Neptune Wellness Solutions Inc (NEPT) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Neptune Technologies & Bioressources first-quarter fiscal-year 2015 earnings call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to turn the conference over to your host for today, Mr. John Ripplinger, Director of Investor Relations. Sir, you may begin.

Thanks, Operator, and good morning, everyone, and thanks for joining us today. As mentioned, the purpose of today's call is to review our results for the first quarter ended May 31, 2014.

Joining me on today's call are Dr. Ronald Denis, former Chairman of Neptune and Acasti; Messieurs Pierre Fitzgibbon and Jerry Wenker, newly appointed Chairmen of Neptune and Acasti, respectively; and Mr. Andre Godin, Interim President and Chief Executive Officer.

We will be starting off the call with a few introductory comments from our Board members. Andre will then follow up with a review of our most recent operational and financial highlights. We will then open up the lines for questions.

Before we begin, I want to remind you that today's remarks contain forward-looking information that represent our expectations as of today and accordingly are subject to change. We do not undertake any obligation to update any forward-looking statements, except as may be required by Canadian and US security laws. A number of assumptions were made by us in preparing these forward-looking statements, which are subject to risks. Results may differ materially. Details on these risks and assumptions are in our filings with the Canadian Securities Commissions and with the SEC.

With that, I will turn the call over to Dr. Denis.

Thank you, John, and good morning, everyone.

I would like to begin by commenting on some of the corporate events that have taken place since our last quarterly call. At our annual and special meeting held in June 2014, shareholders elected a solid slate of directors, comprised of entrepreneur, executives, doctors, and investors. On behalf of all the Neptune family, I would like to personally welcome our returning and newly appointed Board members. Collectively, we will benefit from their leadership and experience as we move forward with our growth initiative.

As announced July 15, I will be stepping down as Chairman of Neptune and Acasti's Board, but will remain a director of each Company. In addition, I will remain Chairman of NeuroBioPharm. I have been serving on Neptune's Board since 2000 and Acasti since 2008 and felt that it was the right time for new leadership.

At our most recent Board meeting, Mr. Pierre Fitzgibbon and Mr. Jerry Wenker were appointed Chairman of Neptune and Acasti, respectively. Both of these individuals are leaders in their field with a deep strategic and marketing-driven focus and a strong ability to develop high-performance organizations. They have a very strong track record of value creation and are well positioned to guide our organization forward. I wish them all the best in their new positions and look forward to working with them.

In closing, I would like to thank you, our shareholders, for your steadfast support of the Company. It has been an honor serving as Chairman of both companies and I look forward entering our next phase of growth with new leadership team.

With that, I would like to turn the call over to Pierre for a few comments.

Merci, Ronald, and on behalf of my fellow Board members of the Neptune family, I would like to start off by thanking Ronald for leadership and sound advice over the years. In the recent past, it certainly has been a challenging time for Neptune, but under Ronald's careful watch, the Company successfully navigated the difficult period and is emerging with a solid foundation.

Going forward, your newly formed Boards at Neptune and Acasti will focus on supporting management along a path of value creation, building on a solid base. Your Board of Directors will be more active than in the past and will focus on building a stronger Company through solid leadership, performance, and sound corporate governance.

Despite some obvious challenges, Neptune has a bright future, and I'm looking forward to working with my fellow Board members and the management team as we develop and implement our growth initiatives.

Turning to the most important Board undertaking, the search for a new CEO is now underway. A top-tier executive search firm has been engaged, and through a Board committee, which include Jerry and I, we are working very closely with them. Candidates both from within and outside will be considered, and we are geographically agnostic on the source of the candidate. At this point, it is too early to elaborate further on the search, including timing, but I reconfirm that this is a top priority for us.

In the meantime, I would like to reassure our shareholders that Neptune Group is in good and safe hands under Andre Godin's leadership. His entrepreneurial team, his spirit, and his strong knowledge of the business make him highly qualified to lead the Company during this transitional period.

And in closing, I am very excited and committed to work with Neptune and to help to become a stronger Company which is well positioned for the next phase of growth.

