Neptune Wellness Solutions Inc (NEPT) 2014 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Neptune Technologies & Bioressources Inc. second-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).

As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference Henri Harland, President and CEO. Sir, you may begin.

Thank you, operator. Good morning, everyone, and thanks for joining us. As mentioned, the purpose of today's call is to review our results for the second quarter ended August 31, 2013, which were released yesterday. As well, we will be providing you an update on our action stance to resume operations and supply cost numbers following the November 8, 2012 incident that destroyed our production facilities.

Before we begin, I would like to remind everyone that today's remarks contain forward-looking information, including without limitation those regarding Neptune's ability to successfully execute its action plan.

Please keep in mind that forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond Neptune's control. Consequently, this could cause actual results to differ materially from those that are disclosed or implied by such forward-looking information.

Additional information about these assumptions, risks and uncertainties is contained in Neptune's annual information form dated May 29, 2013, and its other public securities filings available on SEDAR and EDGAR. [Thus] (inaudible) should not place undue reliance on forward-looking information. Any forward-looking information provided in the context of today's discussion represents Neptune's view only as of today's date and is subject to change. Neptune does not undertake to update any forward-looking information except as required by applicable securities laws.

Turning to the call, joining me today are Andre Godin, our CFO; and Benoit Huart, our Director of Legal Affairs. Due to the scheduling conflicts, we were unable to have Dr. Harlan Waksal on today's call. However, going forward, we will try to do so.

Now before reviewing our financial results, we would once again like to start by updating you on our action plan to resume operations and supply costs numbers following the November 8, 2012 explosion that destroyed our production plant.

We continue to make solid progress in restoring and announcing our production capacity reaching a number of significant milestones over the past few months. Simply we announced a major manufacturing and supply agreement with Rimfrost, which gives Neptune the right to purchase at a preferred price up to 800 metric tons of krill oil over the first three years term of the renewable agreement.

This partnership not only secures supply while the Sherbrooke facility is being rebuilt, it also allows us to move from a centralized to a diversified production model, thereby strengthening and safeguarding Neptune's future operations and expansion. The Krill oil purchase from Rimfrost will be further processed by Neptune to meet our Eco Krill Oil standard, thereby allowing us to offer an enhanced and differentiated product to our customers.

On top of this positive news, we are still planning for the Sherbrooke facility to be operational before the end of the current fiscal year, giving us the additional possibility to produce annually more than 150 metric tons of Neptune Krill Oil, our NKO premium brand, the best krill oil in the market.

Our new production arrangements brings greater flexibility by allowing us to focus our in-house production at first on our premium product NKO while meeting the demand for good quality krill oil through third-party manufacturing agreements. We now benefit from the necessary capacity to meet demand expectations as the omega-3 phospholipid [international] market continues to grow at double-digit rates.

Now with respect to the Sherbrooke plant, we recently received a CAD12.5 million loan offer from the Quebec provincial government to help fund the project, which is expected to cost around CAD43 million. As you are aware, we are overhauling the expansion facility that was underway at the time of the incident. Giving the innovation in the new plant much (inaudible) and additional purchase replace lost equipment and the incident are being made to bring it to an operational state and announce production process as well as the operational efficiency.

The cost of the project is to be funded by loans, insurance recoveries and working capital.

Speaking of insurance recoveries, the Company has access to a total potential compensation of CAD15 million to CAD20 million. To date, CAD11.7 million has been received, including CAD5 million during the second quarter, and the Corporation is actively pursuing the remaining balance.

Turning to another milestone for Neptune, we recently announced a settlement with the five companies and the Rimfrost-Olympic group concerning the US International Trade Commission, the ITC investigation, into infringement of Neptune's composition of matter. This is a significant accomplishment and one that attests to the strength and validity of our IP.

As part of the settlement, Neptune granted the Rimfrost-Olympic group, a worldwide nonexclusive, royalty-bearing license allowing them to market and sell within the international (inaudible) krill oil product containing components extracted from krill. The Rimfrost-Olympic group also agreed to pay Neptune a royalty amount for the manufacture of krill, all prior to the effective license commencement date.

