Neptune Wellness Solutions Inc (NEPT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Neptune conference call. At this, time, all participants are in a listen-only mode. Later, we'll a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Henri Harland. Sir, you may begin.

Thank you, Madame. Good morning, ladies and gentlemen. Thank you, everyone, for joining us today. My name is Henri Harland, and I am the President and CEO of Neptune Technologies & Bioressources. Joining me today are Andre Godin, Neptune's Chief Financial Officer, and Benoit Huart, Neptune's In-House Counsel.

Let me begin this call by saying that fiscal year 2012 was a very challenging and stimulating your for Neptune. And that I am, and we are, very proud of Neptune team for all of the important milestones that have been accomplished.

In this call, I will provide you with an update on a number of business development. And immediately after, Andre Godin will discuss the 2012 fiscal year-end results.

As we begin our overview Neptune's 2012 result, let me remind you that some of the statements made during this call may disclose certain subjects that contain forward-looking statements and does involve risks.

I will update you on Neptune -- production capacity and expansion plans; sales and marketing; intellectual property; functional food and clinical; Neptune subsidiaries Acasti Pharma and NeuroBioPharm; as well as Neptune 2012 and 2013 management.

The first item on the agenda is Neptune production capacity and expansion. Just before Christmas 2011, we announced the start of Neptune Phase 1 plant expansion in Sherbrooke. And we have in March 2012, in Sherbrooke also, the official press conference with Quebec Prime Minister.

This plant expansion includes new production capacity and innovation with improved extraction technologies that will increase Neptune productivity, and, therefore, its competitiveness in the market. Our current production capacity is 150,000 kilo per year. And it will increase to 300 [sic] kilo per year at the completion of Phase 1, still scheduled for the first quarter of calendar 2013.

Neptune will also increase to 500,000 kilo per year at the end of Phase 2, a year later. At the end of the expansion, starting in 2014, the Sherbrooke plant will be in a position to support approximately CAD80 million in sale per year.

We are on time with the program, and Neptune will invest up to CAD30 million to complete Phase 1 and Phase 2. Also, Neptune announced on September 19 that it has signed a memorandum of understanding for a 50-50 joint venture with a Chinese fishing company, SKFC.

We are now reviewing the IP evaluation of the recently completed by Ernst & Young, which will need to be agreed on by both Neptune and SKFC in order to finalize the deal. This deal involved the construction of a state-of-the-art krill oil production facilities in China, and leverage SKFC fleets of vessel for a supply of krill.

Neptune will be receiving an upfront payment as well as royalties. And we still expect this deal to go through and to be fully operational by the end of 2014, early 2015, which will deal -- generate another 300 [sic] kilo per year for this Eurasian market.

300,000.

I'm sorry? 300,000 kilo per year. Thank you.

The following item is Neptune sales and marketing. Our primary focus during the year has been to continue to expand into new emerging markets in strategic location worldwide; to fully penetrate the North American market with our nutraceutical products; and to ensure that NKO and EKO, Neptune krill oil product, will be found on the shelf in all major retail store.

During the year, our new management team complete the hiring of new agent and full-time employees to pursue, on-site, the commercializations of the Neptune product in South America, Europe and in Asia. We also open Neptune 100%-owned subsidiary in Hong Kong.

Recently, we announced that National Football League Hall-of-Famer John Elway has signed in to be the brand public figure partner for Neptune Krill Oil, and his effort has generated a great deal of attention to NKO and to our Company.

The North American rollout of Neptune Krill Oil has been going extremely well. We are pleased to see that our nutraceutical product are now hitting store shelf across the US and Canada. Our two major distributor in the US represent close to 30% of the US dietary supplement mass market, making Neptune Krill Oil available in over 20,000 store. And in Canada, Jamieson has almost completely rolled out the product, with network of 7000 store under the Omega-3 Super Krill brand with Elway's NKO logo on the label. Jamieson had also complete -- commit to a full-scale advertising program and promotional campaign.

We are just coming back from an exhibition in Iraq with an additional potential and blanket order for more than 100,000 kilo for the year to come.

