amarin has a value chain focused on a differentiation strategy. However, generics are about low value chain costs to achieve the low prices needed to compete in the generic marketplace, a sizable market when considering that generics are about 80 percent of all the drugs sold in the US.

Although generic providers are frugal, they seldom hesitate to spend aggressively on resources and capabilities that promise to drive costs out of their business, in order to capture greater market share or enter new markets. Indeed, having competitive assets of this type and ensuring that they remain competitively superior is essential to achieving competitive advantage as a low-cost provider.

As noted by Thompson and Strickland in their textbook “Crafting & Executing Strategy,”

When looking at the competitive environment, a low-cost provider strategy becomes increasingly appealing and competitively powerful when:

  1. Price competition among rival sellers is vigorous, it puts low-cost providers in the best position to compete offensively on the basis of price and win the price-sensitive customers. So, not only does it enable low-cost providers to remain profitable despite strong price competition, it can enable them to gain market share at the expense of rivals, and further their own survival.
  2. The products of rival sellers are essentially identical. Look-alike and overabundant product supply set the stage for lively price competition. In such markets, the less efficient and higher cost companies are the most vulnerable.
  3. It is difficult to achieve product differentiation in ways that have value to buyers. When the differences between product attributes and brands do not matter to buyers, buyers are sensitive to price differences and that makes those able to provide the lowest-priced brands the industry leaders.
  4. Most buyers use the product in the same way. With common user requirements, a standardized product can satisfy the needs of buyers. This means low price, not features or quality, becomes the dominant factor in causing buyers to choose one product over another.
  5. Buyers incur low costs in switching their purchases from one seller to another. Low switching costs give buyers the flexibility to shift purchases to lower priced sellers with equally good products or to attractively priced substitute products.

The problem for Amarin is that it is small and does not have economies of scale to reduce costs in its value chain as easily as a larger firm. Moreover, Amarin built its business model on a single, highly differentiated drug. What comes with differentiation is a willingness to incur additional costs in order to ensure the quality necessary to support the premium price it would get for Vascepa. Consequently, with the threat of generics capturing market share, merely reducing the price of Vascepa as an attempt to retain share in the U.S. would be an avenue to financial risk. Prices can only be profitable if the lower price is born of a lower cost value chain that supports increased sales, at lower prices, if they offset the loss in revenue due to the lower per unit profit margin.

But remember, large scale generic manufacturers can take costs out of production and commercialization through economies of scale and can reduce prices on a given product if it enables them to capture greater market share. This affords them the opportunity to compete on price in ways that a smaller company with a differentiation strategy cannot. And, to try to copy the actions of a large company is a mistake, as they are not easily imitated. In fact, pursuing a competitor’s low priced generics has led small companies to degrade or diminish the quality of their finished product.

As Thompson-Strickland further noted:

To realize the full potential of a low-cost provider, all organizational functions must be aligned with the cost-leadership strategy as reflected in specific value chain activities. For example,

  • Manufacturing – with lean, low-cost, good-quality activities
  • Marketing – emphasizing value, reliability, and price
  • Research & Development – with a focus on product extensions and process improvements
  • Finance – investing in low-cost initiatives and stable organizational structure
  • Accounting – with the adoption of conservative accounting principles
  • Sales – with a focus on value, reliability, and low price

It is important that management control systems in a cost-leadership strategy include tight cost controls; quantitative cost goals; close supervision of labor, raw materials, and inventory; and an organizational culture that rewards cost reduction and provides incentives for everyone that are aligned with the cost-leadership strategy and its implementation.

Nothing about Amarin suggests they have the business model to compete on costs. According to a MarketWatch article, when most generic drugs first hit the market they are priced at around 60 percent of the brand-name drug. And, as additional competitors enter the market, prices decrease even further, to about 20 percent of the brand price. The purpose of generics is to provide a less expensive, yet equally as effective alternative to brand-name drugs. Even so, it can be a challenge to provide affordable, quality drugs while remaining profitable. Access to less costly API is critical and requires strong partnerships with suppliers. It’s also accomplished with leaner manufacturing, as well as efficient marketing activities. While brand-name drug makers have the resources to conduct extensive marketing promotions and ad campaigns, generics must work hard to communicate their product’s capabilities and unique qualities in ways that keep down costs.

Moreover, despite effective sourcing strategies and operating a lean organization, the fact of the matter is that there really are few ways to reduce cost, since generics must contain the same chemical composition and effectiveness as the branded products. The end result is that generics are priced low to ensure they make up in market share what they lose in lower prices.

In a marketplace where generic manufacturers must strategically define themselves in order to compete for market share, the end result is almost always about greater process and system innovation that enable them to keep costs low through efficient value chain management.

Any relevant quotes from Yogi? Yep –

You’ve got to be very careful if you don’t know where you are going, because you might not get there.

A perfect segue to the next section.

EU Approval and Commercialization Opportunity

Amarin expects a European Medicines Agency regulatory decision in early 2021 and has already hired a commercial head, Karim Mikhail, who joined from his own commercial consultancy founded in 2018. (I could ask why Mikhail is opting out of his consultancy after such a short period of time, but that would be a snarky question and I want to transcend such a line of commentary.)

On the issue of going-it-alone in Europe, Amarin CEO John Thero said the company made the decision after an “extensive evaluation” of its options and after considering some licensing deals. Further, Amarin plans to hire a core commercial team of around 12 people this year and then add country-by-country sales teams, as it builds out approvals and reimbursement. Its initial focus would be on larger EU countries.

