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  • 1. BURRILL INSTITUTIONAL RESEARCHINITIATING COVERAGE Biotechnology August 21, 2012 sNeptune Technologies & Bioressources, Inc. (NEPT) Elemer Piros, Ph.D. Senior Biotechnology Analyst epiros@b-c.comRating: Market OutPerform / Speculative Risk Target Price: $7 415-591-5453Healthy Living: “Krilled”, Not Fried MARKET DATA INVESTMENT OPINION We are initiating coverage of Neptune Technologies & Bioressources with a Market Outperform rating and 12- Price $4.79 month price target of $7/share. We’ve determined the target price based on 52 Wk Hi - Low $5.14 - $2.02 a sum of the parts analysis of Neptune’s core business plus an equity stake Market Cap (MM) $240 in a spinoff company. We believe Neptune’s differentiated product NKO® Shares Out (MM) 50 has the potential to capture a significant share in the vastly expanding Avg. Daily Vol. 361,900 omega-3 fatty acid nutraceutical and pharmaceutical markets. Short Interest 739,400 EARNINGS DATA ($) BETTER THAN FISH OIL Neptune’s pipeline is based on phospholipid FY - Feb 2012A 2013E 2014E omega-3s extracted from Antarctic krill, a tiny crustacean. The company Q1 (May) (0.03) (0.03) N/A Q2 (Aug) (0.04) plans to take advantage of the higher absorption and potential superior (0.06) N/A Q3 (Nov) (0.01) (0.06) N/A efficacy of krill omega-3 compared to fish oils. Q4 (Feb) (0.01) (0.04) N/A Full Year EPS (0.04) (0.19) (0.02) BALANCE SHEET MULTIPLE MARKETS Neptune is addressing several markets: dietary supplements, functional foods, and drug development. The entire omega-3 Cash (MM) $13 consumer product market has already reached $13B worldwide. Globally, Long Term Debt (MM) $3 sales of omega-3 dietary supplements grew from $1.8B in 2007 to $2.8B in Cash / Share $0.26 2009. We believe that Neptune could capture a sizeable portion of the EV (MM) $230 market due to its differentiated krill based omega-3 platform enabling diverse opportunities. CHART $6 BLOCKBUSTER THROUGH A SUB Neptune’s majority-owned $5 subsidiary, Acasti Pharma (APO, Not Rated), is pursuing a potentially $4 blockbuster indication in cardiovascular disease. CaPre®, a concentrated form of NKO®, is in Phase 2 clinical trials targeting the large $3 hypertriglyceridemia market. Lovaza™, an omega-3 fatty acid approved $2 for lowering triglycerides, recorded 2011 sales of ~$1.1B in the U.S. alone. The company that initially introduced Lovaza™ was acquired for $1.7B in $1 2007. Amarin (AMRN, Not Rated), with recent FDA approval for the $0 8/18/11 11/18/11 2/18/12 5/18/12 8/18/12 same indication (Vascepa), is valued at ~$1.7B. In our view, CaPre® could become an important value driver for Neptune. Source: Yahoo Finance Burrill Merchant Advisors One Embarcadero Center Suite 2700 San Francisco, CA 94111 Please refer to pages (43-45) for important disclosures, price charts, and Analyst Certification.
  • 2. Neptune Technologies & Bioressources, Inc. August 21, 2012INVESTMENT SUMMARYNeptune Technologies & Bioressources commercializes its flagship nutraceutical product Neptune Krill Oil (NKO ®)through a distributor network in more than 30 countries. In recent years, the Company also established higher valueproduct lines for:The pharmaceutical market, represented by two subsidiaries:  Acasti, which is developing the lipid-lowering drug CaPre®  NeuroBioPharm, which is pursuing neurological applicationsMedical food ingredients, represented by partnerships with Yoplait (Private, Not Rated) and Nestle (NESN, Not Rated).Neptune’s pipeline is based on omega-3 fatty acid phospholipids extracted from Antarctic krill, a tiny crustacean,considered the most abundant biomass on earth. The company is generating cash flow from the sales of its nutraceuticalomega-3 product, NKO®. Neptune is taking advantage of the higher bioavailability and potential superior efficacy of krilloil in providing omega-3 fatty acids for human consumption. Krill oil is the only source of omega-3 fatty acids thatcontains phospholipids; which appears to make krill omega-3s more bioavailable and efficacious than fish oil or flax oilomega-3s. Additionally, NKO® is the source of omega-3s that naturally carries a high amount of astaxanthin, a powerfulantioxidant attached to omega-3s. Given the increasing demand for NKO®, Neptune is expanding its capacity to address amarket that is expected to grow on average 12% annually1.Preclinical and initial clinical trials have demonstrated that NKO® decreases LDL and triglycerides, while increasing HDL(the perfect lipid trifecta - critical in the management of chronic cardiovascular disorders). Acasti - Neptune’s subsidiary -is in Phase 2 trials with the clinical candidate CaPre® targeting the large hypertriglyceridemia market.A Japanese firm, Mochida (Private, Not Rated), markets an omega-3 drug – Epadel - in Japan for managing triglycerides.Annual sales of Epadel in Japan were ~$433MM in F2010 and they are forecasted to be similar in F2011 2. Anotheromega-3 product approved by the FDA for triglyceride lowering is marketed in the U.S. as Lovaza™, and as Omacor ® ex-U.S. Lovaza™ was initially marketed by Reliant Pharmaceuticals, which was acquired by GlaxoSmithKline (GSK, NotRated) for $1.7B. Lovaza™/Omacor® is manufactured by Pronova BioPharma (PRON.OL, Not Rated) and sold byseveral licensing partners worldwide. Lovaza™ achieved blockbuster status in 2009. The drug reached $1.2B in sales in2011 in the U.S. alone. Finally, Amarin (AMRN, Not Rated) just received FDA approval for Vascepa, an omega-3 fattyacid, as a prescription drug to treat severe hypertriglyceridemia. The company is currently valued at ~$1.7B, even thoughthe product may not have the strongest IP protection. Therefore, we believe the upside potential for Neptune could besignificant.VALUATIONWe value Neptune shares, based on a sum of the parts analysis: (1) probability-adjusted NPV model for CaPre®, whichyields $120MM (58% ownership), and (2) a DCF valuation on the nutraceutical business, which contributes $230MMplus $26MM projected cash to our model. The combined value of these two programs is estimated at $370MM, or$7/share, factoring in fully diluted shares. Upon completion and successful outcome of CaPre® Phase 2 development, thevalue attributed to this program could rise from $120MM to $240MM, boosting Neptune’s target value from $7 to$9/share, in our view.EXPECTED NEWSWORTHY EVENTS/MILESTONES FOR 2012 / 2013Nutraceutical Business  Quarterly sales and EBITDA growthCaPre®  Phase 2 data readouts (4Q12/mid-2013)1 Frost & Sullivan, 2010.2 EvaluatePharma Worldwide Product Sales.BURRILL INSTITUTIONAL RESEARCH 2 2
