Why And How To Play AMRN

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One of the most heavily followed stocks in the healthcare industry is Amarin (NASDAQ: AMRN), which recently initiated their launch of Vascepa. The drug was approved in 2012 for the treatment of hypertriglyeridemia (very high triglyceride levels) in patients with ≥500 mg/dL, which is only a portion of the high triglyceride population.

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Why Amarin?

Perhaps the main reason that investors are excited about the value potential of Amarin (especially at these levels) is because of the success of the drug known as Lovaza, which is marketed by GlaxoSmithKline (NYSE:GSK). Lovaza brings in an annual revenue of about $1 billion in the United States, and an addition $400 million from abroad. Since Amarin’s Vascepa is expected to largely displace Lovaza due to its comparable efficacy and superior safety profile, you can see that Amarin’s market capitalization of $1.3 billion is pricing in a scenario where Vascepa only generates a fraction of Lovaza’s current revenue. This seems overly pessimistic given its success in clinical trials.

Amarin’s valuation also doesn’t account for the Vascepa’s potential to expand its target patient population as early as this year. With its current FDA approved indication, it targets about 4 million patients in the United States with triglyceride levels of ≥500 mg/dL. Based on their phase III ANCHOR trial, which tested Vascepa in patients with high triglycerides at ≥200 mg/dL but less than 500 mg/dL, the pill works just as well at triglyceride reduction. If you consider that about 40 million Americans have triglyceride levels above 200 mg/dL, (NASDAQ:AMRN) starts to look even more undervalued.

Amarin will be submitting a supplemental NDA to the FDA before the end of this month (February), which should result in another FDA decision right before the end of this year. For the meantime, investors are anticipating early figures from Vascepa’s launch. Since things are temporarily quiet, I think it’s a decent time for investors who want the stock to slowly accumulate it for the long run.

How to play

I think there are a few ways great ways for an investor to play (NASDAQ:AMRN) right now, given that he/she has performed sufficient due diligence on the company and likes Vascepa’s future prospects. The most basic method is to simply buy (NASDAQ:AMRN) on small dips and to hold in anticipation of early Vascepa prescriptions. One can also wait for the end of the year, when we should receive an FDA decision that expands Vascepa’s target population tenfold. Ultimately, this is a value play that will take a bit of time to pay off.

The other ideas are options-related, and require a bit of understanding about options strategies.

A straightforward way to potentially “buy” (NASDAQ:AMRN) at a price lower than the market’s is to sell put options on AMRN with a strike price lower than the market price, all covered with the appropriate amount of cash. Since Amarin doesn’t want to drop below $8/share these days, I think 8.00 is an idea strike price for this kind of strategy.

Those who are holding (NASDAQ:AMRN) shares may want to be selling covered calls, which can generate some passive income on a position while the underlying stock stays flat. This may not be a good idea for those who are still expecting an acquisition of Amarin in the near future though, since it’s likely that the acquisition price of Amarin would be in the teens (at least).

Finishing up

Over 16% of (NASDAQ:AMRN) is still short. I think that the bulk of the bears are anticipating a very weak launch for Vascepa. There’s no way to tell for sure who will be right, but I think the odds favor the bulls by quite a margin. Much of the negativity has already been unleashed on (NASDAQ:AMRN), after it was announced that they would launch Vascepa without a partner. The company secured an extra $100 million in cash to facilitate a smooth launch (in December 2012), and could be EPS-positive quite soon.

Disclosure: Long AMRN

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