Amarin Corp Plc (AMRN)

[HDGabor]

If somebody could not sleep …. maybe it could help as it is long

g- (&CaptBeer and to who is interested in it)

I hope it helps to understand the “background” of reported numbers.

Last year, sales increased from $142.2M to $154.5M from Q1 2021 to Q2 2021, a seasonal 9% increase. So with a decrease in wholesales price per 120 Vascepa caps coupled with a decrease in scripts # for Q2 2022

In my calculations I assumed VASCEPA would get the same average price of $99.73/Rx that it did in Q1.

(Please note: numbers below are Non-GAAP, excluding Non-cash items like salaries in RSUs and Options.)

I. (Net) Revenue:

First of all the revenue is based on “sold to wholesalers” and does not on “dispensed to patients” (Symphony Health / IQVIA …“weekly raf-‘s report” / IQ) … since (IIRC) 2015.

(“footnote”: Furthermore Symphony Health and IQVIA are “guess” / survey. Meanwhile they cover / collect from the majority of the universe (dispense points) did not cover all, extrapolate the total from the collected data. They had not report the same number ever, usually a 4-9% difference exist. e.g.: Symphony Health: 937k vs IQVIA: 878k in Q1 2022)

How Amarin calculate, book the (net, reported) revenue?

1.) Gross Revenue: “sold to wholesalers” x wholesale price (WSP)
The WSP had not been decreased ever, it is the same or higher than in the previous month / quarter. Acc. to my best knowledge it is (app.) $340+ / bottle now, increased from $330+ / bottle in Q4 2021. (End of) December is the usual time for this increase in every year.
The WPS / bottle ($) was 318 …330 … 330 … 330 … 330 …340 in the last 6 quarters (Q4 2020 – Q1 2022) based on: Pricing NDC Code 52937-001-20 Vascepa Icosapent Ethyl (ndclist.com)

Due to this well-known timing and increase of WPS the wholesalers always increase – more than “necessary” - their inventory level in Q4, buy the bottles on a lower price … they buy more than the quantity dispensed to patients.
The opposite is true in Q1. The WSs satisfy the market demand from their inventory and buy less than dispensed to patients.

The sold / dispensed bottle ratios was: 1.14 … 0.98 … 1.07 … 1.04 … 1.11 …0.89 in the last 6 quarters (Q4 2020 – Q1 2022). As you see it was the lowest in Q1 2022, it was at the low-end of the range of the days of sales (Please: note this range is not a fixed one, depends on the actual sales.)

Gross Revenue is not a reported line, but could be calculated as: +4 + 3 +2 (all of them in the 10-K/Qs)

2.) Trade Allowances, Product Returns and Other Incentives (TPO)
I do not detail these, since it is more or less flat (10)12-15% of Gross Revenue in every quarter. The “fluctuation” is coming from Other Incentives, which includes Vascepa Card.

3.) Rebates, Chargebacks and Discounts (RCD)
See details below.

4.) Net Revenue = + 1.) – 2.) – 3.)
Net Revenue / bottles = 1.) / WSP

e.g.(Q1 2022; $, in ‘000 except WSP and Net Revenue / bottles)

WSP: 340 / bottle
1.) Gross Revenue (calculated from 2, 3 and 4 below): 273.760
2.) TPO (from 10-Q): 31.571
3.) RCD (from 10-Q): 148.203
4.) Net Revenue (from 10-Q) : 93,986
Net Revenue / bottles: 116.89 (273.760 / 340)

II. Rebates, Chargebacks and Discounts (RCD / 3.) above):

The Company contracts with Medicaid, Medicare, other government agencies and various private organizations and estimates the rebates, chargebacks and discounts and deducts these estimated amounts from its gross product revenues at the time the revenues are recognized.

(More likely) The new market approach (exclusive contracts) did not started in Q1 2022 … but in Q2 2021, as
(i) it was at 40% by EOY2021 (45% at EO Q1 2022) and
(ii) the – calculated – RCD / bottle ($) was 146 … 147 … 154 … 162 … 167 …184 in the last 6 quarters (Q4 2020 – Q1 2022).

I do not expect a further increase … maybe a decrease …as:

(i) It is increasing continuously – as more and more exclusive contracts were in place – but the Q4 21 vs Q1 22 increase was significant: +10%. I assume it is due to:
(a) increase in WSP (+$10 / bottle …keep the exclusive net price on the same level)
(b) new exclusive contracts (40% vs 45% … Q4 vs Q1)

(ii) It could be due to also
(a) final settlement of 2021
(b) one time fees

I did not expect a lower Net Revenue / bottles than $116.89 … it could be a slightly higher (e.g. $120 … please note: it was $129 in Q4 2021).

III. Gross Margin (no change – 75% - “as” in Q1

IV. Operating Expense

(i) R&D: no significant change, but less than in Q1 ($7-7,5M vs $8,6M)
(ii) SGA: They will report a one-time cost of the restructuring - $10M – but ont he other hand they will have less marketing cost ($30M reduction in annual marketing expenses was announced during Q1 call, beginning of May) and the $100M cost reduction plan (over the next 12 months, announced by beginning of June) – more likely – has some effect on June / Q2 also.

