Neptune Wellness Solutions Inc (NEPT) 2014 Q3 法說會逐字稿

(Operator Instructions). Good day, ladies and gentlemen, and welcome to the Neptune Technologies & Bioresources third-quarter fiscal-year 2014 earnings conference call. (Operator Instructions). I would now like to introduce your host for today's conference, Andre Godin, CFO. 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 third quarter ended November 30, 2013, which were released yesterday. As well, we will be providing you with an update on our action plan to resume operations and supply customers following the November 8, 2012, incident that destroyed our production facilities.

Before we begin, I want to remind you that today's remarks contain forward-looking information that represents our expectations as of today and accordingly are subject to change. We don't undertake any obligation to update any forward-looking statements except as we may required by Canadian and US securities laws.

A number of assumptions were made by us in preparing these forward-looking statements which are subject to risk. Results may differ materially. Details on these risks and assumptions are in our filings with the Canadian securities commission and with the securities exchange commission.

Turning to the call, joining me today are Henri Harland, our President and CEO; Benoit Huart, our Director of Legal Affairs; Harlan Waksal, a Board member on both Acasti and Neptune; and Mike Timperio, our EVP Global Sales.

The format today will be slightly different than seen in past quarters. I will be handling the formal presentation of operating and financial results, and we will then open up the lines for the Q&A session. Both Henri and I will be available to respond to our questions -- to your questions.

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

Although the last year has been challenging, we are approaching the end of a difficult period, with our Sherbrooke plant expected to open around the beginning of our next fiscal year. We are still waiting for some final approval from government authorities before opening.

Once operational, we expect the plant to have the ability to produce annually more than 150 metric tons of our premium brand NKO, the best krill oil on the market. On top of this, the previously announced manufacturing and supply agreement with Rimfrost gives us access to an additional 800 metric tons of krill oil over the next three years. Neptune began to source krill oil directly from Rimfrost near the end of the third quarter.

The diversified production arrangement put in place significantly increases our capacity and safeguards operations by moving us from a centralized to a decentralized production model. As well, with our increased capacity, we are in a much better place to capture future growth opportunities as the omega-3 phospholipid market continues to grow and as we extend our customer base.

Speaking of expanding our customer base, Neptune recently received approval to sell its krill oil products NKO and EKO in China. With a population of over 1.35 billion and increasingly affluent consumer looking for health and wellness products, China offers significant growth opportunities for Neptune. We already have sales representation in China and are actively pursuing sales opportunities to capitalize on this important market.

Turning to the other positive news, we continue to actively defend our intellectual property and recently announced another key patent infringement settlement and license agreement, this time with Aker, another dominant player in the industry.

With eight of the 10 respondents named in the International Trade Commission investigation now settling with us including Aker and Rimfrost, we are basically resolved -- we have basically resolved the ITC investigation. These settlements represent significant accomplishments and show the strength and validity of our intellectual property.

They also are a clear indication that our competitors recognize the value of our IP assets. We firmly believe that everyone benefits when industry partners recognize and respect the IP of innovative companies. This new spirit of corporation with our industry partners allows us to work together to increase awareness on the benefits of phospholipid omega-3s, which in turn should lead to increased market penetration and higher revenues.

Only Enzymotec has yet to settle although, as previously announced, a settlement term sheet has been signed, and we remain hopeful that a final binding written agreement will be reached soon.

Now turning to the pharmaceutical side. Acasti and NeuroBioPharm are actively carrying out their research and development programs. Acasti recently announced a number of key milestones including clearance from the US FDA to initiate a pharmacokinetic, or PK, study on CaPre. And also the closing of a $23 million public offering.

Acasti has engaged Quintiles, the world's largest provider of biopharmaceutical development and commercial outsourcing service, as a CRO to conduct its PK study. Going forward, Acasti intends to amend its original PK investigational new-drug submission with the FDA to also seek approval to conduct a pivotal Phase 3 trial in the US.