As you can see, Neptune can only be extremely confident in its future growth.

The following subject is Neptune intellectual property stages. In October and November, 2011, we announced that Neptune has been granted two patents in the United States. The first one, ended with 348, covering omega-3 phospholipid, the main bioactive ingredient in our krill oil; and the second one for krill extract used in the treatment of cardiovascular disease.

In addition to these issue patents, we are also pursuing our IP strategy in the US through the filing of continuation. These continuation are part of Neptune's continuous effort to further strengthen our intellectual property and strategic positioning in the US market. It will allow us to pursue additional patent claims that should preclude our competitor from selling any krill oil product in the US market.

[Actually] during the last conference call, the first patent, the 348 patent, is undergoing a re-examination before the USPTO. Nonetheless, the patent remains valid and enforceable. And we are confident that at the end of the re-examination process, the validity of our claim will be reconfirmed.

Recently, the Australian patent office issued a patent for a krill oil composition and process to Aker BioMarine, one of our competitors. This patent has no impact on our position as the leading krill oil provider to the Australian market, and has no bearing on our business. We firmly believe that the patent is invalid. On May 22, Neptune filed for re-examination of Aker Australian patent. And Neptune is confident that the Australian Patent Office will reconsider its grant and declare the claims to be invalid.

As a pioneer in the krill oil industry, we owe to our client and to our shareholder to ensure that we present and prevent invalid -- sorry, that we prevent invalid patents from being issued and used by our competitor.

In closing the IP portion of this call, I will again like to strongly reaffirm to all Neptune shareholder and distributor that we have put in place a global and strong legal intellectual property strategy. Neptune's patent portfolio is solid; and that we will not hesitate to enforce patent -- our patent against -- sorry, infringer.

2012 and 2013 will be very interesting and stimulating for patent -- for Neptune on the IP front, as we anticipate positive outcomes from all the administrative, legal, strategic action that have been taken in combination with our outside legal counsel.

Now I will address Neptune functional food and chemical. We recently complete two clinical study and we obtain the results. We obtained interesting and promising clinical results in NKO for Alzheimer's disease as well as for joint health.

Given the strong positive signals achieved, we are now evaluating different avenue to conduct larger studies to statistically validate the effect observed in this clinical. We are now conducting with a new European partner another clinical study on joint health, following Yoplait's recommendation, even though Yoplait will not be collaborating.

On the other hand, Nestle officially informed Neptune that, even though it will be interest to learn about Neptune further development, it renounced, for reason internal to Nestle, to enter a formal negotiation with Neptune.

Neptune take also this opportunity to announce that the near future, because of success escalating demand, and return on investment, and that the dietary supplement market for its product EKO and NKO krill oil, Neptune will mainly focus on the dietary supplement market.

Neptune subsidiary Acasti Pharma and NeuroBioPharm -- currently, several product are in the development process. In some case, this product have already been validated for efficacy. Another case study have been initiate to test the safety and efficacy of this product in clinical and preclinical setting.

We expect positive outcomes from this program in the following two fiscal years. We are very close to dividend. Also, we are very close -- sorry, to dividend that Neptune -- to Neptune shareholders, unit comprising shares and warrants of NeuroBioPharm. We are in the filing process of the prospectus, and should expect to hear from the regulatory body very soon after filing.

On Acasti -- Acasti Pharma have achieved the following significant milestones during the last fiscal year -- listing of Acasti share on TSX Venture Stock Exchange; addition of two Board member, Marc LeBel and Martin Godbout, and one Executive Officer, Dr. Harlan Waksal; initiation of two Phase II clinical trial, following CTA acceptance by Health Canada; clinical trial evaluating the effect of CaPre Acasti prescription drug candidate at different doses on patients with moderate to high triglyceride. Patient enrollment was initiate late last year for those two clinical.

Acasti also complete to financing CAD8 million to an oversubscribed Right Offering, and CAD2 million to a private placement from Neptune and from Dr. Harlan Waksal. And finally, Acasti continued penetration of medical food market in the US with its Onemia product, generating first sales recently.

