Neptune Wellness Solutions Inc (NEPT) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Neptune Technologies and Bioressources conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded. Now I will turn the conference over to Henri Harland, Chief Executive Officer. Please begin.

Thank you, sir. Thank you, everyone, for joining us today. My name is Henri Harland and I'm the President and CEO of Neptune Technologies & Bioressources. Joining me today are Andre Godin, Neptune Chief Financial Officer; as well as Benoit Huart, Neptune in-house Counsel. I will kick off the call by saying that Neptune has made great strides over the past year and I truly believe we are a much stronger and effective corporation than we were at this time last year. As mentioned in the guidance news release on December 1, the third quarter financial result was an important achievement for Neptune. Andre Godin, CFO of Neptune, will discuss the third quarter result as provide -- after I provide you with an update on a number of business developments.

The first item of the agenda is Neptune's planned expansion. Just before Christmas, we announced the start of Neptune Phase 1 planned expansion in Sherbrooke, Quebec. Phase 1 will take around one year to complete and will cost approximately CAD14 million. CAD6.5 million should be paid through debt financing, CAD3 million should be paid through an interest-free loan, CAD2.5 million should be covered by a grant, and CAD2 million will come from Neptune cash flow. Details and names of the different groups supporting this project will be released at a news conference to be held sometime in February or March 2012. The planned expansion include new production capacities and innovation with improved extraction technologies that will increase Neptune productivity, and therefore, its competitiveness in the market.

During this current fiscal year for the nine month period ending 2011 and 2012, Neptune produced and sold 40% more product than last year nine month period, but only increase itself by 10%. This is a result of aggressive promotional pricing, which Neptune has undertaken to better compete in the Omega-3 Krill Oil market. One of the key strategies behind the planned expansion project is to respond to increased demand at the more competitive price by increasing productivity without compromising profitability. Our current production capacity is 150,000 kilos per year. Neptune capacity will increase to 300,000 kilos per year at the completion of Phase 1 scheduled for the first quarter calendar 2013, and will increase to 500,000 kilos per year at the end of Phase 2 a year later. At the end of the expansion, the Sherbrooke plant will be in a position to support approximately CAD80 million in sale per year.

Another item that I would like to address is sales and marketing. A primary focus for the coming months will be to continue to expand in new emerging markets in strategic location worldwide. To fully penetrate the North American market with our Nutraceutical product and to ensure that NKO and EKO, Neptune Krill Oils can be found on the shelf in all major retail stores. To that end, Neptune has, during the last year, increased the sales and marketing team. Neptune hired two new sales representative who are covering South America, Asia, and Middle East and also hired two full time sales personnel, including a director of sales, exclusively for the United States.

During this current nine month period for the fiscal year 2011-2012, Neptune signed a new major distributor in the United States, representing more than 50% of the Omega-3 dietary supplement market, and Neptune also recently signed a distribution agreement with the largest supplier/dealer in Canada. They all have recently launched or are preparing their launch of our Neptune Krill Oils, EKO, and our NKO. Neptune Krill Oil, EKO, NKO will be then on the shelf in all important retail stores and available progressively during this coming year all over North America, as well in the United States and Canada. Neptune is extremely confident in its future growth.

On the functional food side, in the second quarter conference call we indicated that we intend on issuing news on the result on the next listed date by the end of 2011. For confidentiality reason, we were not allowed to do so and we apologize for it. Nonetheless, we can tell you that as of today, both the Yoplait and the Nestle clinical studies have been complete. We are (inaudible), but additional analysis are necessary to determine the next step. In the Yoplait file, even though we have interesting and positive achievement, we foresee we will have to conduct an additional clinical study to meet Yoplait's requirements. Although the data from the initial study was positive, there was a technical mistake done by a [northern] clinical research organization during the recruitment phase of the clinical study. However, we remain confident about the efficacy of Neptune Krill Oil as well as in Yoplait yogurt with NKO inside, and we are currently in communication with Yoplait in order to define the next step of our relationship.