  • 3. Neptune Technologies & Bioressources, Inc. August 21, 2012RISK ANALYSISWe ascribe a Speculative Risk rating to Neptune shares. In addition to development, manufacturing, marketing, andfinancial risks associated with emerging biotechnology companies, specific additional risk factors to be considered are asfollows:Highly Competitive Nutraceutical BusinessThere is already a large number of different formulations of omega-3 fatty acids available on the market. Most of theseproducts are not approved as drugs; they are mainly marketed as nutraceuticals. The omega-3 market has become highlycompetitive. Enhanced competition and pressure on margins drive cost competitiveness among established brands.Building market awareness of the differentiated profile of krill oil may entail a significant marketing effort, in our view.In addition, the company faces meaningful competition from other krill oil manufacturers, such as Aker Biomarine(AKBM, Not Rated) and Enzymotec (Private, Not Rated).Patent ChallengeNeptune has issued U.S. patents of omega-3 phospholipids and krill extracts on both composition of matter and method ofuse in cardiovascular disease. However, Aker BioMarine filed for patent reexamination request in the U.S. against two ofNeptune’s patents – U.S. Pat. No. 8,030,348 (also known as 348 patent) and U.S. Pat. No. 8,057,825 (also known as 825patent). The 348 patent covers novel omega-3 phospholipid compositions suitable for human consumption, while the 825patent is directed to methods of using krill extracts to reduce cholesterol, platelet adhesion and plaque formation.Should both of these patents be overturned, damage to the manufacturing business would be minimal. However,maintenance of the claims on these patents could represent a significant upside to Neptune: the company could becomethe only source of krill oil and derived products in the U.S.Regulatory RiskDrug development is an inherently risky business. Acasti’s drug development projects could fail to generate positiveresults from current or future clinical trials. Even if trials are successful, the FDA could reject the firm’s regulatory filingsfor unforeseen reasons, or require additional studies prior to granting approval. However, we believe that negativeoutcomes from cardiovascular trials would have a minor impact on Neptune’s nutraceutical business compared to thesizable upside that a potential FDA approval could bring to the company.Capacity Expansion RiskIn March 2012, Neptune announced completion of expansion plans in its Sherbrook plant (Canada). Expansion could cost$20MM and could generate at least 40 new jobs. The company intends to triple its current production capacity from150,000kg to 450,000kg per year by the end of F2014. Neptune is expecting a higher demand for its product. However,unexpected decrease in anticipated demand could have a negative impact on Neptune’s business model.BURRILL INSTITUTIONAL RESEARCH 3 3
  • 4. Neptune Technologies & Bioressources, Inc. August 21, 2012COMPANY OVERVIEWNeptune Technologies & Bioressources (NEPT, Market Outperform) is a biotechnology company engaged in themanufacturing and formulation of marine omega-3 phospholipids. The company develops and commercializes itsproducts for multiple nutraceutical and medical markets. Neptune’s products are mainly proprietary krill oils marketedunder the trademarks NKO® and EKO™. The company also exploits various protein concentrate formulations extractedfrom the different marine biomass.The company has a 58% ownership in the pharmaceutical spin-out Acasti Pharma (APO, Not Rated), which is developingCaPre® as a prescription drug for cardiovascular diseases. Results from CaPre ® Phase 2 open-label clinical trial areexpected in late-2012. In parallel, Acasti is also conducting a CaPre® Phase 2 double-blind study, with data expected inmid-2013.Additionally, Neptune supervises its CNS subsidiary NeuroBiopharm that is expected to develop krill oil prescriptiondrugs in neurological disorders. Neptune was founded in 1998 and is headquartered in Laval, Canada.Nutraceutical MarketIn its manufacturing plant (Quebec), Neptune develops and produces a range of marine health ingredients grouped underthe OPA™ trademark. The products are composed of different concentrations and ratios of omega-3 containingphospholipids and antioxidants. The Neptune krill oil products NKO® and EKO™ are marketed either by distributors orby different private labels in the dietary supplement and functional ingredient markets.Neptune Krill Oil (NKO®)Neptune Krill Oil (NKO®) is naturally sourced from Antarctic Krill (Exhibit 1). It contains a patented blend of omega-3fatty acids bound to phospholipids as well as astaxanthin, an antioxidant. The main components of NKO ® arephospholipid esters of the widely-known nutritional fatty acids DHA (docosahexaenoic acid) and EPA (eicosapentaenoicacid). DHA and EPA have been linked to a broad spectrum of health benefits in:  Chronic inflammation and arthritis3  Hyperlipidemia4 (high cholesterol blood levels)  Premenstrual syndrome5  Cognitive disorders, and many other inflammatory conditions6Exhibit 1: Antarctic KrillSource: Neptune website.The antioxidant astaxanthin has been investigated in a large number of studies related to the cardiovascular andcerebrovascular systems. The NKO® formulation appears to have a positive impact on blood lipid profile, at a lower dosethan alternative omega-3 formulations. Superior bioavailability has been suggested for phospholipid-bound omega-3 fattyacids in krill oil.3 Deutsch L. American College of Nutrition (2007) 26(1):39-48.4 Bunea R. et al., Alternative Medical Review (2004) 9(4):420-428.5 Sampalis F., et al., Alternative Medical Review (2003) 8(2):171-179.6 Calder P.C., et al., European Journal of Pharmacology (2011) 668: S50–S58.BURRILL INSTITUTIONAL RESEARCH 4 4