Collectively, these are critical, and this is a next step forward approving market approval of CaPre in the US. Acasti Phase 2 trifecta trial is ongoing, and special focus is being given to recruit patients with TG levels above 500 MG per DL. Acasti's strategy may change depending on how Canada responds to a request from Acasti to expand the patient inclusion criteria.

Our other subsidiary, NeuroBioPharm, also continues to actively develop and validate new-product applications for the management of neurological and cognitive disorders and has a number of preclinical and clinical studies underway.

Particular focus has been given to the treatment of MCI, mild cognitive impairment, addressing memory and concentration along with mood disorder such as anxiety and depression, as well as treatments focusing on ADHD. We are still in the early stages due to the plant incident. However, preliminary results obtained from pilot studies using precursors of product candidates have shown promising results. We continue to expect to make important progress as we move forward into 2014.

Now turning to the financial. I would 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 procedures and policies applied following it render, as you realize, difficult (inaudible) between year-over-year results.

Looking at Neptune on a standalone basis, third-quarter nutraceutical revenues were CAD4.4 million, down from CAD6.6 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 [previous] incident revenues through the sales of krill oil obtained through short-term temporary arrangements and margin concession.

The Rimfrost manufacturing and supply agreement, along with the expected opening of our Sherbrooke plant, ensures long-term production capacity to meet both current and expected increase in customer demand for our products.

Turning to margins. They came in at 12% for the current quarter, unchanged from Q2 of the current fiscal year, but below historical level due to the plant incident. Going forward, we expect to see margin improvement as we ramp up our manufacturing and supply agreement with Rimfrost and reestablish our Sherbrooke operations.

Moving to profitability, adjusted EBITDA for the nutraceutical business was negative -- CAD4.2 million versus CAD0.4 million in the corresponding prior-year quarter. The year-over-year decrease in adjusted EBITDA is largely due to margin concessions on lower revenue resulting from the plant incident along with additional legal fees to defend and reinforce the Corporation intellectual property. As we approach the end of the ITC investigation, we expect legal fees to decline in our upcoming fiscal year.

The nutraceutical segment recorded a second-quarter net loss of CAD6.9 million compared to a loss of CAD10.9 last year. The improvement in the net loss versus last year is largely due to the CAD8.5 million in impairment losses and costs related to the plant incident recorded in the third quarter of 2012. The improvement over last year was partially offset by a lower gross margin in the current quarter resulting from the plant incident, as well as higher stock-based compensation expense and additional legal fees to defend and reinforce the Corporation's intellectual property.

On a consolidated basis, third-quarter revenues totaled CAD4.4 million, down from CAD7 million last year, once again due to the plant incident. Quarterly consolidated adjusted EBITDA was negative CAD5.9 million versus negative CAD7 million -- CAD0.7 million in the corresponding prior-year period.

The CAD5.2 million year-over-year EBITDA decline is largely due to the lower gross margin resulting from the plant incident totaling CAD2.8 million as well as CAD1.8 million in additional legal fees to defend and reinforce the Corporation intellectual property.

During the quarter, our subsidiaries who are actively engaged in clinical studies and research development recorded negative CAD1.7 million of EBITDA, down CAD0.6 million from negative CAD1.1 million in the prior year.

The Company recorded a third-quarter consolidated net loss of CAD10.4 million versus a loss of CAD12.4 million in the corresponding prior-year quarters. The improvement in the net loss versus last year is largely due to the CAD8.5 million in impairment losses and costs related to plant incidents recorded in the third quarter of 2012. The improvement over last year was partially offset by a lower year-over-year gross margin of CAD2.8 million in the current quarter resulting from the plant incident as well as higher stock-based compensation expense of CAD2.1 million and CAD1.8 million in additional legal fees to defend and reinforce the Corporation intellectual property.