With that, I will turn the call back over to Ronald.

Thank you, Pierre, for your thoughtful words.

While capital investment are the foundation for growth, it is people who really make a difference, and I am proud to be able to work with such a strong team. I would like now to pass the call over to Jerry for a few comments.

Thanks, Ronald.

I'd like to begin by echoing Pierre's comments concerning your leadership and say how enthusiastic I am to be taking on the role of Chairman of Acasti.

Cardiometabolic conditions are considered among the leading health problems worldwide and the cardioprotective efficacy of omega-3 fatty acids is well established. I'm excited about the opportunities ahead for Acasti and its prescription drug candidate CaPre.

There remain a number of important milestones before we can submit a new drug application to market and sell CaPre, but Acasti continues to make important progress in its drug development program, including the recent conclusion of its TRIFECTA and PK trials. With the encouraging results seen to date, we should be well positioned to seize the opportunities ahead.

I look forward to leading Acasti's Board and contributing to the Company's ongoing success. I would like to now pass the call over to Andre for a review of the operational and financial highlights for the quarter.

Thank you, Jerry, and good morning, everyone. I would like to begin by welcoming our returning and new Board members. We will benefit from their leadership and experience as we move forward with our growth initiatives.

I would also like to thank Dr. Denis for his years of dedicated service as Chairman and congratulate Pierre and Jerry on their newly appointed roles.

Turning to our operational and financial highlights, we are very pleased with the strong start of our new fiscal year, with both our nutraceutical and pharmaceutical businesses achieving some major milestones. Most importantly, in June Neptune announced the opening of its Sherbrooke plant. An inaugural event at the plant for media, members of the government, along with employees and their families, was well received by all.

Startup of the facility has been completed and the Company is now entering a ramp-up period. The Corporation anticipates a ramp-up period over three months, which each phase lasting one month. During this time, annual production capacity will grow from approximately 50,000 kilograms of krill oil at the end of Phase I to 100,000 kilograms by the end of Phase II and 150,000 kilograms at the end of Phase III.

While production levels are increasing, a significant portion of revenue are expected to be generated through the sales of commodity krill oil obtained through our third-party manufacturing agreement.

That said, some customers have indicated their intent to delay purchases until our premium product NKO is available. As you are aware, NKO has a number of advantages, offering the highest concentration of phospholipid omega-3, improved flowability, and less fishy smell and taste than competing products on the market. Those customers looking for premium krill oil recognize these unique attributes and are willing to wait for it.

We are working hard to return to full production capacity as quickly as possible. In the meantime, we expect revenues for our second quarter to remain at the same levels seen in most recent two quarters ended May 31, 2014.

Later this year, Neptune will also make available three new condition-specific formulations announced this past June, including NKO Beat, which supports heart health and blood circulation; NKO Flex, which supports bone and joint health; and NKO Focus, which supports brain and vision health.

Another important achievement since the start of our new fiscal year was the successful conclusion of all outstanding litigation issues surrounding the US International Trade Commission's investigation into infringement of Neptune composition-of-matter patents. Positive terms were reached with all 10 respondents named in the investigation, including nonrefundable settlement payments and favorable royalty-bearing license agreements.

During the quarter, we recognized CAD1.6 million in royalty settlements, bringing the total recognized to date to CAD7.1 million. This represents all nonrefundable settlement payments available to the Corporation.

Going forward, Neptune is also eligible for additional payments through its royalty-bearing license agreements. As previously announced, royalty levels for Aker and Enzymotec in the US will be dependent on the outcome of the pending inter partes review proceeding before the USPTO regarding certain claims of Neptune's 351 composition-of-matter patent. The hearings are expected to take place in the first quarter of calendar 2015.

Further adding to the strength of our worldwide patent estate, Neptune received two new composition patents in recent months, including one for the US and one for the Australian market. Both are valid until 2022. The US patent, which is the Corporation's first specifically targeting neurological conditions, relates to the treatment of Alzheimer's, while the Australian patent protects Neptune Krill Oils, particularly NKO.

