Neptune Wellness Solutions Inc (NEPT) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Neptune Technologies & Bioressources conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference may be recorded. And now I will turn the program over to Andre Godin. Please go ahead.

Yes, hi everyone. My name is Andre Godin. I am Chief Financial Officer of Neptune Technologies & Bioressources. Today, I will have two other speakers on this call, Tina Sampalis, the Chief Scientific Officer of Neptune, as well is Mike Timperio, who is joining us from Las Vegas, he is at SupplySide West over there. He is our Vice President of Business Development. I'd like to take some time to start to thank our consumers and our shareholders for buying the product, as well as supporting the Company. All the publications including MD&A, financial statements, press releases, have been put online since 4 o'clock today, right after market close. So you will be able -- probably some of you have already read the press release or read some of these information, so it's going to be there for you to read over the weekend, if you wish.

I would also like to thank everyone that sent their questions prior to this webcast. We received a lot of questions. We will try to address them all over the phone as well as through e-mail. So I will start with the financial results. So if we start with the revenue, we have an increase in revenue this quarter of 6% from last year. 6% in terms of dollars but we also -- we actually increased our volume or quantity sold by more than 50%. And [ETO], which is our new product launch a few quarters ago, represents an increase of more than 30%. This increase allows us to take more market share, and this is the objective of Neptune, taking more market share right now even though there is a lot of competition out there, and the price has been a little bit tight, so that's why in terms of revenue, the increase is only 6%. But in the absolute dollar from last year, we would have been way above CAD5 million but this number is soon to arrive. We expect dollar number to increase and pick up from the next quarter on.

Mike will talk very briefly about the strategy. I will finish with the numbers and I will pass him the follow-up right after I am done with the numbers. What is very important to keep focus on is the fact that Neptune is a profitable Company. As an entity, Neptune in a [true] nutraceutical segment is making money. We made bottom line profit (technical difficulty) as well as CAD650,000 EBITDA. So, it is -- we are very glad to see that we can keep our profitability, even though our pricing has gone down. But what I have to reinforce is the fact that we also reduced our cost of goods sold in order to keep more or less the same margin. This is why we are still profitable, even if our price went down.

In order to understand why the bottom line for the three months and six months are negative, CAD1.7 million in terms of -- for the last quarter and CAD3 million negative for the first six months of this year, is basically because Acasti has picked up a lot of progress and its R&D activities, more specifically in with Onemia, the medical food with the commercial launch and strategy for the US market as well is initiating its Phase II study in this quarter, which is increasing drastically our R&D expense on a consolidated basis. So, this is important to understand, and I think most of you do understand that. It is unfortunate in a way that the consolidated statement needs to include Acasti and [NeuroBioPharm] expenses, even though Neptune doesn't support those two companies and especially not Acasti because Acasti has just raised more than CAD8 million. So Acasti is on its own and pays for its own development plan, medical food, drug, CaPre, everything is paid for by Acasti.

This is why we need to reinforce on the fact that Neptune is profitable, mixed profit doesn't burn any money, and that Acasti supports its burn rate. And this situation will remain for the next several quarters, because Acasti will be spending more and more money on its drug development program, but we'll always make sure that Acasti has sufficient funds to support this development. So Neptune will keep on growing, keep on being profitable as we are, and so this is something that I really put emphasis on because it is important that it is well understood. Right now, Acasti has more than CAD9 million in the bank account. The consolidated grew by more than CAD20 million in the bank account, so this is very important to understand that the cash situation is extremely healthy in both Acasti and Neptune.

One other thing that I want to focus on as well is the loss -- not a loss but the lower profit in the nutraceutical segment. In Neptune, even though we are profitable, we are less profitable than last year and this is basically very easy to explain. There is close to CAD1 million that is a non-cash expense, which is the stock-based compensation expense. The stock has increased in value from last year. Even with the last [new] adjustment on the market that we are not too happy about, but we are working on bringing that back where it belongs. But it's still -- the stock-based compensation expense has been much greater than last year and that accounts for the difference between the net profit this year and last year.