The open-label study is a dose escalation clinical trial which allows Acasti, on one hand, to better understand the effect of different CaPre doses; and, on the other hand, to measure the effect of CaPre with escalating dose titration. During FDA review of the pre-IND package submitted by Acasti, it was proposed that a 4-gram dose of CaPre is evaluate in Phase 2 clinical study. In order to comply with the FDA demand, Acasti has recently implement, after Health Canada acceptance, a 4-gram dose arm in the open-label trial.

Even if it modified the initial schedule, Acasti believe it is the most cost- and time-effective way to degenerate this [platform]. We expect to be able to communicate clinical trial results by the end of this year. Enrollment of both clinical trial is ongoing and progressing well.

Finally, we also plan to have Acasti share listed on a US Exchange before the end of the year.

At the end, and at this time, I would like to turn the call over to then Andre Godin, who will present a summary of Neptune 2012 year-end financial result.

But before doing that, I would finally like to recall that we recently improved our management team and ability to well manage our growth and expansions by appointing Dr. Tina Sampalis as Global Strategic Officer; Michel Chartrand as COO; Michel Timperio, Vice President, International Sales and Marketing; Dr. Eric Simard, Vice President, Science and Development; and Dr. Wael, Vice President, Scientific Affair; and by also welcoming Dr. Harlan Waksal as a Board member.

I will be available at the end of the presentation to answer any question. Thank you very much.

Please, Andre.

Thank you, Henri. Once again, good afternoon, everyone. And thank you again for joining us. Neptune reported a record CAD90 million in revenue for fiscal year ended February 29, 2012. This represents an increase of 15% compared to fiscal 2011. And Neptune also reported an increase in revenue of 32% in Q4 2012 from Q4 2011. The increase is attributed to our worldwide key destination partner, as well as a rollout of our NKO and EKO krill oil across the United States.

In the production front, Neptune has reached a new high of 140,000 kilogram per year in 2012, and has maintained its gross margin above 50%.

I'm also pleased to report that on the nutraceutical side of the business, Neptune recorded a net income of CAD2.4 million, compared to CAD1 million last year. The consolidated group, including Acasti Pharma and NeuroBioPharm, resulted in a loss of CAD4.6 million, due mostly to the subsidiaries' R&D program, including the two clinical studies conducted by Acasti Pharma.

Neptune consolidated working capital is currently over CAD24 million. And since Neptune nutraceutical business is cash-flow-positive, we have sufficient funds to support our activities and projects.

Again, I would like to thank all shareholders for their support. And I would also like to tell everyone that we are very excited about the progress of the Company in fiscal 2012, and are looking forward to a great year ahead of us.

We are now entering the question-and-answer portion of the conference call. Henri Harland, CEO; Benoit Huart, Neptune In-House Counsel; and myself, CFO, will answer any question you may have.

(Operator Instructions). Joe Pantginis, Roth Capital.

Good afternoon, thanks for taking the question; and, certainly, congratulations on your progress and your increasing revenues. Couple questions, if you don't mind. First, over the last week, the omega-3 space saw some very interesting intellectual property news regarding Lovaza.

So I just wanted to see if you can potentially translate that news to your strong patent position. Obviously, the patents are very, very important. Amarin had been struggling, it appears, over the last year or so, because of their patent issues. So I just wanted to see, as a first question, can you translate the positive news for Lovaza to your NKO and also your potential CaPre products?

This is Benoit Huart. To be very honest, I haven't -- I've been working really hard on concentrating our efforts on Neptune's intellectual property. I stated before, it is very strong. We believe that it will help us to progress and to move forward.

With regards to Lovaza, it's difficult for now. It's still something that's very recent, so we have to review this.

The only thing I can add is, we have patent ended in the year 2025. And I understand that the other patent that you are referring to are ending 2013.

Sure.

So that's quite a difference.

Yes, no, I guess more to the point in fact that Lovaza, at least for the time being, was able to stave off a potential generic attack. So you not only -- I think you can not only say you have the benefit of long-acting patents; but also, at least looking at the potential signal from the Lovaza news, that you also have a differentiated product and may also be able to stave off generic attacks.