  • 5. Neptune Technologies & Bioressources, Inc. August 21, 2012Neptune continues to expand its customer base worldwide and is expecting revenue growth to be driven by repeat demandfrom existing customers and incoming demand from new customers from North America, Europe, Asia, South America,and Middle East.Prescription Drug MarketNeptune is also developing products for the prescription drug markets through its two subsidiaries, Acasti andNeuroBioPharm. Acasti is developing a pipeline focused on treatments for chronic cardiovascular disorders within theOTC (over-the-counter), medical food and prescription drug markets. Acasti’s drug candidate, CaPre ®, is a concentratedform of NKO® and recently received approval to enter Phase 2 clinical trials from Health Canada. NeuroBioPharm ispursuing pharmaceutical neurological applications.INFLAMMATION AND MARINE N-3 FATTY ACIDS (OMEGA-3)Inflammation is a normal defense mechanism that protects the host from infection and other injuries; the process triggerspathogen death, as well as tissue repair and wound healing, and helps to restore homeostasis at infected or injured sites.However, pathological inflammation may occur when there is a loss of tolerance and/or of regulatory processes. Wherethis becomes excessive, irreparable damage to host tissues and disease can occur7.Inflammatory disorders are characterized by markedly increased levels of inflammatory markers and high concentration ofinflammatory cells at the site of injury and in the systemic circulation (rheumatoid arthritis, inflammatory bowel diseases,asthma). Inflammatory diseases have been long recognized, yet it is only more recently that chronic low-gradeinflammation has received attention, particularly in relation to obesity, metabolic syndrome and cardiovascular disease.Chronic low-grade inflammation is characterized by raised concentrations of inflammatory markers in the systemiccirculation.Fatty acids (FAs) are naturally occurring constituents that have extensive metabolic, structural and functional roles withinthe body. They are important sources of energy, major components of all cell membranes, and precursors to signalingmolecules. All fatty acids have a generic structure being based on a hydrocarbon chain with a reactive carboxyl group atone end and a methyl group at the other.Fatty acid chain lengths vary from 2 to 30 or more carbon atoms, and the chain may contain double bonds 8. Fatty acidscontaining double bonds in the acyl chain9 are referred to as unsaturated fatty acids, and a fatty acid containing two ormore double bonds is called a polyunsaturated fatty acid (PUFA). The systematic name for a fatty acid is determinedsimply by the number of carbons and the number of double bonds in the acyl chain (Exhibit 2). There are two principalfamilies of PUFAs: the n-6 (omega-6) and the n-3 (omega-3) families. In our report, the keen interest lies on PUFAs,especially the longer-chain ones, the omega-3 family.7 Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.8 A double bond in chemistry is a chemical bond between two chemical elements involving four bonding electrons instead of the usual two. Double bonds are strongerthan single bonds.9 An organic radical derived from an organic acid via removal of the hydroxyl group from the carboxyl group. It is a generic term for fatty acid groups.BURRILL INSTITUTIONAL RESEARCH 5 5
  • 6. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 2: Fatty Acid Naming Systematic name Trivial name Shorthand notation Octanoic Caprylic 8:00 Decanoic Capric 10:00 Dodecanoic Lauric 12:00 Tetradecanoic Myrsitic 14:00 Hexadecanoic Palmitic 16:00 Octadecanoic Stearic 18:00 cis 9-Hexadecenoic Palmitoleic 16:1n-7 cis 9-Octadecenoic Oleic 18:1n-9 cis 9, cis 12-Octadecadienoic Linoleic 18:2n-6 All cis 9, 12, 15-Octadecatrienoic α-Linolenic 18:3n-3 All cis 6, 9, 12-Octadecatrienoic γ-Linolenic 18:3n-6 All cis 8, 11, 14-Eicosatrienoic Dihomo-γ-linolenic 20:3n-6 All cis 5, 8, 11, 14-Eicosatetraenoic Arachidonic 20:4n-6 All cis 5, 8, 11, 14, 17-Eicosapentaenoic Eicosapentaenoic 20:5n-3 All cis 7, 10, 13, 16, 19-Docosapentaenoic Docosapentaenoic 22:5n-3 All cis 4, 7, 10, 13, 16, 19-Docosahexaenoic Docosahexaenoic 22:6n-3Source: Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.Polyunsaturated Fatty Acids (PUFAs): Omega-6 and Omega-3Both omega-6 and omega-3 fall under the category of polyunsaturated fatty acids. The simplest members of each family -linoleic acid (LA, omega-6 family) and α-linolenic acid (ALA, omega-3 family) - cannot be synthesized by mammals.They are considered "essential" since the body is not able to make significant enough amounts.LA is found in significant quantities in many vegetable oils, including corn, sunflower and soybean oils, and in productsmade from such oils, such as margarines. ALA is found in green plant tissues, in some common vegetable oils, includingsoybean and rapeseed oils, in some nuts, and in flaxseeds (also known as linseeds) and flaxseed oil. Between them, LAand ALA contribute over 95%, and perhaps as much as 98% of dietary PUFA intake in most Western diets.The intake of LA in Western countries increased considerably in the second half of the 20th Century, following theintroduction and marketing of cooking oils and margarines10. Typical intakes of both essential fatty acids are in excess ofthe required amounts. The increase of consumption of LA has resulted in a marked increase in the ratio of omega-6 toomega-3 PUFAs in the diet. This ratio is typically between 5 and 20 in most Western populations11.Although LA and ALA cannot be synthesized by humans, they can be metabolized to other fatty acids. LA can beconverted to arachidonic acid. By an analogous set of reactions catalyzed by the same enzymes, ALA can be converted toeicosapentaenoic acid (EPA). Both arachidonic acid and EPA can be further metabolized, EPA giving rise todocosapentaenoic acid (DPA) and docosahexaenoic acid (DHA) (Exhibit 3).10 Blasbalg, T.L., et al., American Journal of Clinical Nutrition (2011) 93:950-962.11 Burdge G.C., et al., Nutrition Research Reviews (2006) 19:26-52.BURRILL INSTITUTIONAL RESEARCH 6 6
