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Judicial Ruling Guts Amarin (AMRN) Stock; What’s Next?

If after seeing Amarin (AMRN) stock tumble 35% over the past year, you consoled yourself with the knowledge that "at least it can't get any worse" -- surprise! It just got worse.

On Monday, a judge for the United States District Court for the District of Nevada ruled against Amarin and in favor of two generic drug manufacturers seeking to produce drugs based on Amarin's Vascepa hypertriglyceridemia treatment, invalidating six Amarin patents in the process. Of course, Amarin quickly promised to "vigorously pursue all available remedies, including an appeal of the Court’s decision and a preliminary injunction pending appeal to ... prevent launch of generic versions of VASCEPA in the United States." And management was similarly quick to reassure investors that "geographies outside the United States in which VASCEPA is sold ... are not subject to this litigation and judgment" and "no generic litigation is pending outside the United States."

Those reassuring words didn't prevent the inevitable sell-off, however, and in Tuesday's trading session, Amarin shares got gutted like a fish -- down 70%.

As Amarin stock tumbled below $5 a share, Stifel's Derek Archila, who has been watching the stock from the sidelines, reiterates his "hold" rating on AMRN, while slashing his price target on the stock by two thirds, to $8 a share. (To watch Archila's track record, click here)

"The negative IP ruling is a serious blow for AMRN, and we would not be buying shares here given the uncertainty the decision has created around the future of Vascepa sales and, more importantly, AMRN's near-to-medium term cash runway," Archila said.

Nevertheless, while characterizing his "hold" rating as more of a "sticking to the sidelines" maneuver than one that encourages investors, who own Amarin already, to hold onto their shares, Archila declined to recommend actually selling Amarin shares.

So why not sell?

"There is no doubt in our mind AMRN management will appeal the negative ruling," explained Archila. Moreover, "there is likely some time before we actually see an ANDA approval and it's not clear whether a generic will launch at-risk prior to appeal. So no immediate threat." Perhaps the idea, then, is to hang onto Amarin shares for a while, wait for the initial panic to pass, and then sell in a few weeks, after the price has recovered a bit.

That being said, the picture Archila paints for the medium-to-long term seems grim. "We think it is prudent to assume the ruling stands," warns the analyst. And even if Amarin's generic rivals (those would be Dr. Reddy's (NYSE: RDY) and Hikma Pharmaceuticals by the way) wait to see Amarin's appeals finally put to bed before bringing their rival generics to market, it's likely that Amarin will begin to face generic competition no later than 2022. Additionally, Archila sees the potential for Teva (Nasdaq: TEVA) to enter the market.

In the end, Amarin's Vascepa may end up retaining "only modest share in a limited generic market." With this bleak future ahead of it, the analyst believes Amarin will now move to scale back spending to conserve cash and try to achieve cashflow breakeven before new generics arrive to begin challenging it for market share.

With only $645 million in the bank though, and operating expense forecast to be about $500 million this year, Amarin only has about five quarters left to make the necessary changes before it begins going deeply into debt, trying to promote a product that will probably find only limited demand on the market.

All in all, Amarin has a lot of disappointed bulls out today. According to TipRanks, out of 11 analysts polled in the last 3 months, 8 rate AMRN a Buy, while 3 say Hold. The 12-month average price target stands at $29.57, marking a huge upside of over 600% -- most likely a result of yesterday's news and analysts’ inability to turnaround new price targets so quickly. (See Amarin stock analysis on TipRanks)

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