In regard to Nestle, analysis of that (audio skip) from the study are still underway. The result will be disclosed whenever (inaudible) agreed with Nestle. We are in discussion with them to define the next step and we are confident. As I just explained for the Nestle and Yoplait file, Neptune cannot disclose any further information, and Neptune is not in control of the definitive timing of the release of additional information, although Neptune expects additional disclosure before or during summer 2012.

Another important item is the China joint venture. Neptune announced on September 19 that it assigned a memorandum of understanding to form a 50-50 joint venture with Shanghai Kai Chuan Deep Sea Fisheries Co or SKFC. Neptune management will be returning to China in February to finalize detail with SKFC. The definitive site of the Neptune Krill Oil production facility has not yet been determined, however, we are looking at several locations close to Shanghai, some with already existing building facilities on it. Construction of the production facility is expected to begin in late 2012, early 2013. And as SKFC is a Chinese government owned company, we expect minimal complication with roll out, and we also expect to begin seeing revenues in 2014.

Neptune R&D program. Neptune is currently undertaking clinical studies for claims [in the] wrap. In order to be able to make certain (inaudible) claims on packaging and wrap, those things need to be supported by specific scientific clinical studies. We are expecting the clinical as well as the regulatory processing file to be active in progressing throughout 2012, 2013, and 2014. We are also investing in new (inaudible) biomass product development, as well as in conducting preclinical studies with it. We do expect to be able to release new data and results from new biomass extracts during the coming year.

The last item on the agenda before an update on our subsidiaries and Andre Godin's presentation relates to our intellectual property strategy and to the recently issued Neptune US patent as well as the preceding involving some of our competitors in regard to our IP strategic action plan. Neptune finds in 19 -- sorry, in 2004, in the United States its patent application relate to marine source phospholipids and their application for patent protection as part of its ongoing business and IP development strategy. On October 5, 2011, Neptune was proud to announce that its US patent covering Omega-3 phospholipids, one of the main bio active ingredient in all krill oil in the market reissue. We also announced that later Neptune had filed two complaints for the infringement of its patent against leading manufacturer and distributor of krill oil in the United States. The case are at the early stage before the Federal court in Delaware.

On December 19, 2011, the US patent and trademark office grant a competitor a request to examine the 348 patent. As 95% of inter-party request for re-examination are grant, Neptune and its US patent lawyer had anticipate the US PTO reaction in the grant. As such, Neptune is well prepared to defend and resubmit all necessary argument for the reexamination process and welcome this opportunity to reconfirm the validity of its patent with the US patent office. Pending the outcome of the reexamination, Neptune also anticipate that the defendant will file in Delaware for stays of the complaints. Again, this is part of the normal legal process. Typically, the time frame for examination is between two to three years. It's important that everyone understand, though, that during the reexamination process, our patent remains valid and enforceable.

Finally and as part of Neptune IP strategy, on January 12, 2012, we announced in a press release the filing of continuation application for additional patent protection. These additional protections will not only re-enforce Neptune position in the US market, but will also create an entry buyer to competitor in the krill oil market. In the United States, Neptune competitor will end up paying Neptune to obtain the rights to sell krill oil in that US market. In closing the IP portion of this call, I would, again, like to strongly affirm to all Neptune shareholder and distributer that Neptune IP portfolio strategy and its use -- issued patent are strong and enforceable.

Now, turning to our subsidiaries and starting with NeuroBio, we are committed to provide a dividend of NeuroBioPharm units, share and warrants, to existing Neptune shareholders. Due to regulatory delays, the process is taking much longer than anticipate, but Neptune expects a conclusion to the process in the coming months. As for Acasti Pharma, during the fiscal year, Acasti Pharma raised more than CAD8 million and introduced a new casual Acasti krill oil product in the US market under the [Onemia] trademark. Acasti also initiate two Phase 2 studies, one double blind and one open label. The recording phases are ongoing and the initial data collected in the market shows positive results with Acasti product on patient with cardiovascular condition.