  • 7. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 3: The Biosynthesis of Polyunsaturated Fatty Acids Methyl Carbon Group Double Carboxyl bond GroupSource: Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.Dietary intakes of the longer-chain omega-3 PUFAs, such as EPA and DHA, are typically much lower than the intakes ofLA and ALA. EPA and DHA are found in fish, especially so-called “oily” fish (tuna, salmon, mackerel, herring,sardine)12 and krill, a small red-colored crustacean (similar to shrimp) that flourish in the extremely cold waters of theAntarctic Ocean13.Omega-3 PUFAs Modify Fatty Acid Composition of Inflammatory CellsPUFAs are important constituents of the phospholipids of all cell membranes (Exhibit 4). Laboratory animals that havebeen maintained on standard chow have a high content of the omega-6 PUFA arachidonic acid and low contents of theomega-3 PUFAs EPA and DHA in the bulk phospholipids of tissue lymphocytes14,15, peritoneal macrophages16;17;18,19alveolar macrophages20, Kupffer cells21 and alveolar neutrophils22.12 Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.13 Krill oil. Monograph. Alternative Medicine Review (2010) 15(1):84-86.14 Calder P.C., et al., Biochemical Journal (1994) 300:509-518.15 Yaqoob P., at al., Cellular Immunolology (1995) 163:120-128.16 Brouard C., et al., Biochimica et Biophysica Acta (1990) 1047:19-28.17 Chapkin R.S., et al., Journal of Nutritional Biochemistry (1992) 3:599-604.18 Lokesh B.R., et al., Journal of Nutrition (1986) 116:2547-2552.19 Surette M.E., et al., Biochimica et Biophysica Acta (1995) 1255:185-191.20 Fritsche K.L., et al., Lipids (1993) 28:677-682.21 Palombo J.D., et al., Journal of Parenteral and Enteral Nutrition (1997) 21:123-132.22 Careaga-Houck M., et al., Journal of Lipid Research (1989) 30:77-87.BURRILL INSTITUTIONAL RESEARCH 7 7
  • 8. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 4: Cell Membrane: Phospholipids, Fatty Acids and AntioxidantsSource: Kidd P.M. Alternative Medicine Review (2007) 12(3):207-227.Feeding laboratory animals a diet containing fish oil, which provides EPA and DHA, results in a higher content of thesefatty acids in lymphocytes23, macrophages24, Kupffer cells25and neutrophils26. Typically enrichment in marine omega-3PUFAs is accompanied by a decrease in content of arachidonic acid.Blood cells involved in inflammatory responses (neutrophils, lymphocytes, monocytes) collected from humans consumingtypical Western diets contain about 10 to 20% of fatty acids as arachidonic acid, about 0.5 to 1% as EPA and about 2 to4% as DHA in their membranes27, although the content of these fatty acids varies in different phospholipid classes28.The fatty acid composition of these cells can be modified by increasing intake of marine omega-3 fatty acids29. Thisoccurs in a dose response fashion30 and over a period of days to weeks31, with a new steady-state composition reachedwithin about four weeks. Typically the increase in content of omega-3 PUFAs occurs at the expense of omega-6 PUFAs,especially arachidonic acid. Exhibit 5 shows the time course of changes in EPA and DHA contents of human bloodmononuclear cells in subjects consuming fish oil. Healthy subjects supplemented their diet with fish oil capsulesproviding 2.1g EPA plus 1.1g DHA per day for a period of 12 weeks. Blood mononuclear cell phospholipids wereisolated at 0, 4, 8 and 12 weeks and their fatty acid composition determined by gas chromatography. Data are mean fromeight subjects32.23 Yaqoob P., et al., Biochimica et Biophysica Acta (1995) 1255:333-340.24 Brouard C., et al., Biochimica et Biophysica Acta (1990) 1047:19-28.25 Palombo J.D., et al., Journal of Parenteral and Enteral Nutrition (1997) 21:123-132.26 James M.J., et al., Journal of Nutrition (1991) 121:631-637.27 Caughey G.E., et al., American Journal of Clinical Nutrition (1996) 63:116-122.28 Sperling R.I., et al., Journal of Clinical Investigation (1993) 91:651-960.29 Lee J.Y., et al., Journal of Biological Chemistry (2001) 276:16683-16689.30 Rees D., et al., American Journal of Clinical Nutrition (2006) 83:331-342.31 Faber J., et al., Journal of Nutrition (2011) 141, 964-970.32 Yaqoob P., et al., European Journal of Clinical Investigation (2000) 30, 260-274.BURRILL INSTITUTIONAL RESEARCH 8 8
  • 9. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 5: Changes in EPA and DHA in Mononuclear Cells from Humans Taking Fish OilSource: Yaqoob P., et al., European Journal of Clinical Investigation (2000) 30, 260-274.Omega-3 Mechanisms of ActionA high ratio of omega-6 to omega-3 can alter cell membrane properties and increase production of inflammatorymediators because arachidonic acid, an omega-6 fatty acid found in cell membranes, is the precursor of inflammatoryeicosanoids, such as prostaglandins and thromboxanes33. In contrast, omega-3 fatty acids are anti-inflammatory.Therefore, a high dietary ratio of omega-6 to omega-3 fatty acid could promote inflammation. Increased omega-3 fattyacid concentration in the diet may also act by altering cell membrane fluidity and phospholipid composition, which mayalter the structure and function of the proteins embedded in it.All in all, omega-3 fatty acids appear to act through the enrichment of membrane phospholipids with EPA and DHA.Once these long chain omega-3 PUFAs are resident in cell membranes, they have at least four separate effects:  First, because of their highly unsaturated nature, they may alter membrane properties. This can have the secondary effect of changing the microenvironment of transmembrane proteins (e.g., receptors) altering the manner in which they interact with their ligands.  