These new patents provide additional strength to our IP estate and furthermore highlight our commitment to continue to protect and build this valuable asset for both our nutraceutical and pharmaceutical businesses.

On top of this positive news, we have also been busy on the pharmaceutical side, with Acasti recently announcing the completion of its Phase II double-blind TRIFECTA trial and its PK study. Topline data for both trials will be available by the end of September, with full results coming out by the end of the following quarter.

Topline data for the TRIFECTA trial will include information on the safety and efficacy of CaPre in lowering triglycerides, along with data on other lipid markers, including HDL, non-HDL, and LDL. Data for the PK study will include information evaluating blood profiles and bioavailability of CaPre.

We're hopeful that the results of the TRIFECTA trial will be in line with those seen in our open-label COLT study trial announced in August 2013. If the lipid efficacy found in the COLT study is maintained throughout our clinical trial, it could be a key differentiator from other omega-3 prescription drugs currently on the market.

Concurrent to the TRIFECTA and PK trials, the Corporation continues to correspond with FDA regarding its IND filing for a pivotal Phase III clinical study in the US. As previously announced, Acasti intends to request an end of Phase II, pre-Phase III meeting with the FDA to obtain buy-in on the clinical program and to address specific questions for which Acasti is seeking final responses.

Following this, Acasti is evaluating the possibility of submitting a Special Protocol Assessment to the FDA.

Now with respect to Neuro, the Company is currently in the early stages of its R&D program. Particular emphasis is being placed on the treatment of mild cognitive impairments, addressing memory and concentration, along with mood disorders, such as anxiety and depression, as well as treatment focusing on ADHD.

Neuro is currently conducting nonclinical studies investigating the potential therapeutic effects of its product candidates, including studies to assess their safety.

Going forward, Neuro would like to conduct pilot studies to evaluate the effect of its product candidates on such areas as cognitive impairment in elderly and ADHD in children. Approvals of applicable regulatory authorities are required before the trials can commence.

The positive milestones seen to date for both our nutraceutical and pharmaceutical businesses set the stage for a bright future. We remain committed to solid execution and will focus on driving strong revenue and margin growth through our market-leading offering and creating industry-leading products.

Turning now to the financials, 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 policy applied following it render, as you realize, difficult analytical comparison between year-over-year results.

My comments today will focus on our nutraceutical business. Detailed information on our consolidated results can be found in our press release and Neptune's audited consolidated financial statement and related MD&A, available on SEDAR, EDGAR, and the investors section of Neptune's website.

Turning to the results, first-quarter nutraceutical revenue were CAD3.6 million, down from CAD6.1 million in the prior year, but in line with levels seen in the last quarter.

The Company recorded CAD1.6 million of other income for the quarter, resulting from royalty settlements with certain third parties to resolve cases related to infringement of the Corporation's intellectual property. To date, the Corporation has received CAD7.1 million in royalty settlements.

Gross margin as a percentage of revenue stood at 14% for the quarter, up from 10% in the prior year. The margin improvement is due to the product cost reduction following Neptune's krill oil manufacturing and supply agreement with Rimfrost. As we ramp up our Sherbrooke operation, we expect to see a gradual improvement in margin.

The quarterly adjusted EBITDA was negative CAD3.8 million versus negative CAD2.7 million in the prior year. The decrease was driven by higher general and administrative expenses, including wages, training costs associated with reopening of Sherbrooke plant, and a bad debt charge for one significant customer.

Selling expenses also rose, due to increased marketing and advertising efforts in expectation of the resumption of krill oil production. The expense increase was partially offset by other income of CAD1.6 million resulting from the royalty settlement described earlier.

Neptune recorded a quarterly net loss of CAD5.7 million for the nutraceutical segment versus CAD3.4 million in the prior year. The higher net loss for the current quarter is largely due to the reasons mentioned for the year-over-year decrease in adjusted EBITDA. As well, foreign-exchange losses came in higher for the current quarter, while in the prior year, Neptune recorded CAD700,000 of insurance recoveries related to the plant incident.

