Amarin Corporation plc — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Financial statements are unaudited; amounts below are U.S. dollars unless stated otherwise.
Business context
Amarin is a biopharmaceutical company focused on Vascepa (icosapent ethyl), its sole commercial product. Vascepa was FDA-approved for severe hypertriglyceridemia (the MARINE indication) and launched in the U.S. in January 2013. The company also markets through a co-promotion agreement with Kowa, whose approximately 250 sales representatives began promotion in May 2014 alongside Amarin’s roughly 130 U.S. representatives. Amarin’s principal development program is the REDUCE-IT cardiovascular outcomes trial.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Product revenue | $14.1m | $8.4m | $37.7m | $16.2m |
| Gross margin | 62% | 56% | 61% | 52% |
| Operating loss | $24.9m | $40.4m | $75.8m | $149.2m |
| Net loss | $26.1m | $48.9m | $36.7m | $150.8m |
| Net loss per share, basic | $0.15 | $0.29 | $0.21 | $0.96 |
Revenue increased 68% for the quarter and 133% year to date. Gross-margin improvement was attributed principally to lower unit-cost API purchases. Nine-month selling, general and administrative expense fell 40% to $60.9m, and research and development expense fell 32% to $37.9m. Net losses narrowed substantially, reflecting lower operating expenses, derivative fair-value gains, and a $38.0m gain on extinguishment of debt in 2014; these non-operating gains mean net loss is not a direct measure of recurring operating performance.
Net cash used in operating activities was $58.7m for the first nine months, compared with $157.3m in 2013. Cash and cash equivalents were $135.4m at September 30, down $56.1m from year-end 2013; investing cash flow was nil. Management said cash was expected to fund projected operations for at least the next 12 months. The company had a $69.2m stockholders’ deficit and $254.6m of total liabilities. Balance-sheet carrying amounts included $13.8m of current debt, $89.2m of long-term debt, and $120.5m of exchangeable senior notes; these exclude associated derivative liabilities.
Material changes and unusual items
- Beginning January 2014, Amarin changed revenue recognition from distributor resale to sales upon shipment to distributors after concluding it could reliably estimate returns. It recognized $1.7m of previously deferred revenue in Q1 2014. Accordingly, comparisons with 2013 are affected by differing recognition methods; the filing does not quantify the precise effect on period-to-period comparability.
- In May 2014, $118.7m principal amount of 2012 exchangeable notes was exchanged for new 2014 notes. The modification moved the first holder put date from 2017 to 2019 and changed conversion terms. Amarin recorded a $38.0m extinguishment gain and a $10.1m reduction to additional paid-in capital for reacquisition of the conversion option.
- Nine-month derivative fair-value gains were $11.9m, versus $21.1m in 2013. The 2014 results also included $4.0m of other income, primarily supplier and encapsulator settlement refunds.
- Inventory declined to $11.9m from $26.7m at year-end 2013, including no long-term inventory at September 30. Accounts receivable rose to $6.7m from $3.6m.
Outlook, risks and contingencies
- Guidance: No quantified revenue or prescription guidance was provided. Management anticipated continued Vascepa revenue growth but cautioned that growth could vary between periods and that early sales data may not predict future results. Q3 prescription estimates were approximately 132,000 from Symphony and 113,000 from IMS; the filing cautions these third-party estimates may differ and are not definitive.
- Clinical and regulatory: More than 7,100 patients, approximately 90% of the 8,000-patient target, were enrolled in REDUCE-IT. Management expected enrollment completion within 2015, an interim efficacy review by the independent monitoring committee during 2016, trial completion around 2017 and results in 2018. Estimated remaining study costs likely exceeded $100m. The company remained blinded to trial data. The FDA had rescinded the ANCHOR trial’s Special Protocol Assessment, rejected Amarin’s appeals, and had not yet acted on the pending ANCHOR application; management expected FDA action in the near future and said positive REDUCE-IT results would likely be required for label expansion.
- Commercial and supply risks: Vascepa depends on one product and U.S. commercialization, with significant competition, reimbursement and market-acceptance uncertainties. The top three customers represented 95% of gross product sales in the first nine months and 96% of gross receivables at September 30. Suppliers’ minimum-purchase commitments totaled $54.5m, potentially payable over time; certain agreements allow cash payments for shortfalls.
- Debt and funding: BioPharma financing had $145.8m remaining under its maximum repayment obligation. Payments are revenue-linked and subject to quarterly thresholds; management said revenues had been below contractual thresholds and amounts could be deferred. The financing is secured by Vascepa-related intellectual property and other collateral, and a change of control can accelerate repayment. Exchangeable notes have conversion, put and change-of-control provisions that could affect liquidity or dilution.
- Legal and regulatory contingencies: The company faced a consolidated securities class action alleging disclosures related to ANCHOR and REDUCE-IT; loss exposure was not reasonably estimable. It also challenged FDA’s denial of five-year new-chemical-entity exclusivity, pursued patent litigation concerning Epanova, and sued six generic applicants. The company said the Hatch-Waxman stays generally prevent final generic approval before September 2016 absent an earlier adverse court ruling. Separately, a September FDA inspection made observations about adverse-event reporting processes; Amarin said it had responded and was working to improve the systems.
- Other commitments: Potential Laxdale payments tied to future approvals were not accrued because they were not considered probable or estimable: approximately $12.2m for a first European indication and up to approximately $16.2m for two further approvals. The company reported no material changes in market-risk disclosures and no material changes in internal control over financial reporting; management assessed disclosure controls as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether Vascepa revenue growth continues, considering the January 2014 revenue-recognition change, distributor shipment timing, rebates and returns.
- REDUCE-IT enrollment, interim review and completion milestones, remaining trial costs, and any FDA communications or eventual results.
- FDA disposition of the ANCHOR application and the outcome of the NCE exclusivity challenge and patent cases, including generic-entry timing.
- Cash burn and runway relative to the stated 12-month estimate, the greater-than-$100m remaining REDUCE-IT cost estimate, and debt repayment or conversion obligations.
- Vascepa’s gross-margin trajectory, Kowa co-promotion economics, supply commitments and customer concentration.
- Progress resolving the FDA’s adverse-event reporting observations and the potential exposure from securities and other litigation.