A number of industry players named by Neptune and Acasti in the ITC complaint have still not reached a settlement with us, namely (inaudible). As such, we continue to actively prepare for the upcoming ITC hearings, which are scheduled to commence this coming December.

In conclusion, we continue to maintain a large percentage of our pre-incident sales with the recent announcement of a manufacturing and supply agreement along with the expected completion of our separate plant in the coming months. We are well placed to capitalize on future growth and reaffirm ourselves as a leader in the omega-3 phospholipid in the (inaudible) market.

At the same time, we remain committed to the protection of our IP as it is available asset and represents part of our shareholder value for both our nutraceutical and pharmaceutical business.

Subsidiaries now, turning to them. Acasti and NeuroBioPharm, have actively -- are actively developing and validating new product. Acasti was particularly busy during the quarter announcing a number of important achievements and its drug development program aimed towards obtaining market approval of CaPre. CaPre is the Acasti investigational new drug under development and validation.

This includes the release of a positive result in Acasti recently completed open label Phase II cohort trial testing the safety and efficacy of CaPre as well as the signing of a manufacturing agreement with a world leader in natural base specialty chemicals for the contribution to the manufacturing of CaPre clinical material. Going forward, Acasti intends to present full cohort results at an international scientific forum.

Acasti other Phase II trial, a double-blind placebo-controlled called TRIFECTA study is expected to be available during the first half of 2014. Currently, Acasti is also moving forward with its US strategy to conduct PK and Phase III clinical trials in the USA.

Our other subsidiaries and NeuroBioPharm also continue to actively develop and validate new product applications for the management of neurological and cognitive disorders and we continue to expect important progress as we move forward.

With that, I'd like to now turn the call over Andre. Thank you.

Thank you, Henri. Before turning to the financials, I'd like to remind you that our results are in Canadian dollars, and today's remarks may contain forward-looking statements. As well, I would like to highlight that the Sherbrooke incident and the accounting procedure and policy applied following it render, as you realize difficult and hard to call comparisons between year-over-year results.

Looking at Neptune on a standalone basis, second quarter nutraceutical revenues were CAD5.1 million, down from CAD7.9 million in the prior year due to the plant incident. As you are aware, Neptune has been able to protect a large portion of its pre-incident revenues to the sales of krill oil obtained through short-term temporary arrangements and margin concessions. With our recent manufacturing and supply agreement, we have further secured supply as production is being reestablished while also ensuring long-term production capacity to meet expected increases in customer demand for our products.

Turning to margins, I would like to highlight that although they are below historical levels, they continued to strengthen, increasing from 5% in Q4 of our last fiscal year to 10% in Q1 and 12% in our most recent quarter.

Going forward, we expect to see continued improvement as we ramp up our manufacturing and supply agreements with Rimfrost and reestablish production of our premium krill oil NKO.

Looking at profitability, adjusted EBITDA for the nutraceutical business was negative CAD4.1 million versus EBITDA of CAD0.5 million in the corresponding prior-year quarter. The year-over-year decrease is largely due to margin concessions on lower revenues along with additional legal fees to defend and reinforce the Company's intellectual property.

The nutraceuticals segment recorded second-quarter net loss of CAD1.8 million compared to a loss of CAD2.8 million last year. The improvement of the net loss over last year is largely due to the CAD5 million received in insurance recoveries recorded in the current quarter, reduced by margin concessions on lower revenues resulting from the plant incident, higher stock-based compensation expenses and additional legal fees to defend and reinforce the Corporation's intellectual property.

On a consolidated basis, second-quarter revenues were CAD5.3 million, down from CAD8.1 million last year to due to the plant incident. Acasti's medical food product, Onemia, contributed to CAD266,000 of sales during the quarter with the rest coming from the nutraceutical segment.

Quarterly consolidated adjusted EBITDA was negative CAD6 million versus negative CAD0.7 million in the previous year. The year-over-year decrease is largely due to the reasons mentioned for the nutraceutical business as well are subsidiaries who are actively engaged in clinical studies and research and development recorded negative CAD2 million EBITDA up from CAD1.2 million in the prior year.

