Neptune Technologies & Bioressources Inc. (Neptune) recently released its Q1/12 financial results. The adjusted EBITDA was basically in line with expectations at $0.7 million or $0.02 per share versus the forecast of $0.8 million. Sales were reported at $4.3 million or about $0.1 million shy of the estimate. On a constant currency basis sales were closer to $4.5 million or up 10% Y/Y and actually exceeded the expectations. The C$ appreciated more than expected against the US$ in the period. Although management indicated that the average selling price ofNKO™ declined due to increased competition, the decline was anticipated in the forecast.
For fiscal 2012, the company continue forecast revenue to increase to the $22.3 million for a Y/Y increase of 34%. This level of sales reflects (i) higher sales from Bayer’s “Artic Wonder”, (ii) higher European sales and (iii) higher sales in the U.S. market given the new distribution agreements. The adjusted EBITDA forecast is $5.0 million or $0.10 per share. This represents a 70% increase over fiscal 2011.
For fiscal 2013, the company forecast revenue to increase to the $30 million for a Y/Y increase of 35%. This level of sales reflects further penetration of the U.S. nutraceutical market and the introduction of at least one new OTC product. The company has also assumed both Nestle and Yoplait will in the position to introduce new products in calendar 2012 upon successful approval from European food administrators. The adjusted EBITDA forecast is $7.8 million or $0.15 per share. This represents a 55% increase over fiscal 2011.
Looking out 12 to 18 months, investors will no doubt be focused on Acasti’s Phase II clinical trials; however, the company strongly believe the focus should also include potential exciting clinical trial results from Neptune’s two commercial partners in Europe, Yoplait (50% owned by General Mills) and Nestle. Positive clinical trial results would not only further validate Neptune’s NKO™, but would herald the introduction of new functional/medical food products. The company has estimates this would add over $2.00 per Neptune share on a net present value basis, just for starters.
Neptune has evolved into many moving components. The important message for investors to understand is that each of these components has exceptional potential in their own right which adds huge leverage for Neptune as a whole. The company have maintained the 12 month share price target for Neptune at $7.00 per share.
Summary of Operating Results for Q1/12 Ended May 31, 2011:
- Neptune reported earnings for the first time this quarter in compliance with IFRS (International Financial Reporting Standards). Previously the Company reported under Canadian GAAP. Although this has resulted in several reporting differences, the company has continued to adjust the financials to better reflect the Company’s on-going operations (see Adjusted Earnings Defined below).
- Revenue was reported at $4.3 million, up 3% Y/Y and sequentially. The latter was impacted by the strong C$ relative to the US$ as the majority of Neptune’s sales are in US$. Sales on a constant currency basis increased by an estimated 10% Y/Y and modestly exceeded the expectations.
- Gross margin (cost of goods as a % of sales) averaged about 52% in the quarter down from 59% last year. The decrease resulted from the FX impact, integration of new biomass and lower selling prices due to increased competition.
- Adjusted EBITDA for Q1/12 (Nutraceutical operations, excluding Acasti and NeuroBioPharm) was $0.7 million or $0.02 per share versus $1.1 million or $0.03 per share in the prior year and about $0.1 million below the estimate. The combination of higher selling expenses, including new hires and an increased presence at trade shows, plus the FX impact explained most of the EBITDA decline from last year.
- Adjusted EBITDA margin for fiscal 2011 decreased to 18.1% from 26.1% in the same quarter last year.
- Consolidated EBITDA (including Acasti and Neurobiopharm expense) was negative $0.2 million versus a positive EBITDA of $0.7 million in the prior year. Acasti and Neurobiopharm reported segmented EBITDA losses in the period of $0.7 million and $0.2 million respectively. The latter two companies had virtually no revenue to offset R&D and clinical trial expenses. It should be noted however that Acasti has sufficient cash to finance its shortfall.
- Current plant capacity is estimated at 130,000 kg/year.
- Working Capital was $20.8 million as at the end of the quarter with $18.5 million in Neptune and $2.4 million in Acasti.
- Long-term debt declined to $3.6 million from $3.8 million as at the end of the last quarter. Total debt at year-end was $4.5 million.
- Nestle and Yoplait clinical trials for functional/medical food applications are finished and results are expected to be known by the fall of 2011: The company expects positive results from both studies and the launch of associated products from each company within 12 months. The company believes that these clinical trials and the potential product launches will be viewed as major endorsements for NKO™.
- Plant Expansion: Management indicated that it plans to expand its production capacity to reach, in the first phase, a production of 280,000 kg per year. The expansion should be finalized during the fiscal year 2012-2013. The project cost will be up to 70% financed by grant, loan and long-term debt.
- Neptune recently pre-launched its new product ECO Krill Oil™ (EKO™). EKO™ is a product similar to NKO™ with slightly lower specifications and a lower selling price. What is important here is that Neptune can not only offer NKO™ (higher spec Krill product) but in addition offer EKO™ (lower spec Krill product) to compete at a lower price-point – say up to 30% cheaper. This will particularly important for the U.S. market under the recently announced U.S. distribution agreements.