We also do expect to be able to publish initial result from the open label chemical during the coming months. At this time I would like to turn the call over to Andre Godin who will present a summary of Neptune's [leaders] quarterly financial result. I will be available at the end of the presentation to answer questions. Thank you. Please, Andre.

Thank you, Henri. Once again, good afternoon, everyone, and thank you again for joining us. I am very pleased to report to shareholders on behalf of the entire Neptune team the result for the third quarter of fiscal 2012, which ended November 30. The revenue for the quarter was CAD5.12 million. This is an increase of 20% compared to the third quarter of fiscal 2011. The increase can be attributed to our global IP strategy in light of our new patent in the United States and infringement cases against competitors.

It is also a attributed to our new sales force in place and to the rollout of our NKO and EKO Krill Oil product in the United States, especially to our major distribution partners. Neptune Krill Oil can now be found in Walgreens, Wal-Mart, CVS Pharmacies, and a number of other retailers. After completion of the rollout, our krill oil product will be available in 20,000 stores. I am also pleased to report that Neptune Nutraceutical sales maintained a gross margin of 50% in Q3, and recorded a positive EBITDA of CAD1.1 million and a profit of CAD900,000. The consolidated group including Acasti Pharma and NeuroBioPharm resulted in the loss of CAD1.4 million, due in most part to the subsidiaries R&D program, including the Phase 2 clinical studies that started several months ago in Acasti Pharma. In Q3, Acasti Pharma and NeuroBioPharm R&D expenses amounted to CAD3 million.

As the rollout is recently underway, we expect fiscal 2013 will show accelerated revenues in keeping with our aggressive North American push. As a result for Neptune, we expect for the fourth quarter of fiscal 2012, ending February, that the revenues and EBITDA will be at the minimum in the same range as Q3, 2012. As we speak, Neptune's working capital is over CAD24 million, and we have cash on hand for CAD17 million. Since Neptune Nutraceutical is also cash flow positive, we have sufficient fund to support all of our activities and projects. Again, I would like to thank shareholders for their support, and tell you that we are very excited about the progress of the corporation. We are now entering the question-and-answer portion of the conference call. Henri Harland, CEO; Benoit Huart, Neptune's in-house counsel, and myself, CFO will answer any question you may have.

Thank you. (Operator Instructions) Our first question is from Joe Pantginis of ROTH Capital Partners. Your line is open.

Hi, guys, good afternoon. Congratulations on the strong quarter and thank you for the details you provided today. Couple of questions if you don't mind. First, I'd like to talk about the expansion going on in Sherbrooke. Thank you for those details.

I was just wondering if you can add a little more color regarding the efficiencies that you alluded to here. Obviously you're bringing on new capacity but you also talked about improved extraction technologies as an example. And then maybe a little further color on -- even though you are looking to more than double your capacity, you are not obviously going to be doubling the number of employees, for example. So I'm wondering if you can address some of the efficiencies that you will be seeing and then I have a couple of follow-ups.

I will start with the first part. We will, with the plant be able to be more competitive with the price. As I said, maintaining the same gross margin which is targeted at 50%. That's the first part of the statement. For sure, increasing the capacity we would also increase the fixed costs but the increase of the fixed costs is roughly 25% to reach this additional double capacity. I don't know if that's fair enough.

Sure, no, that's helpful. Second question is I was just wondering with regard to the significant -- the major announcement you made with regard to SKFC, I was just wondering if you could describe the level of contribution that you will have. I know it's a 50/50 collaboration, but the level of contribution you will have at the table in China -- maybe you can provide a little more color as to how the program would progress.

Yes. There is -- it is a 50% joint venture. And the investment that will be needed for the production plant to be up and running will be in the range of CAD20 million. Neptune with the transfer of the product production technology license will get an upfront payment and royalty equivalent to the net present value of this production technology license. So in terms of investment from Neptune, it should be minimal. It's not yet determined because we need to have a final decision on the valuation of the production and technology license.