The Company had a second quarter consolidated net loss of CAD5.1 million versus a loss of CAD4.7 million in the corresponding prior-year quarter. The year-over-year decrease is due to the higher costs outlined for the nutraceutical business along with increased spending at our subsidiaries resulting from their clinical studies and R&D program. This was partially offset by the CAD5 million of insurance recoveries received during the quarter.

As of August 31st, 2013, Neptune had consolidated working capital of CAD33 million and cash and short-term investments of CAD19.5 million. As previously mentioned, Neptune is anticipating additional insurance recoveries above and beyond the CAD11.7 received to date. Neptune will also benefit from the Quebec government loan of CAD12.5 million, which will be used to finance partially the Sherbrooke plant reconstruction.

In closing, we remain focused on laying the groundwork to drive profitable growth and build shareholder value through leadership and strong performance, and I think the positive announcements in recent months attest to this commitment.

As we rebuild and strengthen our production capacity, we are well positioned to reaffirm our market leadership as the premier omega-3 phospholipid krill oil manufacturer and supplier, and we remained focused on the solid execution of our action plan. At the same time, we will remain steadfast in the defense of our IP as it is a strong and valuable asset and part of our shareholder value.

This ends our formal remarks and we can now take questions. Operator, I'll turn the call over to you.

(Operator Instructions) Doug Loe, Euro Pacific.

Yes, thanks very much and good morning gentlemen; thank you for the overview on the quarter. For either of you, I just want to get a handle on your best guess on what quarterly NKO/EKO revenue expectations will be going forward here. You know, for several quarters you've had capacity constraints at Sherbrooke, and of course the last three quarters were impacted by the Sherbrooke incident last year. But with new supply coming on board from Rimfrost, just want to get a sense of what the existing demand is for NKO/EKO from existing customers so we can kind of get a handle on what revenue expectations are going to be over the next several quarters. And then I have a follow-up.

Yes, my name is Michel Timperio, Senior Vice President of Global Sales. Actually, we're forecasting on volume above these products in the ratio of about 60% -- down the road, 60% what we call generic krill, which in the Northeast is EKO, and 40% of NKO. Obviously at this point, what we're selling is basically a generic krill beyond and above specifications that you find in the market in terms of product quality.

Okay, that's helpful. A follow-up to that, then -- the Rimfrost agreement certainly gives us confidence that you see solid demand for Krill oil either as EKO or NKO going forward here, and hence suggests that it might be beneficial to margins and EBITDA for you to even expand the existing facility even further from 150 to 300 metric tons of annual capacity. Have you sort of thought about a schedule over which you might think to do that? And just some insights on how you're thinking about sort of expanding your own facility even beyond the 150 would be helpful.

You know we have many questions in the same phrase. Let's start with the expansion of the NKO. As the customer demand will grow from, let's say, a good krill oil to a premium krill oil, expand Sherbrooke capacity to bring it to from 150 to 300 metric tons, which we foresee in the three coming years during which -- during those three years we will supply as Michel Timperio said the EKO Krill oil. And now we're -- having that agreement on hand, we're trying -- we're working, not trying -- we're working on to rebuild, as I said, our market share and then to grow it. There's big players in the market, there's a large demand and we want to regain our position in the market being number one in the market, which we'll work on the following two years at least to get there.

All right, that's helpful. And then just a quick follow-up on NeuroBioPharm. You provided some solid detail here on near-term clinical programs you expect undertake, chatting about a pediatric ADHD study and a memory cognition study in adults that you expect to undertake here. Just wondering if one of you could maybe just comment on some more clinical trial specifics there and over what time frame you might expect to report some data. I'll leave it there, thanks.

As for Neuro, as you understand we've been a little bit slow down because of the plant. So as per the development of the product, we had to work differently because we didn't have the plant, neither the lab. So now being back on track because we found out ways of developing the product, we do have as expressed in the document for clinical moving on and the clinical, we will have that available during the next year as well as a product in the market with Neuro. And the full program of R&D will be -- present more deeply and with more detail in the following -- the next quarter.

