Amarin (AMRN): Despite Reiterating “Buy” Rating, Stifel Tempers Expectations

In an acronym-heavy update, Stifel analyst Derek Archila reiterated his “buy” rating on anti-cholesterol  drugmaker Amarin Corporation (AMRN) following the company’s Q2 earnings report. The analyst also slightly reduced his price target to $26 (from $27), which implies nearly 40% upside from current levels. (To watch Archila’s track record, click here)

Amarin booked $100.8 million in sales during the quarter, nearly twice the revenue reported in Q2 2018, and showed revenue growth accelerating from the pace set in Q1. Losses during the quarter were significantly lessened — just $0.01 per diluted share, versus the $0.12 per share lost in Q2 2018.

Partly, this was a consequence of having more revenues available to offset cost of goods sold (COGS), selling, general, and administrative expenses (SG&A), and research and development (R&D) spending. Furthermore, it was a consequence of COGS and SG&A spending growing more slowly than revenues — and R&D spending actually declining year over year. But it also worked to Amarin’s benefit that its share count increased by about 13% over the past year, diluting losses across more shares outstanding.

And speaking of dilution, Amarin noted that it issued and sold about 29.3 million new shares last month. On the plus side, those share sales raised $439.5 million in cash with which to fund the company’s continued losses. On the minus side, once Amarin begins earning profits, those profits will be diluted among more shares outstanding — much like Amarin’s losses were diluted among more shares outstanding in Q2.

Not that anyone is talking much about Amarin’s profits and losses right now. Instead, attention is focused on the company’s supplemental New Drug Application (“sNDA”) to expand the permitted uses of its prescription Vascepa drug used to reduce triglycerides in the bloodstream.

Regarding this initiative, Archila noted that he sees a “high probability of approval” of the sNDA by the Food and Drug Administration. In the analyst’s view, it’s unlikely the FDA will empanel an Advisory Committee (“adcom”) to review Amarin’s sNDA for Vascepa because there’s a Sept. 28, 2019 deadline approaching for approving or rejecting the application. Less red tape being a good thing for a drug application, Archila sees the avoidance of an adcom as a positive for the drug’s chances, and for Amarin stock.

How positive could this become?

Archila noted that Amarin management still hasn’t definitively stated what precise conditions it will “label” Vascepa to treat, a matter the analyst notes, deadpan, is rather “important.” Nevertheless, whatever the label ultimately says, Archila is confident it “will increase [Vascepa’s] total addressable market by ~20x” — another plus for the stock.

And yet … “20x?” That seems a rather bold pronouncement to make regarding such an “important,” but unknown fact. This ambiguity may partially explain why, despite insisting that Amarin stock “could trade into the low ~$20 range” upon the sNDA’s approval, and despite reiterating its “buy” rating on the stock, Stifel actually lowered its price target slightly — from $27 a share to $26.

But it’s not the only reason.

Archila raised his fiscal 2019 revenue estimate to $404 million, and raised its fiscal 2020 revenue estimate to $791 million (a 13% increase). At the same time however, the analyst increased its estimate of fiscal 2019 losses (to $0.11 per share) and lowered its estimate of fiscal 2020 profits (to $0.37 per share).

As Archila explained, Amarin plans to roughly double the size of its sales force, and more sales reps logically means more sales for Amarin. At the same time, however, all those new employees will want to be paid, adding SG&A costs and thus reducing profits. (The greater number of shares outstanding, too, is a reason for tempering profits expectations per share).

All of which explains why the analyst can be optimistic about sales growth, at the same time as it tempers its optimism on profits — and why you should, perhaps, too.

But Wall Street’s confidence on the stock speaks for itself; AMRN has received a whopping 6 ‘buy’ ratings in the last three months. Meanwhile, the $32.67 consensus price target suggests a potential upside of nearly 75% from the current share price. (See AMRN’s price targets and analyst ratings on TipRanks)


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