And what we have agreed with the Chinese company is for them to raise between CAD5 million and CAD10 million from bank -- Chinese bank; and since they are a government owned company and they do business with about three to four different bank, we feel and they feel that they don't have any issues there. So it's not -- Neptune will have to investment some money but it's not going to be a large amount, and we have sufficient fund, like I said, to invest in the joint venture. It was part of the project that I included in the last sentence I said.

Sure. Thank you. And then just my last question. Thank you for your patience. I would be remiss if I didn't ask about at least one of your subsidiaries. With Acasti, you obviously have some -- I consider to be very important clinical data coming up relatively soon as you alluded to with the Phase 2. That should really help drive visibility in CaPre in my opinion and I was just curious if you could touch upon the efforts that Acasti making, especially with Harland on board, with regard to engaging the FDA after that.

I think that the Acasti action plan is not for sure defined 100% as we speak. But, yes, we intend to use the results of the open label trial to pursue the FDA file. But this is more Acasti -- part of Acasti action plan -- Again that could be addressed, maybe -- can Henri can add to that.

Yes, I can add to that. Precisely the open label will be finalized this year. Double blind also being able to submit a file for the FDA for Phase 3 clinical. During -- with Harland, we are looking to find some partner, in fact, to finance this Phase 3 clinical study. Up as of now, with partial result that we have, as I indicated, we are really confident with the effect of CaPre product on the cardiovascular disease.

Thank you very much. Again, congratulations on a strong quarter.

Thank you.

Thank you. Our next question is from Peter Massaniso of Ponte Vedra Partners. Your line is open.

Good afternoon, gentlemen. Congratulations on a really good quarter. My question -- I have a couple of questions. One has to do with the statement that you made about revenues being up only 10% even though volume was up 40%. Obviously there has been a huge deterioration in margins. Do you feel that has stopped now? And to further Joe's question, with the new plant will you be able to offset further pricing pressure with -- and efficiency so that you can maintain that 50% gross margin?

As you mentioned -- it's a really good question -- as you mentioned, yes, we did only increase by 10% why do we increase the production by 40%. But we did present this quarter, 50% margin. So we -- all over the years and quarterly work and then improving our technology, our efficiency, always looking for adjustment. Technology and innovation and this is also part of the expansion plan. As I mentioned, we will reach at least 50% margin even being more aggressive in the past, we still have a elasticity place to be more aggressive with the price and to maintain this 50% margin, which is very important. This is the minimum target that we have as per the gross margin.

Okay.

And just to add to that, I can say that obviously by reduce -- by increasing only 10% versus 40% revenue -- I mean product sold, if we had not improve our cost of goods sold, we would have never been able to maintain a 50% margin. So we did work very hard on this front, too. So it's not -- the gross margin is not deteriorating, it's been maintained.

Okay. In regard to the patent issue, can I assume that if you were successful in your patent endeavors, that the pricing pressure -- I guess it comes from MegaRed but there may other products -- the pricing pressure would be alleviated or certainly your profit margins would improve because wouldn't that almost guarantee that you would win your lawsuit and that they would have to start paying royalties? Or is that too simple?

It's a good way of saying it even, it's not too simple but it's a good way of saying it. Winning the debate of the file the patent as we foresee will, as indicated, will bring the competitor at the table and they will have to negotiate rights and royalties to sell krill oil in the market. We will be open to do so if we cannot produce it.

Okay. Then finally with Acasti, they have an open label study going now. And would you have any idea when that -- when we might see data from that open label?

Yes, I have an idea and I will tell you in a few months coming, two or three months maximum.

Okay. And the double blind, that would be later -- would that happen later this year?

Yes, the end of the year and beginning next year. Double blind. They are going very well on both Phase 2 clinicals. I will recall my number of months. Three months on the open label and end of the year, beginning of next year, for result in the Phase 2 double blind.

And I would assume, this is my last question. I would assume that if the results from the open label are as favorable as we all expect, that should make us very confident about the results of the double blind.