Okay, great, thanks very much.

Robin Cornwall, Catalyst Equity Research.

Congratulations on your royalty agreement, that is an extremely positive event. My question is in part on that royalty agreement. You indicated that you will have prior royalties prior to the agreement. Can you give us an idea when those will be recognized? Is it Q3? And how far back would these royalties go?

Robin, as you understand, I cannot give you all the detail for now because we're still in discussion with the other party. But it's covering the infringement time since the patent is valid and is related -- is based on the number of metric tons that we sold in the market.

So, as for the question when it will be recognized in the statement -- Andre? (multiple speakers). By in the next few quarters going forward. Yes, every quarter you will see some of the impact of these recoveries.

Okay, could I ask a question on the EKO? Where will you be processing it after you receive it from Rimfrost?

We do have -- Robin, we do have already an agreement with a third party working with us now reprocessing krill oil that we buy we bought, who is going to be the same party that we're going to be working with until the plant will be up and running, and which plant we will have the possibility of doing it. But, meanwhile, we're still working with a third party which is located in North America.

And have you any time line as to when the first EKO could be available for marketing?

Just sent an order.

Actually, we're going to be starting to do our first shipment of that EKO product, modified EKO product, by mid-November.

So you could be recognizing revenues relatively quickly in the fourth quarter?

Yes.

Absolutely.

Okay, and if I could ask another question. There's been a lot of discussion as to Jamieson and Jamieson's getting their supply of krill oil from third party. What is the arrangement long-term with Jamieson under a contract whereby once you start producing your NKO and EKO, when they will start to buy from Neptune?

This buy is under discussion, Robin.

So that's an ongoing discussion?

Yes.

Okay, the other question is on Acasti, if I may. It is really directed to the PK study for CaPre. How long would the PK study take? Do you have a time line on that?

Yes, it's a few months; let's say 3 to 4 months. But it doesn't refrain you or restrain you to submit for a Phase II/Phase III at the same time. So that's a -- that's it.

Does that -- would you be permitted to begin a Phase III trial before your TRIFECTA results are known?

We're looking forward to meeting with the FDA will tell. But it's in the plan.

And finally, can you explain where your international form might be for the additional quote data?

I don't exactly --

It's going to be taking place in the US (multiple speakers) forum for the (inaudible) study results. (multiple speakers)

Is there any timing on that?

(inaudible) of the results, no there is not yet.

Okay, thank you. That's all I have. Thanks very much.

(Operator Instructions) [Howard Petruk], Private Investor.

I just wanted to ask if you have any time line when you anticipate that the EKO patent dispute will be resolved.

This is Benoit Huart. Well, the dispute with EKO, the patent issues, it's very difficult to give a timeline. It depends on the course; it depends on the different offices and what different parties file, so we cannot give a time line.

Your question is related to the ITC, or it is related to the patent?

To the patent.

Sorry, because, yes, the patent that's longer than the ITC (multiple speakers).

I have one other question. I have in my account some NeuroBioPharm shares and warrants. Is that going to become a public company at some point in time? And if so, when is that going to take place?

When difficult to say, if, yes, it will. Looking forward to be during 2014 hopefully before the first half. Working hard on that. As I said, the Neuro plan would be more detailed and explained in the next quarter.

Yes, one other follow-up question. With regard to Jamieson, and I am a user of the krill oil and I've noticed that it started off as being the NKO, and then the NKO disappeared. Now they are actively advertising on television something I called, I believe, a super red krill oil. Is that a product coming from you, or are they sourcing from another party?

At this point, because of the incident, we have to outsource. As Henri said, we are in discussion with them because they are looking to obviously come back with NKO in due time. And, meanwhile, since we signed an agreement, we are also in discussion for them to take that product from us as soon as we have the EKO specs out in November, we will pursue discussions with them.

Okay, thank you very much indeed.

Thank you, and at this time I'm not showing any further questions. I like to turn the call back to management for any further remarks.

No, thank you, everyone, to be online, and feel free to call us if there's any more questions. Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone have a great day.