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Biotech Stock Mailbag: Amarin, Cytrx, Sangamo and 'Story Stocks'


NEW YORK (TheStreet) -- Let's open this week's Biotech Stock Mailbag with a question from Andy W.:

Is it possible that a Big Pharma might want to buy Amarin (AMRN) even more now so they could move to Ireland for the lower taxes?

"Inversion" -- the relocation of corporate headquarters from the U.S. to more tax-friendly countries like Ireland -- is a big trend in specialty pharmaceuticals circles these days. However, accounting rules make it almost impossible for a large U.S.-based pharmaceutical company to use an acquisition of Amarin (and its Irish domicile) for the purpose of tax inversion.

I won't go into all the details (partly because I don't know them all myself) but here's an important rule to understand: In order for a tax inversion to be kosher, the foreign company -- Amarin, in our example -- must be at least 20% of the NewCo which emerges from the merger/acquisition.

For illustrative purposes, let's pretend Pfizer (PFE) wants to buy Amarin and relocate its headquarters from New York to Dublin so it can pay even less money in taxes to the U.S. government. The inversion would not be allowed because Amarin is too small and would not be 20% of the Pfizer-Amarin merged entity.

A more plausible scenario would be a smaller U.S. drug company -- public or private -- merging with Amarin and relocating its headquarters to Dublin. This is what Alkermes did by acquiring Elan's drug delivery subsidiary.

Amarin is an absolute train wreck right now. The company is hemorrhaging cash and wasting time with futile lawsuits against the FDA. Vascepa sales languish and generic filers are ready to pounce if the drug defies odds and somehow becomes commercially viable.

Amarin's Irish address is the company's most valuable asset.

You might be feeling dizzy right about now, thinking hell has indeed frozen over because I'm saying something bullish about Amarin.

Deep breaths.

A merger or acquisition of Amarin for tax inversion purposes is possible but unlikely, says an institutional investor who's taken a close look at the scenario, in part because he thought about owning the stock for just this reason.

The list of companies which could make an inversion deal with Amarin work is actually pretty small, he says. [As I said above, the accounting rules are much more complicated than just "Irish headquarters equals buy."] Amarin's valuation today pretty much prices in the value of the company's Irish tax domicile, he believes. [He doesn't think much of Vascepa, obviously.]

"Someone might be willing to overpay [for Amarin], especially in a market like today which seems less price sensitive," said this investor. "But I see this as the number one reason not to short Amarin rather than a reason to own it."

I agree with Steve. Cytrx's (CYTR) relationship with the stock touts at The DreamTeam Group, as detailed by Richard Pearson in his recent SeekingAlpha article, are certainly worthy of an SEC investigation. Cytrx could be in big trouble if found to be promoting its stock surreptitiously right before the February financing at $6.50 per share. Buyers of the Cytrx deal have lost a lot of money, unless they flipped their shares quickly.

Regulators are investigating Galena Biopharma (GALE) already so a parallel probe into Cytrx seems likely. If the SEC contacts Cytrx, disclosure will be made in the company's 10-Q for the first quarter, which should be filed in early May.

If you visit Cytrx's Web site and click on "Oncology Compounds," three clinical-stage drug candidates are described: Aldoxorubicin, Bafetinib and Tamibarotene. If you read the company's recently filed 10-K or even peruse its investor slide deck, you'll see the latter two drugs are on the shelf. Cytrx stopped spending money on bafetinib but is seeking a partner; tamibarotene appears dead due to a failed clinical trial.

That leaves aldoxorubicin as Cytrx's only drug candidate -- not exactly what I have in mind when I think of strong pipelines, even for small-cap oncology stocks.

I don't believe the data from the phase II study of aldoxorubicin in soft tissue sarcoma. I explained the problems with the sarcoma study and why the aldoxorubicin data are not credible in this story published last December.

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