Amarin Corporation plc — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited U.S. GAAP statements; financial amounts below are in millions of U.S. dollars unless noted.
Business context
Amarin is a biopharmaceutical company focused on Vascepa (icosapent ethyl), its sole commercial product and principal development program. Vascepa was FDA-approved for severe hypertriglyceridemia (the MARINE indication) and launched in the U.S. in January 2013. The company had about 150 sales professionals and began co-promotion with Kowa in May 2014, adding approximately 250 representatives.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Product revenue | $12.6 | $5.5 | $23.6 | $7.8 |
| Gross margin | 60% | 48% | 61% | 47% |
| Operating expenses | $32.8 | $51.5 | $65.1 | $112.6 |
| Operating loss | $(25.2) | $(48.8) | $(50.8) | $(108.8) |
| Net income (loss) | $15.3 | $(39.8) | $(10.7) | $(101.9) |
| Net cash used in operations | Not separately stated | Not separately stated | $(38.8) | $(112.4) |
- Q2 revenue rose 129% year over year; first-half revenue rose 203%. Management attributed growth to commercialization of Vascepa. Prescription estimates increased sequentially in Q2, but the company cautioned that third-party estimates may be inaccurate and are not reliable forecasts.
- Gross margin improved, which management attributed primarily to lower unit API costs. It expected 2014 gross margin to remain below subsequent years, citing supply pricing and other factors.
- Q2 net income included a $38.0 million gain on extinguishment of debt and $4.2 million of other income, primarily supplier and encapsulator reimbursements. These items, alongside a $3.0 million derivative fair-value gain, mean reported quarterly profit did not reflect operating profitability. First-half results remained a net loss.
- SG&A was $21.1 million in Q2 and $41.7 million for the first half, down 38% and 43%, respectively, year over year. R&D was $11.7 million and $23.4 million, down 33% and 40%. Lower spending largely reflected the 2013 workforce reduction and reduced launch, supply, and study costs.
- Cash and cash equivalents were $150.5 million at June 30, down $41.0 million from year-end 2013. Total current assets were $178.0 million and current liabilities $37.9 million. Total liabilities were $255.8 million; stockholders’ deficit was $50.0 million.
- Debt included $119.2 million of exchangeable senior notes and $88.7 million of long-term debt. In May 2014, $118.7 million principal of the 2012 notes was exchanged for new 2014 notes; $31.3 million principal of the 2012 notes remained. The notes carry 3.5% stated interest. The BioPharma financing had $147.1 million remaining to repay, secured by Vascepa-related rights and receivables.
- Management said cash was expected to fund projected operations for at least 12 months. It also expected 2014 net cash outflows to be significantly lower than in 2013. The company filed a new shelf registration statement on August 7, 2014, after quarter-end, for offers of up to $300 million in securities; any equity issuance could dilute shareholders.
Material changes, outlook, and risks
- Revenue recognition: Beginning January 2014, Amarin changed from recognizing revenue when distributors resold product for prescriptions to recognizing sales upon shipment to distributors, after concluding it could estimate returns reliably. This recognized approximately $1.7 million of previously deferred revenue in Q1 2014 and complicates comparisons with 2013. Returns had been de minimis through June 30.
- Regulatory outlook: The FDA had not acted on the ANCHOR supplemental application, and no new review goal date was set. The FDA rescinded the ANCHOR trial’s Special Protocol Assessment; two internal appeal levels upheld that decision, and a further appeal was pending. Management said it expected positive REDUCE-IT outcomes to be required for label expansion. There is no quantified revenue guidance.
- REDUCE-IT: More than 7,000 patients were enrolled. Management estimated enrollment completion in the first half of 2015, study completion around 2017, and results in 2018. Estimated remaining costs to complete and evaluate the study exceeded $100 million. Management said it might reassess continuation if ANCHOR is not approved.
- Commercial and supply risks: The business depends on Vascepa and a concentrated wholesaler base; its top three customers accounted for 95% of gross product sales in the first half. API sourcing and qualification remain important, and the BASF agreement was terminated in February 2014, followed by a settlement and $3.0 million refund. Minimum supplier purchase commitments and supply execution pose risks.
- Competition and legal matters: FDA-approved Epanova could compete with Vascepa. Amarin was pursuing patent litigation against generic applicants and AstraZeneca/Omthera; the generic cases triggered a 30-month stay that management believed extended to September 2016, subject to earlier court decisions. The company also challenged FDA’s denial of five-year exclusivity and faced consolidated securities class-action litigation; outcomes and potential losses were uncertain.
- Other commitments: Contractual cash obligations totaled $84.2 million, including $57.7 million of purchase obligations and $24.1 million of exchangeable-debt interest payments; the table excluded repayment of the $150 million notes. Potential Laxdale milestone payments of approximately $12.8 million for European approval of a first indication and up to $17.0 million for further indications were not accrued because they were not considered probable or estimable.
Most important facts for investors to verify
- Progress and FDA decisions on the ANCHOR application and the appeal concerning the rescinded SPA; any updated regulatory requirements for label expansion.
- REDUCE-IT enrollment, event accrual, projected completion/results dates, remaining cost estimates, and the company’s ability and intention to fund the trial.
- Vascepa prescription and net-sales trends, channel inventory and returns, payer coverage, and the effect of the 2014 revenue-recognition change on period comparisons.
- Cash burn and financing needs against management’s stated 12-month runway, including any use of the new $300 million shelf registration.
- Debt repayment terms and BioPharma revenue thresholds; outcomes of generic, competitor-patent, exclusivity, and shareholder litigation; and the implications for product exclusivity and commercialization.