During the quarter, our subsidiaries, who are actively engaged in clinical studies and research and development, collectively reported CAD56,000 of revenue and a net income of CAD1.3 million. The quarterly income for Acasti is due to a change in the fair value of its derivative warrant liability arising from the 2013 public offering. The warrants are derivative liabilities for accounting purposes, due to the currency of the exercise price, which is US dollar, being different from Acasti functional currency, which is Canadian dollar.

As at May 31, 2014, Neptune has consolidated working capital of CAD65 million. Cash and short-term investments totaled CAD52 million, of which CAD23 million relates to Acasti.

Cash and short-term investments increased by CAD22 million over the quarter ended February 28, 2014, due to the proceeds generated from our public offering and private placement completed in March and April 2014, respectively.

In conclusion, we had a strong start to our new fiscal year and we are well positioned going forward. We have laid the foundation for growth, and our overriding objective is clear -- focus on strong execution in order to reaffirm our role as a premier krill oil provider.

I would also like to thank all Neptune management and employees for their increased contribution in this transition period.

With that, I will turn the call back over to the operator for the Q&A portion of the call.

(Operator Instructions). Robin Cornwell, Catalyst Equity Research.

I guess I had a couple of questions for Andre first, and then perhaps one for Jerry. Andre, again, you've got cash of about CAD30 million net in Neptune, but you have a lot of inventory buildup. I asked it before, but can you give us an idea of what kind of capital might be released as the inventory buildup works down?

Honestly, there is -- thanks, Robin, for your question. The inventory as at this point is high in terms of frozen krill, and we are looking to basically keep the premium frozen krill. So there will be some of that frozen krill that will be sold directly as frozen.

For the balance, obviously we will be using the krill that we just purchased, and we probably have enough frozen krill to go for a year to 18 months. So, the kind of -- we will be able to generate the revenue that we expect to generate, based on the production capacity ramping up, and basically generate the revenue according to the forecasts that we have internally.

Okay, so really there might not be that much capital released from the excess inventory?

Not so much, no.

No, okay. On the backlog of orders for NKO, can you give us an idea whether you have enough backlog to absorb the full 150,000-kilo production?

I will direct this question to Mike Timperio, our VP Sales in there.

My name is Mike Timperio. We do have a backlog, obviously, of orders of NKO. Following obviously -- within the ramp-up, we're obviously scheduling potential deliveries for these customers that basically retain a bit, in some cases, do a launch, a new launch, or other cases transiting from the generic krill back to NKO.

As far as making the 150 metric ton threshold, obviously we are working, as you know, as said before, in emerging markets, which are quite starting to be in movement and progressing at a good speed. So, it is hard for me at this time to say do we have the backlog at this point. This backlog will be built as quarters are evolving with the existing business and added business.

Okay, thank you. Now this is more hypothetical, but going forward, if all your production is sold, perhaps, Andre, would you outsource the NKO production to your new partners or would you rather spend money on building the expansion to your plant in Sherbrooke?

We have different options, several options open, I should say. There is a possibility of expanding the plant. We have always said that.

There are other opportunities as well. And now with the new management and new Board members, we will be carefully looking at all our options and make the decision on where the excess capacity will come from.

We have basically three, four options open right now and we are looking at all of them. Our main priority is to basically reduce the cost of production, optimize -- or optimize the cost of production and efficacy of our production plant, and I believe we will do and make the right decision. But at this point, licensing our production is not an option. But it could become an option.

Okay, thank you. And finally, for you, Andre, the royalties going forward, I can understand the US situation, but what about Australia and Enzymotec in Australia, and are you going to be receiving royalties in all other countries?

I will pass that question to Benoit Huart.

Good morning, everyone. With regards to royalty payments in Australia by Enzymotec, this is a little premature to discuss.

But there is -- and I don't want to discuss this in details, but depending on the outcome, and it is the same situation as in the US, depending on the outcome of the re-examination proceeding, royalty payments would be received by Neptune if Neptune is successful. It's the same structure.