Exactly right, I mean you got those two points.

Okay.

But also -- you must also keep in mind that we have re-examinations that will continue to be filed and that we are continuously working on. And that we also get a re-examination that will be confirmed shortly, hopefully. So with all this, it gives us an edge in the krill oil industry at least, on our competitors.

Yes, absolutely. Thank you. And then, before I ask a question on Acasti, just wanted to ask some NKO questions. Obviously you're on track. You're making good progress with regard to your expansions in Sherbrooke. So that's very good, and thank you for providing the guidance as to what the facilities can support sales-wise.

So what I wanted to do is maybe ask the question, since you do have what appears to be very strong demand, especially when you sign large distributors such as Jamieson, and you have the growing demand in the US, I just wanted to see how your current supply, as you're building out your manufacturing capacity, links up with the current demand.

We don't have an any shortage supply. It plans for the two, three years coming. And with the growth, as I explained, there is no issue also, that the advantage that we have is, we deal with three different supplier. So we independent with the choice of the supply. And we are confident with the quantity that -- that we have the quantity that we need. We don't see any issue at that level.

Now, that's great. Thank you. And then, just a quick question on Acasti and then I'll jump back. Thank you for the updates here. I just wanted to verify the data catalyst. I know you said the open-label study has data by year-end. I just wanted to know if that also applied to the randomized study. And then, second part of the question is, I just wasn't sure if I heard you correctly earlier. Have you had any initial discussions with the FDA? Thanks a lot.

I don't want to go too far with Acasti because it's an [in essence] a conference. And I'm going to have to be short. On the double-blinds early next year -- and yes, we did have a pre-discussion with the FDA.

Okay. Thanks so much, guys, and congratulations on the progress again.

Thank you very much.

Elemer Piros, Rodman & Renshaw.

Good afternoon, gentlemen. Thanks for taking the questions. What I'd like to ask, Andre, is the growth; it's about the growth that you experienced. There is pricing trending. Is it fairly stable, or you have pricing power? And was the growth itself due to volume increase, primarily?

Yes. I mean, the pricing has been stable for the last year or so. Obviously, recently, we have managed to increase slightly the price. But, overall, it's more or less the same price as it was last year. The revenue growth is mainly attributed to an increase in volume sold.

Would you care to provide guidance on the expenditures that you expect for this fiscal year? Would they be comparable to the number that we have observed in 2011?

You mean guidance in revenue for --

Not revenue, but R&D expenditure. How would that compare in this coming fiscal year, as opposed to the previous one?

I think it's going to be online with what we have experiment in the past years. Obviously, in terms of revenue, I think that we will be facing a faster growth in the future, as opposed to what we've experienced in the past. This is why we are expanding the plant and we are going to reach a double capacity and then triple the capacity by the end of 2014.

And in terms of SG&A and R&D, I think you can look at the previous years' percentage increase year by year. And you'll see in 2012, 2013, more or less the same increase. Maybe in sales and marketing, we will be more aggressive with John Elway onboard, with more marketing towards next year. I mean the current year, I should say. But for the balance, it's more or less the same growth as previous years.

If you look at the number of distributors that have currently the product, and as opposed to compare that to 12 months ago, how did that number change, Andre?

We increased the number of distributors, but we mostly increased the quality of our distributors. So we have larger distributor onboard. And we also have better penetration of the mass market. And this is where Elway will also give a leverage for us on the mass market.

So as we explained there, we expanding the capacity but we also have on-hand larger quantity. Interesting number, and which will support the growth. And maybe to add to -- we don't see a big expansion of the expenditure, but a larger improvement of profitability by increasing the sales.

Yes, yes. Just wanted to confirm Henri, to the Acasti studies -- another arm, another dose -- the 4-gram dose has been added. Did I understand that correctly?

Yes.

Okay, thank you. And my last question is, what is your expectation, how long does it normally take for the USPTO for to re-examine the patent?