The other point would be the fact that since the cost of goods sold has increased, in terms of total amount, because we've been producing much more quantities than last year. So even though the cost per unit is lower because we manage -- because of the productivity to bring down the cost per unit, and we are still working on this. And we'll -- we are expecting to even decrease furthermore, but in the meantime, if you sell 50% more product, and you basically get only 6% increase in your dollar value, it means like you have to produce 50% more product. So that is the difference between the net profit of this year and the net profit of last year.

So, overall the situation is bright. The situation looks good for the future. We expect the revenue to really pick up in the next quarters to come, and we expect Neptune to remain profitable [in] Acasti, and NeuroBioPharm to expand their R&D and development program. Just to finish on that, if -- [differs] on how you look at things because the way I look at things with Acasti, yes, we have to consolidate their expense, but since we don't [spend] for Acasti anymore, we do benefit from 60% of their value, and this is where I think the main focus needs to be put. Having said that, I think that now I will pass the line to Mike Timiperio to define a little bit of the strategy in terms of commercialization and especially in the US.

Thank you Andre. Thank you very much. Hello everybody, I'm -- as Andre mentioned, I am in Vegas right now with the SupplySide West, which is a very, very important show for Neptune. Basically, I will try to be as brief as I can. Andre mentioned that we increased our [talents] by 50% versus corresponding quarters last year. This is actually was part of our strategy to continue to build some momentum in the US to a point where we -- where the strategy of coming with -- as he mentioned, we would at least capture the business that people would not want a licensing agreement on. So we stopped really our competitors to grow into new business, coupled with the fact that we stole some business from them, because on an equal price, we are very close to it. The perception of Neptune (inaudible) is so strong that we automatically picked some business.

So it was a strategy that we build a momentum to build some market shares, which we have obviously by these results, coupled with the fact that in the US, we were, as well as the strategy, we were reinforcing our patent possibilities, which were granted, as you know, by a press release recently, which brings (expletive) of a lift to Neptune in the US market, obviously. There's a lot of positive hype about Neptune right now. This will allow us -- the fact that we have increased our market shares and building momentum in the market penetration. With the patent, obviously doing it strategically, we will certainly be able to pass down some price increase along with the fact that Andre mentioned, that we work on our cost of good sold and really is working hard to reduce our costs. So we basically are working at three [ends] -- we have increased the volume; we have actually reduced our cost per unit from what we see in terms of results; and at the same time, we will be able to build a bit more margin into pricing. So we're working at the three levels.

Obviously also, the US has been very important. The mass market result obviously takes a while because when you have 5,000 point-of-sales to fill the pipeline, it takes a while to be filled and obviously the promo are coming and [triggering] into the market. We expect, obviously, results to come much more -- actually, some of it in this quarter and in the quarter to come. So this looks very good. Neptune has the ability to grow outside of the mass in the US and now the mass is being triggered. So that should be a very positive outlook for overall in Neptune's activity for the months to come.

We also balance ourselves worldwide. We've got India which is coming along with a [couple] of pharma. We've already signed some NDA and moving along with stability tests so without naming the companies, this has been confirmed. So we're looking at India, as we always announce, it's a market that is growing. Europe is doing quite fine. We have a show coming in November, which will also I think [crystallize] some additional business. So overall, our sales are well-balanced. We have been able to [react] strongly with our patent in the US and that, like I say, will be a very, very good and strong edge in the US.

Besides that, we have hired a new Business Development for the US as my undertaking takes me more and more in Europe and Asia. As you are aware through our press release, a MOU was signed with a Chinese company so we're already working on building the commercial network because that's -- we want to build, obviously, some customer interest and generate some attention in that market. Germany is coming along with the -- our pretty large customers that is, hopefully we'll announce soon. We're pretty much at the end of -- with them. So Canada is going strong and Australia, obviously, as -- we have a foot [edge] there that is showing a great market share and continuing to be. So normally, our sales momentum is good but well-balanced [in a well] with a major market being strong with the recent announcement. So, things -- the outlook overall is very promising.

Okay. Thank you, Michel. And just to [complete] on Michel, we -- because there is a lot of -- and I will address this right away because we received a lot of questions about that. The Neptune product will soon be distributed in all major retail stores in the US because a lot of Americans are concerned not seeing the exposure of Neptune Krill Oil and other products of Neptune. But it is coming, it's a question of weeks now. So you will see them in Walgreens, Rite Aid, CVS, Wal-Mart.