As at November 30, 2013, Neptune and (inaudible) consolidated (inaudible) impact capital of [CAD21.2] million and cash and short-term investment of CAD8.4 million. During the quarter, Neptune received an additional CAD300,000 in insurance recoveries, bringing the total recoveries received to date to CAD12 million.

In conclusion, over the past year we have maintained the course protecting Neptune's name, brand, and IP, while keeping a significant portion of pre-incident sales and putting in place the necessary building blocks to ensure our long-term success and profitable growth. As we approach the end of this difficult period, we are well positioned to emerge stronger than we ever in prior to the incident.

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

(Operator Instructions) Jason Butler, JMP Securities.

Congratulations on the progress towards getting the manufacturing facility back up and running.

I had a couple of questions on the opportunity in China. Can you talk to us about what you -- what your steps are now towards that beginning to generate revenue in China? How quickly you can generate revenue in China? And then maybe you could talk to us a little bit about the market. Do you view this as more of a market suited to NKO or EKO or both? And what are your plans to supply that -- either of those products and manufacture as well?

I will have Mike Timperio answer this question. Mike.

To answer your questions, obviously, in China there already has been some groundwork prior to the approval of the novel food certification for Neptune. So there is already in the pipeline a certain amount of players that showed interest, but have to wait for approval. The level of speed that this is going to take, we think that 2014 will be basically breaking ground for that market, obviously. As you know, the middle class in China is growing rapidly, so we see this market as very promising.

In terms of products, NKO both and EKO will definitely be two products that could be -- that will be, obviously, sold in China depending on who we basically are targeting. And also the type of [RIM], what are the pharmaceutical healthcare company versus strictly health food type or related organization will also factored in in terms of them selecting one or the other products.

Okay. Great. Thanks. Then on the Sherbrooke facility, when you start manufacturing, are you at a capacity of -- or do you have the full 150,000-ton capacity, or is that something that you need to ramp up to get to over the year?

We are expecting -- obviously, when you open a plant you have to schedule a ramp-up period. So we will have a ramp-up period and expecting to be probably in the two, three months. But we will see as the plant reopens how long the ramp-up period will last for. But for sure, will -- our objective is to reach 150-metric-ton run rate as soon as possible after the reopening.

Great. Thanks for taking my questions. And congrats again on the progress.

Thank you, Jason.

Doug Loe, Euro Pacific.

Good morning. Thanks for the update. General theme question to start. I was wondering if within the current overall omega-3 nutritional supplement market if you have any general industry data on how krill oil alternatives are performing within the overall market. I was just wondering if krill is capturing an increasing market share for all of the bioavailability and ease of dosing reasons that we are all aware of. Just some industry data that you might be aware of there would be helpful.

And then second of all, just wanted to follow up on the China question. I know that you -- a couple of years ago you announced that you had a relationship with SFKC I think was the organization, and you had plans to build a facility in China. I was just wondering what the status of that relationship was and if you had any intentions of actually building out manufacturing capacity in China, building on the approval to market that you announced last week.

Okay. I will answer the second question. I will leave Mike Timperio answer the first one. (multiple speakers)

If you answer the first part of the question, krill oil appeared on the radar of the Nelson report last year for the first time. As it picked up as (inaudible) it is probably the fastest growing product in the omega-3 (inaudible). So it finally appeared on the radar of the Nelson report for the first time last year. And we do expect the industry as a whole to grow at a remarkable speed in that category over the next two or three years. Due in fact to what you just highlighted, the fact that it is starting to be known that phospholipid omega-3 shows greater bioavailability and of the (inaudible) in the case of Neptune, which is even more important a great antioxidant part of the product due to our process, which also gives us as an NKO product an advantage in the marketplace for the future of the awareness. Market awareness grows towards knowing the differentiation between products.

Okay. And, Doug, in regards to your second question, obviously we have a very good relationship with the SKFC. The file is still open. They are from far our largest supplier of frozen krill oil. So we work with them intensively for -- regarding the potential joint venture, obviously with the plant explosion, we had to prioritize certain things. So this file has been put aside for now, and we will reconsider later this year or next year to see if this will pursue or not. But for the time being we are full focused on reopening our plant in Sherbrooke.