This is Benoit Huart. The re-examination process -- it's very difficult to determine a timeline. We know that it will take a few months. Hopefully -- we hope to get something by the end of the year. A lot of documents have been produced by both parties. So it will take some time for the examiner to review everything and to reach a decision. But we're looking at something by the end of the year, hopefully.

Okay. And just to make sure that I understand the process itself, if the patent is re-examined and most of the claims remain intact, does this mean that you could have a monopoly in the US market, as far as krill oil goes?

Well, a patent is, by itself, a legal monopoly. So, yes, if the patent is, after re-examination, reconfirmed and the claims are maintained, then yes, we will have this legal monopoly for -- because we have the patent on krill oil. At least on the phospholipid that is within the krill oil.

We also have the continuation.

And the continuations are in the process right now.

Yes. Gentlemen, thank you very much.

[Salwan Banecken], Private Investor.

Thank you. Good afternoon, gentlemen. Unfortunately, I didn't hear the opening remarks. I'm just wondering if you can tell me what the status is of the plants in China. And secondly, is there any word coming out from Nestle? And Dannon or Yoplait, regarding the yogurt side, the food side of the business. Thank you.

Okay, we went through that, but I will be pleased to repeat. As for the Chinese plant, we did receive the evaluation of the IP now. We are viewing it as the other party, SKFC, is reviewing it. And we need to accept that the devalue issue with the -- by Ernst & Young for the IP. And we are in that process now. Chinese people are taking long. We're approaching them, but we're still online with the timing, which is 2014, 2015 as being the timeline.

As per Yoplait, we did address on the 16 January that we were in the discussion with Yoplait. Now, Yoplait will not be collaborating in the other clinical that we're doing on joint, even though we did follow their recommendation. It's not a closed door, but it's not a collaboration.

As of Nestle, [nest egg], we're not allowed to say that much. But we can say that they renounce for reasons which are internal to Nestle, to enter into a formal negotiation with Neptune.

Perfect. Thank you very much.

A pleasure.

Robin Cornwell, Catalyst Equity.

Hi, good afternoon to everyone. Thank you for the update, that was very insightful. I have two questions. One is sort of an operational, housekeeping for Andre. Andre, the expenses in the quarter were higher than expected. You did mention defense of the IP, or the IT IP defense. Can you expand on, perhaps, how much that cost in the quarter? And whether or not we should be assuming that's going to continue for 12, 18 months?

The exact number, I wouldn't want to put a number up front. But, not having all the numbers in front of me, but it would probably range in the CAD500,000. And I think that for the next year -- I mean maybe Benoit can elaborate a little bit -- but as we speak, there's no more money spent on that litigation until the re-examination outcome is known. So there will not be any expenditure on legal fees for at least Q1, and the next one, the next one coming.

(multiple speakers) Aker. Even though we have a budget allocated for it, but I will add to that that it's a -- hope we won't spend that much, but we what we are spending in justify and support the strategy that we would follow, Robin. What I can say, we're going to invest and spend what need to be spent to make sure that we have the (inaudible) in the US. And having met with the competitor, they do think that we have more than a point, that we're in a good position.

Okay, thank you. My next question is really a clarification of -- I know you can't say too much on the Nestle. But you did mention that, or at least I interpret it as a, 100,000 kilo, not order, but indications out of Europe. Does that relate to a potential Nestle deal or is that --

No, not at all. I did mention 150,000 kilo. And they're not related to Nestle, not at all. It's in the dietary supplement business.

Okay. So that is not at all related to Nestle.

Sorry?

I was confused.

100 -- when I said 100 by mistake, it's 150,000, sorry.

It was 150,000?

Yes, I said 100 by mistake. But it's 150,000 that I was supposed to say as it's written. And this is it, also.

And that relates to, again, the nutraceutical part?

Dietary supplement business. (Multiple speakers). Directly.

Sorry. I didn't quite get that.

I said, it's related to the dietary supplement business. It's krill oil, Neptune Krill Oil, EKO and NKO as -- in the oil form, or soft gel or capsule form.

Okay.

And it's really the dietary supplement market. It's not in the functional food business.

Okay. And finally, Tina -- can you expand on Tina's new position for the Global Marketing?