But the rest of the world, you will receive royalties from the sales in all of the other countries?

We receive -- as in almost every license agreement, you usually receive royalties in jurisdictions where you have a valid patent, and this is similar to the situation we have with our licensees.

So Australia, the US, Canada, those are the jurisdictions where we have a patent on the composition, and we are working on developing and improving and increasing, if I can say this, our IP portfolio to be able to get more royalties or to strengthen our market.

Okay, thank you. Last question, perhaps it's for Jerry. I know it's perhaps a little premature, but it was indicated that Acasti is reassessing its clinical-trial strategy and may put the primary focus on severe, rather than moderate, triglyceride levels. Would this change of focus, would this complicate the Phase III application with the FDA at all?

Thanks. I think the most important thing is for us to just clarify with the FDA, so we've indicated that we are requesting a post-Phase II and a pre-Phase III meeting with the agency to be able to move forward constructively for CaPre.

We haven't made final decisions on our Phase III clinical-trial strategy, but you know, I am sure, are familiar with the agency guidelines on terms of high-risk populations for those with high triglycerides. But we haven't finalized our Phase III plan yet.

Okay, thank you. That's all I have.

(Operator Instructions). Ray Gordos, National Securities.

Quick question, when it comes in terms to your margins and the different phases that you guys have. Can you give us a little bit more clarity on how long it is going to take to get to Phase III, what type of a margin expansion we can expect, and when the Company expects to get to pre-plant margins, before the plant had the incident up in Sherbrooke?

Obviously, like I said in the presentation, we are expecting a ramp-up of three months, and we feel that we should be close to historical margins by the end of the ramp-up, slightly lower. The cost of the construction was fairly high, so that's why one of my priorities is to work on optimization and also increase productivity in Sherbrooke, so that we get closer to our historical margin.

Obviously, the expansion options that we have will definitely help in terms of revenue, and so, it's all being looked at right now. But obviously, very, very -- if you look at the cost of construction and you look at what the plant -- the initial amortization and depreciation on the previous plant, right there it is going to be difficult to get closer -- to get to the historical margin. But we will get close, and with all our plans that we have, all our options, we will get closer and closer, and our objective is to reach that same margin by the time we increase our capacity.

Okay, and also follow-up questions for Michel in sales. Seeing the orders and dealing with the customers, is it safe to say that after this quarter of ramp-up, you guys will be somewhere near full capacity in terms of utilization?

All I can say is, obviously with the impact of the 21 months, we are going to be building up again with some of our customers. But what is the most probably encouraging development is also in markets where they were basically registering the product, which took a long time. In other words, some of the markets are getting ready for us, whether we talk about South America or Asia, which is quite encouraging because we haven't really been as impacted negatively in these markets due to the fact that registration takes a long time.

So we are quite optimistic to develop towards that goal, but it is all premature for me to say at this point that we are selling our full capacity right now. This is work in progress, but we are quite optimistic the goal -- we will get there with our goals.

One last question for Benoit. In terms of going into the Asian markets, are you guys prepared or preparing currently to be positioned patent-wise to have the same type of situations as you do in the Australia and US markets?

Yes, again this is Benoit Huart. Methods patents were filed in 2002, so it's a little difficult to -- and they were not filed in some of the jurisdictions in Asia, but we are definitely working hard with our patent agents to make sure that we are protected to the extent that we can.

But we do have some applications that are currently pending in Asia by Neptune, and also through Acasti, so there is a way for us to be protected and that's what we are working on.

And I am sure the Company looks forward to letting investors know as soon as those patents become effective?

Absolutely. As soon as something gets issued, it is our policy to announce it. That's what we have done in the past and that's what we will continue doing.

Perfect. Thank you so much, guys, and good luck in your future quarters.

Thank you. Ladies and gentlemen, that does conclude our Q&A session. I would like to turn the conference back over to management for any closing remarks.

Thank you, everybody. This ends our quarterly conference call. I thank you for joining us today. Have a great day.

Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude the program and you may all disconnect. Have a great rest of your day.