Daily USA: Amarin–2019’s Biggest Buyout Target for Big Pharma and more

In this briefing:

1. Amarin–2019’s Biggest Buyout Target for Big Pharma
2. H1 2019 Roadmap: Volatility Ahead
3. Big Banks – A Crisis of Investor Confidence
4. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program
5. Beto’s Emergence: Pragmatic Policymaking Suddenly Seems Possible (Just 24 Short Months From Now)

1. Amarin–2019’s Biggest Buyout Target for Big Pharma

Amarin (AMRN US), a US-listed biotech firm, presented the full results of its “Reduce-It” (RI) clinical trial at a conference for the American Heart Association (AHA) last November. The new data announced showed that, Vascepa–Amarin’s cardiovascular drug–when used with statins, reduces the risk of heart attacks by 31%, strokes by 28%, and cardiovascular death by 20%–all with minimal safety issues. The stock has plunged by -37% since the AHA event, largely due to concerns–which are misplaced in our view–regarding the placebo used in the RI trial. 

We attended the AHA event and its ancillary meetings in Chicago and, in this Insight, detail the main points covered there, the powerful efficacy of Vascepa, the addressable market, the placebo issue, and why we think Amarin could be 2019’s biggest buyout candidate among Big Pharma. We also analyze Amarin’s 2018 preliminary results and 2019 guidance from last Friday in detail.      

Enthusiastic Response from Doctors over the “Reduce-It” Trial Data: The data released at the AHA event for Vascepa from its Reduce-It (RI) trial was so robust that it drew applause from the 2,500 doctors in attendance, 87% of whom were polled, responding that they would prescribe Vascepa. Given how safe the drug is and its high relative risk reduction (RRR) of cardiovascular events, Vascepa should be a blockbuster drug. 

Q4 2018 Revenues & Prescriptions Surge Post Trial Results: Amarin just announced Q4 revenues and 2019 guidance last Friday. While its conservative 2019 guidance of $350m in revenues (+55% YoY) may disappoint, as it’s 16% below consensus estimates, the key focus should be on Q4 revenue growth of 38% YoY, with 35% growth in new prescriptions. This came on the back of the RI trial results and without any label expansion, which Amarin plans to file with the FDA during Q1. If label expansion is approved, Vascepa sales should soar further. 

Peak Sales Could Easily Surpass $10bn if Vascepa is Approved in Europe & China: Counting only the patients with coronary heart disease and diabetes–the core target for Vascepa–there are 48m patients in North America, 98m in Europe and 230m in China. If only 30% of these patients use Vascepa by 2030–when its patent expires–peak sales could reach at least $12bn (see Table-3 below). The need for Vascepa is dire, as cardiovascular disease (CVD) is the leading cause of death worldwide (see chart-1). In the US, one in four adults have elevated triglycerides, yet only 4% have been treated. The upside for Vascepa is huge. 

Stock Plunges Due to Concern Over Placebo Used in Reduce-It Trial: Just 16 minutes into the Reduce-It trial results being revealed at the AHA conference last November, Forbes published a “kill” story on the trial outcomes. The Forbes article (here) claimed that results were not trustworthy (quoting doctors in charge of clinical trials for a rival drug), as the mineral oil used in the placebo arm of the trial impacted statin absorption. This sent the stock plunging by -26% in the following two days after the conference. Below we discuss why these concerns are misplaced, especially since the FDA approved of mineral oil for use as a placebo.   

Amarin is Now an Attractive Take-Over Candidate for Big Pharma: Based on our estimates, Amarin should reach $7.6bn in 2022 revenues and $8.40 in EPS (consensus is at $1.5bn and $2.23) on just 40% penetration of the CVD patients in the US and the Middle East (where Vascepa is already approved) and 30% penetration in Canada and Europe.  On average, it takes drug makers at least $4bn over 10 years for new drug development and the success rate for FDA approval is only one in ten. In light of this, Amarin has become an attractive take-over candidate, with potential peak sales of $16bn (if China is successfully penetrated) and current market cap of only $4.2bn. 

2. H1 2019 Roadmap: Volatility Ahead

It gives us little pleasure to say “We told you so”. But we told you so.