Yes, we felt, and we discussed together; and because of Neptune needs and requirements and the strategic moves ahead of us and all, is contribution in Neptune to reach where we stand now. We felt that it was a better asset for the Neptune family, including (inaudible) that she will take the global strategy as officer and help the management team for the vision. Because the operation is one thing; execution is something else, which is also part of the success. But the vision is very important. And she was very contributive to that since the beginning, and she was maybe too much involved in operation in Acasti. And Neptune has for it shareholder needed her at that level. And after discussion, we felt and we decided that it was the best thing for value creation of Neptune.

Okay, and, finally, the Nestle -- is there any timeline that you can give us guidance on?

Well I didn't say with Nestle, that Nestle officially informed Neptune that they will do, it would be interested to learn about Neptune further development. Nest egg renounced, for reason internal to Nestle, to enter into a formal negotiation with Neptune.

Okay, thank you very much.

(Operator Instructions). Doug Loe, Byron Capital Markets.

Yes, thank you. And good afternoon, gentlemen. Just a couple of follow-up things for me. If I could return just to the IP and to the -- of the patent review and the USPTO. In previous comments, you indicated you thought there might be some measure of resolution by end of year. I was just wondering if that was an expectation on your part, or if you actually had some formal feedback on the USPTO that that was a timeline that they were going to meet?

This is Benoit again. No, we don't have any confirmation or information from the USPTO. It's what we would like to have, the decision by the end of the year. But as I mentioned before, we really don't know how long it will take. We were told that it could take a few months or a year, 18 months. It varies a lot. Both parties have filed hundreds of pages of documents, so it will take some time. That, we are aware of.

Everything is filed, though.

Everything has been filed. The re-examination of the 348 -- well, both re-examinations are now finished, as far as the production of documents is concerned. So we're waiting for decisions.

No, that's helpful feedback, thanks. Second of all, I was just interested in kind of drilling down on your impressive NKO/EKO revenue growth over the last couple of quarters. And clearly, much of that growth is materially driven by your expanded US distribution network. But I was just interested in whatever market intelligence or market research you might have undertaken within the last few quarters to ascertain what has driven growth, and what might drive growth going forward.

As you probably know, in the market research that we've seen, indicates that the krill oil is a proportion of the overall omega-3 market. It's a material piece, but still a relatively minor component of the overall universe. And we would certainly think that it has room to grow, not only from overall growth of the omega-3 market itself, but capturing new market share from other marine oil supplements.

So, and celebrity endorsements help, but I was just wondering if you had any sense on whether NKO growth is being fueled by more individuals switching from alternative formulations, or if you're benefiting from overall growth in that nutraceutical subsegment, or any other insight that you have on that would be helpful, just so that we can kind of conceptualize what's driving growth here. And that's it for me, thanks.

Let's say that we saw in the market growth, as we all know, of the omega-3 market. Within that omega-3 market, we also realized growth of krill oil. And in the krill oil market, it's a switch-off growth. The early -- at the early stage, we see and we're still seeing growth of krill oil, commodity krill oil. People, consumer switching from fish oil to krill oil.

And now we're seeing more -- and this is what why, just for to say that we put in the market the EKO krill oil to compete with the commodity krill oil product. And then, when the consumer views or consumes some krill oil, after a certain period we see them switching to krill oil, to the best krill oil, and then they adopt NKO.

So in our sale, we do see different growth of EKO and NKO. And we realized that there's a switch from increasing growth of EKO to a faster, now, growth of NKO. So, yes, we do have market interventions. And we do look at the market. And we do see what's happening in the omega-3 market.

And also, Tina, she's working more on that since she took over the global strategy.

Great. That's helpful. Thanks very much.

Thank you. I show no further questions in the queue, and would like to turn the conference back to the speakers for closing remarks.

So, sorry?

Closing remarks.

Closing remarks. Thank you all for assisting at the conference. If there are any questions other than the one I've been present, I would be more than pleased to answer that and answer the question. We always are available, all the management team, to answer your question, and welcome you to having to sit at your convenience. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.