Altering membrane fatty acids composition can also affect the ability of proteins to actually associate with the membrane and consequently interact with other multi-protein complexes involved with cell signaling systems  In addition, a variety of cell stressors (e.g., inflammatory mediators) interact with transmembrane receptors and subsequently initiate intracellular G-protein linked responses, one of which is the activation of phospholipase A2 (PLA2). This enzyme hydrolyzes long-chain omega-6 and omega-3 fatty acids esterified to inner leaflet phospholipids, liberating them and making them available for conversion to a wide variety of eicosanoids via cyclo-oxygenase, lipoxygenase, and cytochrome P-450 monooxygenases. These molecules powerfully influence cellular metabolism. PLA2-liberated omega-3 fatty acids may directly modify ion channel activity themselves, resulting in altered resting membrane potentials.  Finally, intracellular omega-3 fatty acids are also able to serve as ligands for a variety of nuclear receptors [e.g., peroxisome proliferation activated receptors (PPARs), sterol receptor element binding protein (SREBP)-1c, retinoid X receptor, and the farnesol X receptor] which impact inflammatory responses and lipid metabolism (Exhibit 6).33 Simopoulos A.P. Journal of the American College of Nutrition (2002) 21:495-505.BURRILL INSTITUTIONAL RESEARCH 9 9
  • 10. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 6: Overview of Mechanisms by Which Omega-3 PUFAs Can Influence Inflammatory Cell FunctionSource: Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.Anti-Inflammatory Effects of Omega-3 Fatty Acids Suggest Therapeutic ValueInflammation is an element of numerous human conditions and diseases (Exhibit 7). Although inflammation may affectdifferent body compartments, one common characteristic of these conditions and diseases is disproportionate productionof inflammatory mediators including eicosanoids and cytokines34.Exhibit 7: Diseases and Conditions with an Inflammatory Component Disease/Condition Rheumatoid arthritis Crohns disease Ulcerative colitis Lupus Type-1 diabetes Cystic fibrosis Childhood asthma Adult asthma Allergic disease Chronic obstructive pulmonary disease Psoriasis Multiple sclerosis Atherosclerosis Acute cardiovascular events Obesity Neurodegenerative diseases of ageing Systemic inflammatory response to surgery, trauma and critical illnessSource: Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.Note: this list is not exhaustive.The role of omega-3 PUFAs in shaping and regulating inflammation imply that exposure to these fatty acids might beimportant in determining the development and severity of inflammatory diseases. The recognition that omega-3 PUFAshave anti-inflammatory effects has led to the notion that dietary supplement of patients with inflammatory diseases maybe of clinical benefit. Each of the diseases or conditions listed in Exhibit 7 is a possible therapeutic target for marineomega-3 PUFAs. Supplementation trials have been conducted in most of these diseases. Rheumatoid arthritis’ trialsappear to be the most successful with most studies reporting several clinical benefits35. These benefits are supported bymeta-analyses of the available data36.34 Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.35 Calder P.C., et al., Proceedings of the Nutrition Society (2008) 67:409-418.36 Goldberg R.J., et al., Pain (2007) 129:210-223.BURRILL INSTITUTIONAL RESEARCH 10 10
  • 11. Neptune Technologies & Bioressources, Inc. August 21, 2012Studies in patients with inflammatory bowel diseases (Crohns disease and ulcerative colitis) provide equivocal findingswith some showing some benefits and others not37,38. Likewise studies conducted in patients with asthma do not provide aclear picture. Most studies conducted in adults do not show a clinical benefit, while there are indications of benefits ofmarine omega-3 PUFAs in children and adolescents, although there are few studies in those groups39. In most otherinflammatory diseases and conditions there are too few studies to draw a clear conclusion of the possible efficacy ofomega-3 PUFAs as a treatment. Exceptions to this may be related to cardiovascular disease morbidity and mortality, andattention deficit hyperactivity disorder (ADHD)40.There is evidence that omega-3 PUFAs slow the progress of atherosclerosis41, which has an inflammatory component42,43.Moreover, omega-3 PUFAs decrease mortality due to cardiovascular disease44,45; this may be, in part, due to stabilizationof atherosclerotic plaques against rupture46, which again has an inflammatory component47. Thus, the anti-inflammatoryeffects of marine omega-3 PUFAs may contribute to their protective actions towards atherosclerosis, plaque rupture andcardiovascular mortality. We are going to discuss omega-3 PUFAs and cardiovascular diseases (CVDs) in more detail inthe next section.OMEGA-3 FATTY ACIDS IN CARDIOVASCULAR INDICATIONSThe omega-3 fatty acids found in fish, fish oils and krill oils – principally EPA and DHA – have been reported to have avariety of beneficial effects in cardiovascular diseases48,49. Ecological and prospective cohort studies as well asrandomized, controlled trials have supported the view that the effects of these fatty acids are clinically relevant. Theyoperate via several mechanisms, all beginning with the incorporation of EPA and DHA into cell membranes50, as wediscussed before.Because blood concentrations of omega-3 PUFAs are a strong reflection of dietary intake, it is proposed that an omega-3biomarker - the omega-3 index (erythrocyte EPA + DHA) - be considered as a potential risk factor for coronary heartdisease mortality, especially sudden cardiac death51. The omega-3 index fulfills many of the requirements for a risk factorincluding consistent epidemiological evidence, a plausible mechanism of action, a reproducible assay, independence fromclassical risk factors, modifiability, and most importantly, the demonstration that raising tissue levels will reduce risk forcardiac events. Due to this, the omega-3 index compares very favorably with other risk factors for sudden cardiac death.The increased intake of omega-3 PUFAs has been recommended by several health agencies and professionalorganizations including the American Heart Association, the European Society for Cardiology, and