Andre, it is being channeled right now in all these stores so you are right. I'm sorry, I did not mention that. This will obviously result in a lot of exposure for us.

Okay, thank you. So now, we'll go --

Thank you everybody. Andre, I'm sorry. I'm going to leave. I'm going back to the show place, okay? Thank you.

Thank you Michel. Okay, there was some problem with the phone. Now we will take off a little bit from the agenda, because I think it's important at this time that we address or we clarify certain things. We've got tons of questions regarding the patent that we received last week, so I will leave up to Tina Sampalis, our CSO, to go through the patent.

Thank you, Andre. Thank you everybody for giving us the opportunity to talk to you one more time. As everybody knows and as per our recent press release on October 4, the United States Patent and Trademark Office granted Neptune a new patent. It's a composition of matter patent and what -- a very important as a matter of fact patent for us that protects phospholipids that carry on them either EPA, and/or DHA and the use of this phospholipids in the composition. This is important because these -- as we have said many times in the past, these phospholipids with the EPA and/or the DHA are the ones that we know today are responsible for the ability of the Neptune product, Neptune Krill Oil, the Acasti product, Onemia, CaPre, and later on, the NeuroBioPharm products to have the biological activity that they do have.

And the activities that you are most familiar with are the lipid effects that we have talked to you before in the past, meaning the reduction of triglycerides, the reduction of LDL, or bad cholesterol, and the increase of HDL, and that is, of course, in combination with everything else that we have researched and proven and through Acasti now, we are soon to be validating with our clinical trials. So it's an extremely important patent. This is a composition that contains the main [bioactive] molecules that exist not only in our product but in our competitors' products. It allows Neptune to be the one for whom these compositions are proprietary, at least until 2025.

Okay, thanks Tina. So I hope that this clarifies certain interrogation that some of the shareholders have been addressing to Neptune lately since we [made] in this press release out. So you can understand now why we are very happy about this patent being granted to Neptune. Two other topics that we did mention on the agenda was the expansion for the production as well as the joint venture that we signed with China. So I will briefly cover these two topics, the expansion lately, we -- the production and you'll see that if you read the MD&A, went from 130,000 kg to 150,000 kg so we just increased our production by 20,000 kg the last month. That was with a very minor investment.

And we are looking to increase that or double that to 300,000 kg within the next nine months. There's an expansion program that is taking place as we speak. It's -- hasn't been announced yet, because we are waiting for the last few confirmation from the government. We -- it's going to be financed by bank loan and government grants, minimal investment from Neptune, so this is very important. It won't really affect our cash flow even though we have sufficient money but if we can't keep it in the bank account for other issues, it's even better. So this is really ongoing as we speak and we should be finalizing everything with government. It's a little bit longer sometimes, but this will be announced soon.

In terms of the joint venture with SKFC, the Chinese government-owned company, the project is to build a plant in China. And this plant will cover the Chinese market, actually all the Asian markets and it's very strategic for us because we -- it's a very great way for us to enter this market, because we don't have much presence in this market. And comes with that a partnership for commercial development and business development and commercializing the product in Asia as well as securing supplies for Neptune, which is extremely important. The Chinese have the largest [lead] of harvesting krill in the world. So we actually made a joint venture with the largest company in the world in terms of krill harvest so this was extremely important for us and extremely strategic as well.

The cost of the project is CAD13 million, a lot of people have been asking who is going to pay for that? How much money Neptune will pay from that CAD30 million? There again, because it's always [Neptune] approach, it's minimal investment from Neptune. It will be financed by Chinese bank, by the Chinese partners, and some will be financed by Neptune. But we also get a big upfront for the license transfer, and this is almost offsetting the amount that we have to put in. So there again, it's a minimal amount that Neptune will have to invest in this joint venture.

We have done an extremely long due diligence with our internal lawyer, as well as external lawyers, and some lawyers that we hired in China. This company is very legitimate. They have 30 joint ventures running at this moment. They are all doing very well because some people have concerns about doing business with a Chinese company. But this company, we met with the Chairman, the CEO of the conglomerate, and we feel that they are very serious, and that they will bring a lot of upside to Neptune in the future year starting in 2012 with the construction of the plant in China. So with that, with having said that, I think we covered everything that was on the agenda. Now, we'll -- we are receiving questions and we have received questions prior to this conference. And two of the questions that we received were regarding Nestle and Bayer and for this, I will let Tina Sampalis, the CSO, address these two issues.