Exactly. It's a good statement. Really good statement.

Thank you very much. Appreciate it. Congratulations again.

Thank you.

And the next question is from Robin Cornwell of Catalyst Equity. Your line is open.

Hi, good afternoon. Thanks for taking my question. And thanks for the detail that your expansion on the quarter and the update. My question is directed to your North American distribution and your plans. Could you expand on the -- basically what the marketing plans are going to be for your two US distributors and basically national advertising promotion of NKO and the EKO? And the second part, if I could just give you three parts to it. The second part is who the Canadian distributor is that you are referring to? And I guess, finally, basically, an update on Bayer.

An update on.

Bayer.

Okay. Communication marketing plan, I'm waiting for a proposal because we hired an external firm to design a plan or propose a plan to us. We are open to invest more and support the implementation of the US market with co-marketing with distributor. This is in discussion, but we also, as I said, Mr. Robin, are waiting for the plan to be submit which is sometime this week. And next week, we will probably be more in line with the detail with the plan. But we're going to be more aggressive than we have been before. We are now have more capacity as with the expansion. We have EKO and NKO, we maintain the margin, compete with the price. A good product so we are able to be stronger than we were. And the market is also expanding. And thank you for the competitor and for the marketing they do.

Jamison is one of the potential Canadian that is coming on board. We have -- you can have three or four distributor, but I cannot name the name. That's the second part for the Canadian one.

And Bayer, let's see, we are really proud to have Bayer on board. It's an endorsement of the product and the utility and quality and so on. They change team inside their group that was supporting the NKO. You see on the side also that there are a little more aggressive in their marketing. They are offering free 30 days or 60 days supply. But we are in discussion with them to see if it's possible to be more aggressive and we are really active on that side.

As per the number generate to Bayer, we are not really, really satisfied, to be honest with that. But we keep working with them because being of a large corporation they require high margin and it's bringing more problematic but it's still alive. But we were not satisfied with the numbers generated with Bayer.

Could you just expand, if you can, on Canada again as to -- is this a national rollout for --?

Yes, it's a national rollout all over the place. Launched during the year and it's a very important one. It's a deal with -- that's between us and one of the three largest distributor in Canada.

And when can we expect to see that roll out begin?

Starting in February and going all over more deeply and it started in February and will last until June to expand all over Canada.

And finally, you're able to supply the expected demand?

Yes. It's take time to grow but we are looking forward to go fast with all of the movement. Timing is good.

Okay. Thank you.

Our timing is good. Expansion is on line. Timing is very good. We have -- we are fine with that.

And if I can add to that, just to -- for in terms of supply of NKO and EKO, the expansion is like an escalator so it's not going to move from 150 to 300 from one day to another. There will be some partial increase to reach 300, so we aren't going to be stuck at 150 for one year until we get to 300.

Okay. Thanks for that.

Thank you. Our next question is from Richard Ralph, a private investor. Your line is open.

Hi, how are you? I'm curious about the European patent, I think it was 1B1 that was declined on Aker's reexamination. And you prudently appealed that decision around December '09. I was wondering, if you won that appeal, what effect would that have on the reexamination of the patents in the US?

Well, the patent in Europe that was opposed by Aker is different than the patent we have in the US. If we succeed in the appeal, and we hope that we will and we were working very hard for that, will it have an impact on the reexamination? Probably not. Most likely not because the reexamination is a different procedure. The request has already been made. The documents have been submitted. And we are currently reviewing them and there the process will continue to pursue its course. I don't see how it would effect the outcome of the reexamination.

I would think that if you won the appeal in German federal court, that it would probably -- I would think that it would have a huge effect on the reexamine that Aker is trying on you on the US patent.

It's different. It's a different patent. That's I think why Benoit explained it this way. Even if it's different, as I also understand, it may have an impact but not as much as we say we can expect because it's a different patent.

Okay. I mean, it's not -- what you are saying it's not the patent on the phospholipids?