the Australian Healthand Medical Research Council. These recommendations are based on evidence from a number of reports linking dietarydeficiency of long chain omega-3 PUFAs with a risk for cardiovascular events, notably sudden death. The FDA gave“qualified health claim” status to EPA and DHA omega-3 PUFAs on September 8th, 2004.Links between Omega-3 Fatty Acids and Cardiovascular HealthA meta-analysis of 13 cohorts including over 222,000 individuals followed for coronary heart disease (CHD) death for anaverage of about 12 years has been performed52. The authors found that the consumption of only one fish meal per week37 Calder P.C., et al., Molecular Nutrition & Food Research (2008) 52,:885-897.38 Calder P.C., et al., International Reviews of Immunology (2009) 28:506-534.39 Calder P.C., et al., American Journal of Clinical Nutrition 83 (2006) 1505S-1519S.40 Bloch, M.H., et al., Journal of American Academy of Child and Adolescent Psychiatry (2011) 50(10):991-1000.41 Calder P.C., et al., Clinical Science (2004) 107:1-11.42 Glass C.K., et al., Cell (2001) 104:503-516.43 Ross R. New England Journal of Medicine (1999) 340:115-126.44 Bucher H.C., et al., American Journal of Medicine (2002) 112:298-304.45 Studer M., et al., Archives of Internal Medicine (2005) 165:725-730.46 Cawood A.L., et al., Atherosclerosis (2010) 212:252-259.47 Glass C.K., et al., Cell (2001) 104, 503-516.48 De Lorgeril M. Sub-cellular Biochemistry (2007) 42:283-97.49 Bunea R., et al., Alternative Medicine Review (2004) 9:420-428.50 Sinclair A.J., et al., Allergy and Immunology (Paris) (2000) 32:261-71.51 Harris W.S., et al., American Journal of Clinical Nutrition (2008) 87(6):1997S-2002S.52 He K., et al., Circulation (2004) 109:2705-2711.BURRILL INSTITUTIONAL RESEARCH 11 11
  • 12. Neptune Technologies & Bioressources, Inc. August 21, 2012(versus <1 per month) was associated with a statistically significant 15% reduction in risk. When subjects were classifiedinto categories of increasing fish consumption (<1/month, 1–3/month, 1/week, 2–4/week, and ≥5/week), those in thehighest intake group enjoyed a 40% reduction in risk. Similar findings were reported for stroke. An inverse relationbetween fish intake and risk for CHD has also been reported in Greek53 and in Japanese cohorts54.The largest and most well controlled intervention study carried out to date was the GISSI Prevenzione study, which testedthe hypothesis that relatively small intakes of omega-3 PUFAs (<1g) could reduce risk for death from CHD in high riskpatients. More than 11,000 postmyocardial infarction patients were randomized to either one capsule of omega-3 FAethyl esters (Omacor®, 850 mg of EPA+DHA) or usual care and then followed for 3.5 years. The risk for death from anycause was reduced by 20% and risk for sudden death by 45% in the supplement group. This study will be discussed infurther detail in the next section of this report.The relative reduction in risk for death from any cause in trials of anti-lipidemic drugs and lipid-lowering diets wascomputed in a large meta-analysis55. Over 137,000 patients receiving treatment for lipid disorders were compared tocontrols in a total of 97 studies. There were 35 trials with statins (the cholesterol-lowering drugs), seven studies withfibrates, eight with bile acid binding resins, 14 with omega-3 fatty acids and 18 examining the effects of global dietarychanges. Only two interventions were associated with significant reductions in total mortality: statins (risk ratio 0.87,95% CI 0.81-0.94) and omega-3 fatty acids (risk ratio 0.77, 95% CI 0.63-0.94). One caveat to the omega-3 group is that itcan be argued that these were not strictly omega-3 studies but overall dietary interventions. In these two studies, theactive agent(s) cannot be identified with confidence because so many dietary variables differed between groups.Nevertheless, the preponderance of the data suggests that for most individuals, increasing the intake of long-chain omega-3 fatty acids is a safe and inexpensive way to significantly reduce risk for CHD, especially sudden cardiac death.GISSI StudyThe Gruppo Italiano per lo Studiodella Sopravvivenza nell’Infarto miocardico (GISSI)-Prevenzione trial studied theindependent and combined effects of omega-3 PUFAs and vitamin E on morbidity and mortality after myocardialinfarction. This randomized, prospective study enrolled more than 11,000 patients, between October, 1993 andSeptember, 1995, who had suffered myocardial infarction within the last three months. Patients were randomized toreceive of omega-3 PUFA (1g daily, n=2,836), vitamin E (300mg daily, n=2,830), both (n=2,830), or placebo (control,n=2,828) for 3·5 years. The co-primary endpoints were death, non-fatal myocardial infarction, and stroke.The data showed that treatment with omega-3 PUFA significantly lowered the risk of co-primary endpoints vs. placebo(relative risk decrease 10% [95% CI 1-18]). In contrast, vitamin E did not have a statistically significant impact on therisk of these events. Treatment with both omega-3 PUFA and vitamin E had an impact similar to that of omega-3 PUFAalone.HYPERTRIGLYCERIDEMIAHypertriglyceridemia (hTG) is a common disorder in the U.S. It is exacerbated by uncontrolled diabetes mellitus, obesity,and sedentary habits, all of which are more prevalent in industrialized societies than in developing nations. In bothepidemiologic and interventional studies, hTG is a risk factor for coronary disease.Two rare genetic causes of hTG (lipoprotein lipase – LPL - deficiency and apolipoprotein – apo - C-II deficiency) lead totriglyceride (TG) elevations that are astonishingly high. Counter-intuitively, these genetic mutations do not confer anincreased risk of atherosclerotic disease, which has fostered the unfounded belief that high TGs are not a risk for thatcondition.53 Panagiotakos D.B., et al., International Journal of Cardiology (2005) 102:403-409.54 Iso H., et al., Circulation (2006) 113:195-202.55 Studer M., et al., Archives of Internal Medicine (2005) 165: 725-730.BURRILL INSTITUTIONAL RESEARCH 12 12
