Daily Equities Bottom-Up: 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. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program
3. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge
4. Siauliu Bankas: A Baltic Belter
5. Banco Guayaquil: Off Radar but Surging Higher

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. 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.

3. TRACKING TRAFFIC/Chinese Tourism: Visits to Macau & HK Surge

A year ago we began publishing Tracking Traffic/Chinese Tourism as the hub for all of our research on China’s tourism sector. This monthly report features analysis of Chinese tourism data, notes from our conversations with industry participants, and links to recent company news and thematic pieces. Our aim is to highlight important trends in China’s tourism sector (and changes to those trends).

In this issue readers can find:

Although we remain positive on the long-term growth of Chinese tourism, it’s clear that near-term demand has weakened substantially. We continue to take a negative view of travel intermediaries like Ctrip, which face intensifying competition from many sources. We are more positive on the prospects of actual owners of Chinese travel and tourism assets, like hotel chain Huazhu Group (HTHT US) and Air China Ltd (H) (753 HK). 

4. Siauliu Bankas: A Baltic Belter

Formed in 1992, Siauliu Bankas AB (SAB1L LH) has evolved into the sixth largest Lithuanian bank in terms of Assets and an important provider of banking services to Lithuanian SMEs. SAB1L is based in Siauliai in the north of the country, and in recent years has developed a nationwide franchise. It now has an upgraded network of 43 branches in all regions of Lithuania, and is investing in its digital footprint. SAB1L holds a 9.3% share of the corporate credit market, a 8.7% share of system deposits, and 8.7% of fast-evolving consumer loans. Main peers are SEB, Luminar, and Swedbank.

The bank is generating vibrant non-interest income from settlements and cash office transactions as well as its niche home and multi-apartment improvement revenue stream. The banks commands a 60% share of this energy-efficient focused market.

Constant uncertainty regarding an EBRD loan and conversion terms/dilution  has weighed on shares for some time. This has since cleared. EBRD is now the main shareholder with a 26% stake after a 2013 subordinated loan was recently converted into equity. The decision to strengthen the bank’s capital not only shows that the largest shareholder has a positive view of the bank’s strategy and outlook, but creates conditions for the bank to continue expanding its activities.

The Lithuanian economy represents a relatively solid narrative. Fiscal discipline combines with growth spurred by consumption, credit, firm investment, exports, while inflation and unemployment remain under control. Industrial output soared in October, propped up by a rebound in manufacturing production. In addition, exports climbed in October while upbeat retail sales pointed to strong household consumption. GDP can grow by 2.5-3.0% over the next year barring any unforeseen global ruptures.

5. Banco Guayaquil: Off Radar but Surging Higher

Banco Guayaquil SA (GYL ED) commands Ecuador’s most extensive network of 5,732 points of sale, incorporating branches, ATMs, neighbourhood units, as well as a virtual mobile bank, plus telephone and mobile banking. The bank commands 10.5% and 10.3% of the system credit and deposit markets.

Contrary to perception, Ecuador’s financial system appears relatively sound. It is well-capitalised, with solid credit quality, and high levels of liquidity. Private credit is still growing quite robustly. The supervision of the cooperatives should be strengthened though this is not a systemic risk. Removing barriers to financial intermediation, enhancing risk management, and improving oversight and contingency planning could help fortify the system further.

Ecuador’s economy though remains fragile and speculative. The administration of Lenin Moreno cannot be faulted for not grappling with some of the main issues confronting the country after years of chronic mismanagement by Correa. While growth still remains moderate, limited by structural bottlenecks, inflation and unemployment are under control though the fiscal deficit, debt burden, and paltry reserves represent huge challenges, not aided by recent oil sell-off. For this reason, CDS is sky-high – at similar levels to Argentina at 750bps.

But unlike Argentina, deep value can be found in Ecuador’s Banking Sector. At least investors are compensated, in great part, for country risk unlike elsewhere.

And, arguably, the time to buy oil-related proxies is when the commodity price is low, not high.