The EU is not the U.S. and any learning curve efficiencies gained from their U.S. business are not necessarily or easily applied in the EU. Nonetheless, as Stifel’s Derek Archila noted, there are questions that Amarin faces in Europe, but Vascepa remains under patent protection. He estimated $650 million in peak sales in the EU but noted that the drug still has to be approved and the company still has to secure reimbursement. Further, Archila said:

So we don’t think 2021 sales of Vascepa in the EU are likely to be meaningful. We think the fact AMRN was not able to partner the EU rights for Vascepa for a meaningful sum and chose to go-it-alone could mean partners viewed this opportunity to be a more modest one or challenging to execute on, thus, we are conservative with our peak sales estimates and sales ramp in the EU.

In Europe, Vascepa’s market position appears better protected, with patents on the drug that could extend to 2039. However, when considering risks, it raises the question – If Vascepa’s patents in the U.S. were defeated, how long before a patent challenge is raised in Europe by Hikma, Dr Reddy’s, or some other company that sees a large and available market opportunity?

Then, there are the EMA price controls that mean the profit margins will not be what was experienced in the U.S. before the patents were invalidated. In fact, in the EU, reimbursement does not always mean full cost coverage as most governments control market access and/or pricing of pharmaceuticals using direct price control, indirect price control, utilization control, or a mix of all these methods.

Further, almost all the European countries use reference pricing by using the prices of a pharmaceutical product in one or several countries in order to derive a benchmark (reference price) for the purposes of setting or negotiating the price of the product in a given country.

While countries define their own specific approach, they set prices for new medicines (and/or decide on reimbursement) based on the therapeutic value that they believe the medicine offers. Value usually is assessed through health technology analysis and/or economic evaluation. Volume is controlled, with quotas assigned (as is true for some drugs in the U.S.). In Europe, reimbursement decisions for drugs often include explicit consideration of cost effectiveness and a comparison of the efficacy of the new drug with products that are already available. In the US, such considerations are excluded.

Another barrier for EU drug market success is direct-to-consumer advertising, which is not allowed in the EU. In the U.S. direct-to-consumer advertisements by pharma companies is big business itself; in 2018 it hit another record; this time it was $37 billion spent on DTC ads up from $17 billion in 1997.

So, the higher U.S. drug prices are built to help drug makers afford hefty marketing budgets and that is something Europe does not allow. Countries with national health systems tend to feel they are “all in this together” and cannot afford everything for everybody at any price. In fact, besides the U.S. and New Zealand, no other countries allow direct-to-consumer marketing.

Another hurdle in the EU is that the state-run health systems in most countries drive hard bargains with drug companies – setting price caps, demanding proof of a new drug’s value in comparison to existing ones and sometimes refusing to cover medicines they doubt are worth the cost. The government systems also are the only large drug buyers in most of these countries, giving them substantial negotiating (buyer) power. The U.S. market, by contrast, is highly fragmented, with bill payers ranging from employers to insurance companies to PBMs to federal and state governments. The EU system automatically holds prices low because the countries consulted also have government-controlled prices.

On the challenges of the EU opportunity, once again, here is Yogi

It ain’t the heat, it’s the humility.

M&A Potential

I know M&A pretty well and the premise of my first article, indeed its title, was that – no big pharma firm would ride to the rescue of Amarin. But, as I frequently state, context matters. Since it is M&A – mergers and acquisitions – does it now mean Amarin would be a better M&A candidate now? Again, given the context, it would seem less likely it would entail a merger because, as a company with a single approved drug, no manufacturing capabilities, and limited assets, a merger would be very unlikely as it offers a potential partner little of equal value.

However, does that mean a bigger firm with a fat wallet would now be interested in acquiring Amarin? Perhaps, and it is about context once more. As I have pointed out in a different article about a different company,

The COVID-19 pandemic has caused 202 American business to file for bankruptcy through August 2020. Given the pricing pressures on generics and the pandemic related economic downturn, there are considerable growth pressures on generic drug companies that could provide opportunities to acquire well priced businesses or products at bargain prices…as long as they are a strategic fit and accretive to the business.

So it is that pharma could be bargain-shopping and, given its legal travails, Amarin might make a good acquisition candidate; but only for the drug and, perhaps, some IP. The remainder of the company would be relegated to the dust-bin of synergistic cost benefits that are derived from an acquisition.

While I am not in the habit of speculating on the price per share upon an acquisition, I am confident it would not approach Amarin’s earlier highs. And, yes, I know the noise Amarin has made about Canada, but it is small and no drug has achieved blockbuster status by simply selling in Canada. As for Asia, well there is the Chinese Communist Party that provides a competitive barrier to entry for any companies in any industries. This is, perhaps, a relevant discussion for another time if Amarin still exists as a standalone company.

Once more I turn to Yogi Berra

If you ask me anything I don’t know, I’m not going to answer.

Concluding Thoughts

No company with a single product can afford to simply give up when it runs into the proverbial existential threat. Management makes the big bucks because it is their job to strategize their way out of problems and into success. Critical thinking and effective decisions are necessary in such untenable situations.

So, as Yogi might optimistically say about Amarin –

It ain’t over ‘til it’s over!

As for my thoughts, what was necessary to say about Amarin was said in the aforementioned discussion. So, let’s finish with a metaphorically relevant story.

In the U.S. Civil War, Union Maj. Gen. John Sedgwick, a graduate of West Point, was one of the most experienced and competent officers in the Army of the Potomac. In May 1864, while looking out over the potential battlefield at Spotsylvania Courthouse in Virginia, General Sedgwick was cautioned by his staff officers about approaching the road, as Confederate sharpshooters were peppering the area with fire and causing casualties. But he forgot their warnings a few minutes later when he walked over to untangle a problem he saw in his front line. When his men warned him to take cover, Sedgwick responded by joking, “They couldn’t hit an elephant at that distance.” Just then, a sharpshooter’s bullet killed him instantly.

I trust the metaphorical point of the story is not lost on the reader!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


Originally published on Seeking Alpha

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