  • 13. Neptune Technologies & Bioressources, Inc. August 21, 2012TG levels greater than 1000mg/dL increase the risk of acute pancreatitis. Hypertriglyceridemia is also correlated with anincreased risk of cardiovascular disease (CVD), particularly in the setting of low HDL-C (high-density lipoproteincholesterol, “good cholesterol”) levels and/or elevated LDL-C (low-density lipoprotein cholesterol, “bad cholesterol”)levels. When low HDL-C levels are controlled for, some studies demonstrate that elevated TGs do not correlate with riskof CVD. However, other studies suggest that TGs are an independent risk factor. Since metabolism of the triglyceride-rich lipoproteins and metabolism of HDL-C are interdependent and because of the labiality of TG levels, the independentimpact of hTG on CVD risk is difficult to confirm. However, randomized clinical trials using TG-lowering medicationshave demonstrated decreased coronary events in both the primary and secondary coronary prevention populations.EpidemiologyIf hypertriglyceridemia was defined as fasting TGs ≥200mg/dL, the prevalence in the U.S. is approximately 10% in menolder than 30 years and women older than 55 years. Prevalence of severe hypertriglyceridemia, defined as TGs greaterthan 2,000mg/dL, is estimated to be to be 1.8 cases per 10,000 adult whites, with a higher prevalence in patients withdiabetes or alcoholism. The frequency of LPL-C deficiency is approximately one case per one million individuals, andthat of apo C-II deficiency is even lower. The frequency of LPL-C deficiency in Quebec, Canada is significantly higherthan the single case per million population reported in the U.S. Apo C-II has a worldwide distribution but is infrequent inall population studies to date.Extreme elevations of TGs, usually greater than 1,000mg/dL, may cause acute pancreatitis and all the sequellae of thatcondition. A less severe, and often unrecognized, condition is the chylomicronemia syndrome, which usually is caused byTG levels greater than 1,000 mg/dL. Chylomicronemia syndrome is a disorder passed down through families in which thebody does not break down lipids correctly. This causes fat particles called chylomicrons to build up in the blood56. TGsare lower in African Americans compared to Caucasians.In the Prospective Cardiovascular Munster study (PROCAM), a large observational study, hypertriglyceridemia (TGs>200mg/dL) was more prevalent in men (18.6%) than in women (4.2%)57. TGs increase gradually in men until about age50 years and then decline slightly. In women they continue to increase with age. Mild hypertriglyceridemia (TGs>150mg/dL) is slightly more prevalent in men beginning at age 30 years and women starting at age 60 years.Medical CareAlthough U.S. cardiologists and primary care physicians have typically concentrated on controlling cholesterol, it isbecoming increasingly common to assess triglyceride levels and regard them as an important risk factor and key potentialcomponent of cardiovascular disease. When hTG is diagnosed, secondary causes should be sought out and controlled.Direct treatment of elevated TGs should be undertaken after aggravating conditions, such as uncontrolled diabetesmellitus, are controlled as well as possible. In some cases, hTG will resolve completely when the other condition(s) aremanaged successfully. These conditions include obesity, a sedentary lifestyle, and smoking. Thus, the initialmanagement of hTG should include weight reduction, increased physical activity, and elimination of ingesting largeconcentrations of refined carbohydrates.If the secondary conditions that raise TG levels cannot be managed successfully and if TGs are 200-499mg/dL, the non-HDL cholesterol becomes the initial target of drug therapy using LDL-lowering medication, such as statins. The non-HDL cholesterol is the sum of the LDL and the VLDL cholesterol (total cholesterol - HDL). The goals for non-HDL-Clevels, similar to the goals for LDL-C levels, are dependent on risk and are 30mg/dL higher than the corresponding LDL-C goals. If secondary conditions are not present, no specific care is required other than treatment to improve hTG. Theimportance of obesity, a sedentary lifestyle, and a deconditioned state should not be underestimated in the treatment ofhTG. It is important to point out that approximately 25% of patients prescribed statins abandon the treatment within sixmonths due to unpleasant side effects. Muscle complaints constitute the major symptom limiting the use of statins. Theclinical features of statin myopathy include symptoms such as muscle aches or myalgia, weakness, stiffness, and cramps 58.56 Assmann G., et al., European Journal of Clinical Investigation (2007) 37: 925-932.58 Mancini G.B.J., et al., Canadian Journal of Cardiology (2011) 27:635-662.BURRILL INSTITUTIONAL RESEARCH 13 13
  • 14. Neptune Technologies & Bioressources, Inc. August 21, 2012Preclinical and initial clinical testing have shown NKO® to be beneficial in LDL and triglyceride reduction as well asHDL elevation, all of which are essential in treating chronic cardiovascular conditions59.WHY NKO®, WHY KRILL?Over the last years, natural health products have gathered attention and support of both science and industry. The growingincidence of adverse events with synthetic drugs has given rise to a demand for effective and safe alternative treatments.Frequently, traditional medicine represents a tradeoff between efficacy and side effects. The small number of naturalhealth ingredients that have been carefully researched for safety and efficacy and have passed both peer and regulatoryscrutiny could alleviate the problem. In our view, NKO® could fulfill these criteria by supporting solid scientificallyvalidated research providing safety and efficacy.The Norwegian word “krill” translates into “young fry of fish” and has been adopted as the term used to describe marinecrustaceans belonging to the order Euphausiacea. Krill is broadly known as whale food, but is also a source of food forseals, squid, fish, seabirds, and, to a much lesser extent, humans. In appearance, krill resembles shrimp (Exhibit 8)60.Exhibit 8: Krill Photograph - Body Structure