- Neptune raised $12.4 million in common equity in May, 2011 through the issuance of 2.7 million common shares at US$2.25 per share and warrants to purchase an additional 680,556 additional common shares at $2.75 per share for 18 months. Neptune also issued 3.1 million common shares at $2.15 per share and warrants to purchase an additional 765,709 exercisable at $2.65 for 18 months.
- U.S. Distribution Agreement: Neptune recently completed distribution agreements with two large U.S. distributors. It is estimated that the demand will be 50,000 kg per year. Together these two distributors represent close to 30% of the U.S. mass market nutraceutical business accessing over 100 million Americans with nationwide coverage in over 54,000 retailers. The company expects this to include major private label brands that will shortly be introduced into major U.S. retailers such as Walmart, Walgreens, CVS and Costco and place NKO™ in direct competition with Schiff® MegaRed® Omega-3 Krill Oil.
Outlook for Fiscal 2012 and 2013 (years ended February 28)
The company has not changed the financial forecast for fiscal 2012 or 2013. The detailed forecast is outlined below:
- For fiscal 2012, revenue is forecast to increase to the $22.3 million for a Y/Y increase of 34%. This level of sales reflects (i) higher sales from Bayer’s “Artic Wonder”, (ii) higher European sales and (iii) higher sales in the U.S. market given the new distribution agreements discussed above. The forecast includes a modest level of sales from functional/medical and OTC.
- For fiscal 2013, revenue is forecast to increase to the $30 million for a Y/Y increase of 35%. This level of sales reflects further penetration of the U.S. nutraceutical market and the introduction of at least one new OTC product. The company has also assumed both Nestle and Yoplait will in the position to introduce new products in calendar 2012 upon successful approval from European food administrators.
- Neptune’s gross nutraceutical margin is expected to average 50% to 52% for both years.
- For fiscal 2012, the adjusted EBITDA forecast is $5.0 million or $0.10 per share. This represents a 70% increase over fiscal 2011. For fiscal 2013, the adjusted EBITDA forecast is $7.8 million or $0.15 per share. This represents a 55% increase over fiscal 2011.
- Adjusted EBITDA margin is forecast to increase to 22.4% and 26.0% in fiscal 2012 and 2013 respectively.
- Consolidated EBITDA for fiscal 2012, including all expenses of Acasti and Neurobiopharm, is estimated at a negative $3.1 million up from a negative $2.0 million in fiscal 2011, excluding the gain on dilution and impairment charges. The lower estimate for fiscal 2012 is entirely due to the estimated cost of the Phase II clinical trial being initiated by Acasti. Although the forecast does not assume any milestone payments, the company nonetheless expect Acasti to enter Phase III clinical trials with a major pharmaceutical partner in fiscal 2013 (calendar 2012) which could indeed generate significant potential payments.
Adjusted Earnings Defined
Neptune restructured its operations in 2008 into two distinct subsidiaries, Acasti for cardiovascular applications and NeuroBioPharm for neurological applications. Both subsidiaries are exploiting opportunities in the Over-The- Counter (OTC), Medical Foods and Pharmaceutical Drug market within their respective applications and will incur expenses, largely R&D related, in order to develop commercial applications. In order to better represent the operating performance of Neptune’s nutraceutical business, the company has used adjusted EBITDA which excludes the expenses associated with Acasti and NeuroBioPharma.
MORE ABOUT NEPTUNE
Neptune develops and commercializes products for the nutraceutical, medical food, functional food and over-the counter (OTC) markets. Neptune is developing products for the prescription drug markets through its two subsidiaries Acasti Pharma Inc. (Acasti) and NeuroBioPharm Inc. (NeuroBioPharm). Neptune’s products are based on Omega-3 fatty acid phospholipids extracted from Antarctic krill, a tiny crustacean, considered the most abundant biomass on earth. Preclinical and initial clinical testing have shown NKO™ (Neptune Krill Oil) to be beneficial in LDL & triglyceride reduction as well as HDL elevation, all of which are essential in treating chronic cardiovascular conditions. In addition Neptune focuses on inflammatory and neurological disease management. Neptune’s commercial partners include Bayer, Nestle and Yoplait.
Acasti (50% owned) is developing a product portfolio focused on treatments for chronic cardiovascular conditions within the OTC, medical food and prescription drug markets. Acasti’s drug candidate, CaPre™, leverages off NKO™ and recently received approval to enter Phase II clinical trials from Health Canada.
NeuroBioPharm (100% owned) is pursuing pharmaceutical neurological applications, and has initiated a clinical study for a medical food product with a multinational partner. The development of a prescription drug candidate is currently in progress. Advanced clinical development and commercialization is planned to be carried out with multinational partners.