Understood, and thanks for that. Maybe while I have got the floor, a quick follow-up on NeuroBioPharm if I could. Andre, in your MD&A, you did provide some solid detail on how you intended to prioritize developments of MPL VII, VIII, and IX specifically in cognition ADHD and mood disorders, as you indicated in your comments. But, anyway, that is actually a pretty broad spectrum of indications and projects that you might target over time. Just wondering if there was any -- if there are any specific initiatives that you expected to accomplish over let's say the next 12 to 18 months. Which of those indications do you think that you might try and target initially in your Phase 1, 2 clinical studies, and which of those various MPL candidates do you expect to move forward initially? And I will leave it there. Thanks.

I think it is probably a little bit too early to be too specific on the action plan of Neuro. What I can tell you is that we will be more and more active in the Neuro development, but the plan is taking form right now, and we will announce in the upcoming months the progress or the maybe be a little bit more specific on what is the main direction that Neuro will take over the next 12 to 18 months. But at this time it is a little bit early, but you should hear about Neuro in the upcoming months for sure.

Great. Thanks for that.

Robin Cornwell, [Catalyst Research].

Congratulations on all of your accomplishments. They have been many through the quarter. My question really revolves around do you have a backlog on your end -- I'm specifically really referring to NKO at the new plant. So do you have a backlog, and does that backlog include your former clients? Or some of them are still existing, but some of the clients such as Jamieson acquired a different source of krill. Could you comment on that?

Yes, I think that Mike Timperio, you could answer that one.

Well, in terms of having a backlog, we (inaudible) had the customers that delayed their launch and other area other than the US, they delayed basically their launch waiting for NKO. Those who basically are really strong NKO advocate and have been co-branding with us obviously are eager to go back to NKO. As far as Jamieson, discussions are being ongoing with Jamieson in terms of timing for Neptune to obviously start producing its product -- its premium product, NKO, back in terms of production schedule and agenda. So we are still obviously in the momentum of discussion and, obviously, cannot share all the discussion with you today. But there is, obviously -- yes, there is a backlog and people are waiting for us to be back into production.

Okay. Thank you. And if -- I guess a question maybe for Andre, if you are sold out of NKO fairly quickly, you run right into your capacity, what would be your next step for NKO? Rimfrost, or with you expand the Sherbrooke Plant? And if you expand the plant, just how long would that take before you could double your production?

The plan is to eventually expand the Sherbrooke plant. This is what we are looking at right now. The decision is not made. It is a project that we are contemplating right now. But we believe that the best company to produce NKO is us. So for now there's no intention of licensing the production of NKO. So if we get there, we are already looking at different options. The options are not final, but we are hopeful that we will be ready when the time comes. And obviously if it was going to take place in Sherbrooke, the investment will be much slower because we have got all of the infrastructure already in place, and to accommodate another 150 metric ton would not be such a huge investment for us as compared to the ongoing investment that we have now.

The investment Quebec line that you announced of CAD12.5 million, would that be used for expanding the plant, or is that being used for restoring the existing plant?

It has been used to finance the reconstruction.

Okay. So, we could expect to see that line drawn in the next quarter?

Yes.

Okay. I guess my final question is on royalties. How do you account for -- if you get royalties -- past royalties that you've announced, how do they get accounted for? Are they -- do they become revenue, or is there some other entry?

They are revenue.

Okay.

They -- you will see on the statement of earnings a separate line for royalty income.

Okay. So, whether it is past or future or current royalties, it will all be in the same line. Okay.

Should be, yes.

Okay. Thank you very much.

Thank you. I am not showing any further questions in the queue. I would like to turn the call back over to management for any further remarks.

Well, this ends our conference call, and I would like to thank all of you for joining us today. Thank you again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.