Why is Orbimed Backing Out of Amarin?

Orbimed Advisors, managed by Samuel Isaly, is a hedge fund with a focus on the healthcare sector. At the end of June, according to Orbimed’s 13F filing, the fund owned 1.2 million shares of Irish drug manufacturer Amarin Corporation plc (NASDAQ:AMRN). This is significantly smaller than the 1.8 million shares the fund opened the year with. The sales have continued during the third quarter: Orbimed recently filed with the SEC to disclose that it had sold over 230,000 shares on September 4th at an average price of $14.43. The stock has doubled this year partly due to FDA approval of Amarin’s Vascepa drug, designed to treat high cholesterol. We could easily see Orbimed selling some shares to lock in profits that it has earned from Amarin’s rise this year, yet the fact that the fund has disposed of such a large portion of the stake that it began the year with suggests that it does in fact believe that the stock is now overvalued.

Amarin Corporation plc (ADR) (NASDAQ:AMRN)

We looked at Amarin in depth last month. Amarin’s business prospects depend on the successful production and marketing of Vascepa to compete with rival cholesterol drugs such as GlaxoSmithKline plc (NYSE:GSK)’s Lovaza. If Vascepa can be seen as a credible alternative, the company could bring in hundreds of millions of dollars in annual revenue (at least before giving a cut of sales to any marketing partners). Sell-side analyst projections average out to five cents of earnings per share in 2013, though there is a wide range of estimates. The company will also have a few years of patent exclusivity to help justify the current market capitalization of $2.2 billion.

It will be interesting to see if other hedge funds report smaller stakes in Amarin in their filings for the third quarter when those are released in November. We know that Bain Capital’s Brookside Capital initiated a position of 4.9 million shares during the second quarter (find more stock picks from Brookside Capital). Orbimed was not alone in selling out of the stock between April and June, however: Ardsley Partners, managed by Philip Hempleman, sold more than half the shares it had started the quarter with (see more buying and selling activity at Ardsley Partners).

We’ve already mentioned GlaxoSmithKline as a potential competitor. The pharmaceutical giant trades at 14 times trailing earnings and 10 times forward earnings estimates, and also pays a dividend yield of 4.7%. It certainly does not have as much potential as Amarin, but could be a good value stock. Merck & Co., Inc. (NYSE:MRK) is another large-cap pharmaceutical company. Its 4.5% dividend yield is in the same range as GlaxoSmithKline’s, but it is priced higher relative to its earnings with trailing and forward P/E multiples of 20 and 12, respectively. We would prefer either of these stocks on a value basis, but investors looking for a speculative but potentially high-reward healthcare opportunity might prefer to compare Amarin to weight loss treatment providers VIVUS, Inc. (NASDAQ:VVUS) and Arena Pharmaceuticals, Inc. (NASDAQ:ARNA). The two drug developers are set for a nasty battle in doctor’s offices throughout the U.S. and the world as both appear to be effective in causing weight loss and are FDA approved- but also have safety concerns. Both of these companies have market capitalizations of about $2 billion. We think that the market opportunity for weight loss drugs- particularly if they can break into the vanity market- is greater than that for high cholesterol. If we weren’t worried about potential side effects, we would easily recommend either Vivus, Arena, or both over Amarin given this opportunity and the fact that all three companies have similar market capitalizations.

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