It relates to the phospholipids, but the claims are written differently.

That's probably --

There's really a small distinction between the two. That's probably all I can say right now.

They are both on phospholipids but different things.

Okay. I was just curious because I was just concerned about the patent being invalid back in 2009, and I was told that the court -- the German court hasn't held the appeal process as of yet. And I would think that if it was even close that Aker got shot down that possibly would have effect on US, but obviously I'm wrong on that. And I appreciate your time and effort and good going. Keep it going.

Yes, to finish up on that, the German courts have not yet determined the date for the appeal and we are still waiting on that.

(spoken in French)

Obviously if we win the appeal, it will have an effect. It might bring the parties to the negotiating table like we mentioned before. It's difficult to say because we are speculating. But as we mentioned earlier, we believe that as far as the US patents are concerned, we are in a very strong position.

Yes. I still -- my personal opinion would think that that would have a pretty big effect on Aker.

To bring them to the table probably, but not say to disqualify or qualify the US one.

Okay. Now I understand that. Again, I appreciate it. Appreciate your time.

Thank you.

Thank you.

Thank you. We have a question from Kelly Richard of Innovation PEI. Your line is open.

Congratulations on your third quarter results. I just had a question. There were some discussions going on with Innovation PEI and ACOA for a facility -- a Neptune facility in PEI and I was just hoping to get an update on those discussions.

An update? We are still in discussion. We have to meet again. It's a possibility that we considered expansion depending of the need and also demand of the market over time. There are still outstanding issue, though. And we have to meet with the PEI people in the following months when they [need for sure] to decide if we can solve the outstanding issue or not. If we can, then it's going to be in the expansion plan of Neptune down the road, depending on the demand and the need and if we cannot we will have to consider other options.

So it's my understanding that the expansion plans that you announced for your Sherbrooke site is taking the capacity that would have been needed for the facility that we are in discussions with PEI, is that correct?

Not necessarily. Both plan was in the expansion plan. Not at the same time, for sure. And I cannot say that one replaced the other one. But as I said, [IPI], it's still not solved, the issue is not solved.

All right. Thank you for your help.

Thank you.

Thank you. (Operator Instructions) Our next question is from Robin Cornwell of Catalyst Equity. Your line is open.

Thank you. I just have a follow-up question. You had some pretty impressive results, limited I know, but on Onemia in the US. Can you just update us as to how many US patients are now taking it and give us any kind of time line for possible -- possibility of more results?

This is more on Acasti, Mr. Robin, but I can give you few indication. The income in Acasti coming from Onemia will raise over time. It's a new product. A medical food, as you know. There is a medical food segment. There is an action plan that is now prepared [in a blitz] in the Florida area with new distributor. And looking forward to have more patient, more doctor, and the product starting in Florida, probably all over the place. As per the number, it's -- they gave, let's say, Acasti gave more sample than sold unit, which is a good thing and we have, though, result -- it's -- I have to make sure to point out though that it's on voluntary basis and it's not -- we have result from doctor that want to send us some result on their patient for probably not far from 20 of them. And those result are very interesting. But an indication as NKO result was an indication for the CaPre product, the Onemia result is also an indication of the CaPre potential. But in the Onemia file, we will see more in the following six month following the blitz that now are preparing to the penetration of the market of the Florida market.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the call over to Management for any closing remarks.

Thank you again. An archive of this call will be posted to the Neptune website tomorrow. Including, let me make again a few points, a few statements. First, that Neptune is currently seeing good momentum across its business and is continuing on the path to grow. Again, Neptune is confident in its business and is positioned ahead in the market that we all see.

And Neptune and its management team are focused on identifying the best talent for Neptune to go to the next phase of growth and expansion. Finally, and regardless of what our competitor may say about our IP, Neptune has strong patents and is working very hard to stay ahead of the competition with a strong IP strategy. If you have any other question, please don't hesitate to call us at Neptune's office or Dave Burwell from the Howard Group. Thank you very much. Have a nice and good evening.

Thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.