I did not expect a higher Operating expenses than in Q1 … it could be a slightly lower (e.g.$ 95M vs $100M in Q1).

Operating loss: Due to higher sales, same or slightly lower OPEX it will be better than Q1 and the expectation (the same is true for the expected EPS, -$0.07) … meanwhile still red, could be significantly better (Please note: I will not be surprised by +/- 0 …)

and finally …

V. Cash / Cash-flow

Net cash used in operating activities was - $98,847k in Q1. Significant portion – $75.179k / 76% - was API / product related … the rest - $23.668k – belongs to operation and working capital.

V.1.: API / product

I discuss COGS here as it is very inventory related and the two together is relevant for the cash-flow.

Purchase obligation / commitment has two parts:
a.) Certain of the agreements with the suppliers include minimum purchase obligations. These purchases are generally made on the basis of rolling 12-month forecasts which in part are binding on Amarin and the balance of which are subject to adjustment by Amarin subject to certain limitations.
b.) Certain of the agreements also include contractual minimum purchase commitments regardless of the rolling 12-month forecasts.

Inventory cash-flow equal with (-) COGS (+/-) change of inventory. Amarin had the following ($M)

Period: COGS / Inventory* / Change in inventory = Cash-flow / Commitment at the end of the period** / Change in commitment.
* They have a “new” inventory category since end of 2021 (long-term inventory: when consumption of the inventory is expected normal operating cycle) but as I do not know the duration of the normal operating cycle I did not separate it in this analysis … just as a note below.)
** (“Pursuant to the supply agreements, there is a total of approximately $ X million that is potentially payable over the term of such agreements based on minimum purchase obligations.)

2020: 131* / 189* / 112** = 244* / 326* / +134**
2021 Q1: 28 / 231 / 42 = 70 / 213 / -113
2021 Q2: 32 / 272 / 42 = 74 / 213 / 0
2021 Q3: 30 / 309 / 37 = 67 / 213 / 0
2021 Q4: 31 / 356 / 47 = 77 / 196 / -17
2021: 121* / 356* / 167** = 288* / 196* / -130**
2022 Q1: 22 / 409 / 53 = 75 / 49 / -147
* Sum of the year or at the end of the year
** vs. previous year end

So what could be changed?

First of all: it was an awful “goods” / inventory management e.g. (i) they spent more in 2021 than in 2020 (ii) commitment was not changed during Q2 & Q3 2021 …

The good things (looks like as … based on these data): they are managing the inventory since August 1 (?), 2021 … since Q4 2021 (i) separating the short and long inventory (ii) reducing obligation / commitment.

The commitment is all-time low ($49M) as of March 31, 2021 and I assume this is “100”% the contractual minimum purchase commitments (regardless of the rolling 12-month forecasts) or contains minimal rolling 12-month forecasts.
I do not know how long the contracts are and what is the period (year / quarter / month) for commitment, so I used the following assumptions:
(i) The $49M commitment is due till the end of 2022 (I think it is – very, very - conservative)
(ii) Same in every quarters
(iii) They will not purchase anything top of the commitment (Maybe it is a bold assumption … but it is a prudent one).

What it means for Q2?

They purchase(d) $16,433k in Q2 … less by $58,746k than in Q1.
(Note: If the $49M contains commitment for 2023- and / or the commitment is not on a quarterly basis, the purchase in Q2 could be …. nil … independently from COGS)

V.2.: Operation (without COGS)

The operation related cash (out) flow was …. $2 million …$2,091k in Q1 Let’s leave it as it is.

V.3.: Working capital (WC)

It was …- $21,576k in Q1. 102*% (-$21,979k) belongs to 3 elements: change in (i) Accounts receivable, (ii) Prepaid and other current assets and (iii) Accounts payable and other current liabilities
(* Yes, it is 102% since the rest of the WC was positive.)

Put it into context: The quarterly cash flows of this (3 items together) were (in 2021): + $11,029k / + $15,086k / + $34,281k / - $9,364k … + $30,011k in Q1 2020 and + $16,691k in Q2 2020.

Q2 WC effect could be much better … let’s use +/- 0 (meanwhile usually it is positive in Q2)

V.4.: Cash-flow in Q2

Base case:
Q1: - - $98,847k
Less API: +$58,746k
Better WC: + $21,576k
==============
Q2: - $18,525k (“Cash”: $374,651k vs $393,176k)

Best case:
Q1: - - $98,847k
No API: +$75.179k
Better WC: +$38,670k (same WC effect as in Q2 2020)
==============
Q2: + $15,002k (“Cash”: $408,178k vs $393,176k)

I expect between the base and best … +/- 0.

Best,
G

Please note: Meanwhile I am expecting much better Q2 than Q1 2022 I do not rule out a negative market reaction since it will be compared with Q2 2021 (also) and that quarter - regarding Net Revenue - was the best quarter in 2021 (and slightly missing the 3rd and 2nd places the 4th best during 2020-2021 … better than Q2 2020.)