Thank you Andre. Regarding Bayer, the questions that were -- we've received were obviously how is it going and why was there an interruption of the online sales for Arctic Wonder Krill Oil. I can tell you that this sales interruption had nothing to do with the relationship between Bayer and Neptune nor with the quality of the product. It was -- the launch went very well. It was a decision of Bayer to reformulate the product, they decided that they wanted to complete their reformulation, bring out the new look, and the new product, and restart the sales that everything happens, and as fast a time period as possible. And the product has -- is back on sale, and the relationship between Neptune and Bayer is excellent, as it has always been. And we are all hoping that it will continue to be this way. So it all looks good, The feedback we get from Bayer are very positive and as I said, I will emphasize one more time that the sales interruption had nothing to do with the relationship between Bayer and Neptune, nor with the quality nor with the ability of Neptune to supply the product.

With regards to Nestle, the clinical trial has been completed and we are looking forward to receive the final signed clinical report. As you probably know, this clinical trial will be both for Neptune and for Nestle part of a regulatory package, which means that there is a lot of rigorous details that need to be answered into a very lengthy clinical report that takes a lot longer than just a simple trial in order to get this report and to consider the results final and complete. Until they are complete, they remain preliminary, and that's -- as should not be mentioned and we don't have those results. So we are hoping that the latest by the end of the year, we are -- this process will be completed and we are going to have the results which we will be able to announce to you.

Thank you, Tina. So other questions that we received were in regards to the migration to the TSX, a lot of people are -- have been asking why don't you migrate to TSX, to the larger exchange since you probably qualify? So the answer to that is that we will migrate to TSX. We are very happy about that. We do qualify. It's just a question of time. There is some formality that needs to be finalized. And I think that within a few weeks, maybe four weeks at the most, we should be migrating to the TSX for good. The other question which I was surprised to see was in regards to the spin-off of NeuroBioPharm. This offer has been planned for quite some time right now and we had expected to have this transaction done and over by now for sure. It was a little bit more complicated than we initially thought.

I think some of the responsibility, obviously as a CFO, but I think that the [AMF], it's been a long process, complicated process, because I don't think they have seen a transaction similar to that one before which was a surprise to me. But nevertheless, I think that we managed to explain everything, submit a prospectus that demonstrated well and defined well this transaction and I can say today that we are really at the final stage with them. We speak to them on a -- almost on a daily basis and I think it's a question of short time until we actually can proceed with the distribution of the unit of NeuroBioPharm to Neptune shareholders. So having said that, I think -- let me just see. I have a question here. I have a question here, Tina, for you, saying that when will the next clinical results on CaPre be out?

I don't think anybody can actually give you a specific time on that. I wish I knew. Our conservative scenario is that will last 18 months. Realistically, keeping my fingers crossed, of course, because nobody -- I need a crystal ball and I don't have one. Realistically though, we should have results in 12 months.

Let me just look quickly here if we have covered all the questions. I think that we basically have addressed all shareholder concerns. Yes, so -- no more questions? Okay, so I guess that --

One thing that we have not said about the patent, I did not say about the patent. I believe that we should address this, is that we stand strong by our patents. We consider our patent valid and enforceable. There have been questions about whether we can patent a natural substance. We are patenting a composition and the US patent office has reviewed our patent, has granted our patent and they should know best. It is a valid patent. It is a strong patent, and we strongly stand by it and we are enforcing it. So I want to make this clear that we have no questions, no doubt about the validity nor the strength of our patent and the strength that it will bring to Neptune and both of Neptune's pharmaceutical subsidiaries.

Good point. So on that, I think that we, like I was saying, we covered all -- we hope that we covered all concerns. Feel free to call me directly tomorrow if there is any things that or write to me, or -- and I will redirect the call if it is Tina or a science call or a more specific call regarding either Acasti or Neptune, regarding the science. Tina will be available and I will be available if there is any more question or things that have not been addressed or maybe another way you would've liked to. So we are always available for our shareholders; it is part of our job. So thank you very much for everybody and talk to you all next quarter.

Thank you, sir. Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.