We warned in early December that earnings were going to disappoint in 2019 (see 2019 Preview: Winter Is Coming). Since then, tumbling earnings estimates have been one of the main reasons for the weakness in stock prices.

The recent warning from Apple is just setting the table for further disappointment, and the upcoming Q4 earnings season will be revealing as to how far estimates have to fall. We expect more market sloppiness in Q1 and the first six months of 2019, until the uncertainties surrounding the upcoming growth deceleration and trade war are resolved.

We expect market in H1 2019 to be sloppy as it resolves these uncertainties. Conventional technical analysis suggests that the stock market is undergoing a bottoming process. Long-term sentiment is showing signs of capitulation, and insiders are buying. If history is any guide, the market should make an initial bottom in January, following by a rally and several months of choppiness, followed by a re-test of the previous lows. The re-test, which is expected to occur within a 2–6-month time frame, would be the final bear market bottom.

On the other hand, should a trade war erupt, or if an overly hawkish Fed pushes the economy into recession, all bets are off. The template might be the 2001–-2002 market, where the market made an initial low in the aftermath of the 9/11 attack, rallied and chopped around, only to decline into an ultimate double bottom a little over a year later.

3. Big Banks – A Crisis of Investor Confidence

We analyse the holdings of the world’s largest banks by the 255 global equity funds in our analysis. For each region (America/EMEA/Asia), we have selected the 6 largest banks by total assets, as defined by the S&P Global Market Intelligence Report, 2018.

We find that overall, holdings in these banks are on the decline, and in some cases, investor flight has been acute.  Only 2 of the 18 banks are held overweight by global investors, with Citigroup Inc (C US) and Bnp Paribas (BNP FP) seeing the biggest exodus through 2018.

4. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program

Since its founding in 1960 the Housing Development Board (HDB) has constructed over 1.1 million dwelling units across Singapore. Currently, over 80% of the Singapore population lives in HDB built housing. With the bulk of these buildings having been constructed between 1960-1988 many of them are up for extensive renewal and renovation works. Construction companies should benefit from this trend, as should the micro-cap Ips Securex Holdings (IPSS SP), a reseller of equipment that modifies HDBs with emergency monitoring systems for senior citizens.

Outgoing PM Lee Hsien Loong (LHL) was very outspoken about the need to upgrade HDBs and make them safer for many of SG’s “pioneers” and senior citizens during his speech at the 2018 National Day Parade (NDP). With a general election coming later this year (date TBC) investors in IPS can be hopeful that the company should be awarded some new contracts and finally end the three-year de-rating which has taken the stock from 0.32 SGD in December 2015 to 0.055 SGD recently.

IPS is cheap with a market cap of only 27M SGD (20M USD) but can only start to re-rate on new major contract announcements.

5. Beto’s Emergence: Pragmatic Policymaking Suddenly Seems Possible (Just 24 Short Months From Now)

As market scrutiny focuses on the short-term effects of current trends – i.e., slowing global growth, the US government shutdown and the Trump ‘trade war’ – an overlooked longer-term prospect is that the US political outlook may finally be improving. 

Since Hillary Clinton’s sensational loss in 2016, the Democrat Party has been in disarray about whom to nominate for president in 2020, and this in turn has fostered the specter of President Donald Trump serving through 2024.  However, new polls now show that the Democrats may already be uniting behind a potential nominee who is not only vetted and viable, but also reasonably centrist (especially on economics).  This is the former three-term congressman from El Paso, Texas: Beto O’Rourke (no relation to this insight writer). 

O’Rourke’s emergence is significant because it can reduce perceptions of risk surrounding the 2020 election and, more importantly, offer prospects for sounder policymaking and international re‑engagement starting 24 months from now.  In particular, O’Rourke (like Obama) supports free trade and he voted for the Trans Pacific Partnership (TPP).  In contrast to redressing perceived grievances through ruinous tariffs, the TPP offered hope for bringing about equitable economic relations through positive inducements.  If the pact were to develop and expand with US participation, benefits to membership might become clear – which might eventually elicit interest from China and achieve the cooperation that Trump has fitfully pursued through coercive means.  In any event, the prospect of less US protectionism post‑2020 suggests that the recent downturn for exporters (e.g., Apple) may be, in the grand scheme, a blip – not the start of a secular decline.