Stomach Hepatopancreas Heart Intestine Tail Meat GILLS Highest proteolytic Lowest proteolytic activity activitySource: Tou J.C., et al., Nutrition Reviews (2007) 65(2):63-77.Krill range in size from 0.01 to 2g wet weight and from 8mm to 6cm length61. Despite their small size, krill are capable offorming large surface swarms that may reach densities of over one million animals per cubic meter of seawater62, makingthem an attractive species for harvesting. Furthermore, krill are found in all oceans of the world, making them among themost heavily populated animal species. Despite this abundance, the commercial harvest of krill has mainly focused on itsuse as feed in aquariums, aquaculture, and sport fishing63. From the different species of krill, only Antarctic krill(Euphausia superba) and Pacific krill (Euphausia pacifica) have been harvested to any relevant level for humanconsumption. The underutilization and abundance of krill make it a quite unexploited food source for humans that, whencoupled with a conscientious ecosystem approach to managing krill stocks, should result in its long-term sustainability.59 Bunea R, et al., Alternative Medicine Review (2004) 9:420-428.60 Torres J.A., et al., in: Shahidi F., ed. Maximising the Value of Marine By-Products. Cambridge (UK) (2007):65-95.61 Nicol S., et al., Krill Fisheries of the World. FAO Fisheries Technical Paper (1997) 367.62 Hamner W.M., et al., Science (1983) 220:433-435.63 Nicol S., et al., In: Everson I, ed. Krill: Biology, Ecology and Fisheries (2000):262-283.BURRILL INSTITUTIONAL RESEARCH 14 14
  • 15. Neptune Technologies & Bioressources, Inc. August 21, 2012Krill Nutritional ValueFoods high in saturated fatty acids (SFAs) have been linked to increased risk of CVD, whereas the omega-3 PUFAs,particularly EPA and DHA, have been linked to reduced risk of CVD64. Hence, the nutritive value of krill oil wasevaluated due to the consumer appeal for foods that are low in fat and SFAs and high in omega-3 PUFAs.Saether et al,.65 analyzed the lipid content of three species of krill and reported values ranging from 12% to 50% on a dry-weight basis. The wide range in lipid content was attributed to seasonal variations. A drop in lipid content occurred inthe spring, when food was scarce, whereas it rose in the autumn and early winter, when food was abundant.Kolakowska66 reported that the lack of reproductive activity in the winter raises the lipid content of female krill to over8% of their wet weight. Therefore, the lipid content and profile of krill may vary significantly upon factors such asseason, species, age, and the lag time between capture and freezing. It is important to account for these factors whenevaluating the consistency of krill oil. Apart from this variability, krill is similar to other seafood in being low in fatcompared with other animal foods.The lipid content in krill was analyzed for fatty acid composition. Exhibit 9 shows that krill provides both of the essentialfatty acids: α-linolenic acid (ALA) and linoleic acid (LA). Moreover, krill is low (26.1%) in both SFAs and (24.2%)monounsaturated (MUFAs) but high (48.5%) in PUFAs. The PUFAs consist mainly of omega-3 fatty acids. Kolakowskaet al., described that omega-3 PUFAs account for approximately 19% of total fatty acids in Antarctic krill caught duringthe winter67. Of the omega-3 PUFAs, EPA and DHA are remarkably abundant. This is not surprising given that krill feedon marine phytoplankton such as single-cell microalgae, which synthesize large amounts of EPA and DHA.As shown in Exhibit 9, the DHA content of krill is equivalent to that of shrimp and fish, but its EPA content is higher thaneither lean or fatty fish.Exhibit 9: Lipid Content and Fatty Acid Composition of Krill, Shrimp, Trout and SalmonSource: Source: Tou J.C., et al., Nutrition Reviews (2007) 65(2):63-77.64 Hu F.B., et al., Journal of American College of Nutrition (2001) 20:5-19.65 Saether O., et al., The Journal of Lipid Research (1986) 27:274-285.66 Kolakowska A. Polish Polar Research (1991) 12:73-78.67 Kolakowska A. Polish Polar Research (1991) 12:73-78.BURRILL INSTITUTIONAL RESEARCH 15 15
  • 16. Neptune Technologies & Bioressources, Inc. August 21, 2012The fatty acid profile of krill resembles that of shrimp and fish, with krill containing a higher amount of PUFAs.However, it is important to observe that most of the fatty acids in fish are incorporated into triglycerides, whereas 65% ofthe fatty acids in crustaceans are incorporated into phospholipids68. Animal and human studies suggest that omega-3PUFAs bound to phospholipids, such as those found in krill oil, have superior absorption and release to the brain thantheir methyl-ester or triglyceride-formed fish counterparts69,70.Is There Enough Omega-3 Fatty Acids in Nutraceuticals?Omega-3 molecules have a unique impact on TGs. In large amounts (≥10g/d), omega-3 fatty acids can lower TGs by 40%or more. In order to achieve this dose, purified capsules usually are necessary. Previously, patients have sometimeselected to intake omega-3 fatty acids by increasing their consumption of fatty fish. Those fish highest in omega-3 fattyacids are sardines, herring, and mackerel. To achieve ideal omega-3 levels, daily servings of one pound or more may benecessary. However, if weight gain ensues, TG-lowering will be compromised.The utility of omega-3 fatty acid products has recently been brought into focus by consumer reports highlighting thequality control issues plaguing some omega-3 fatty acid supplements. In one example, the Consumer Council of HongKong disclosed in a report dated October 16th, 2008 that it had discovered significant discrepancies between the claimedand actual contents of the omega-3 fatty acids DHA and EPA in a range of nutraceutical products on the Hong Kongmarket71.The test that formed the basis of the report analyzed 21 fish oil and seven fish liver oil products to assess their fatty acidcontent (along with vitamin A and D content in the fish liver oil products), as well as the levels of possible contaminants.Given the proven health benefits of DHA and EPA, fish oil products often prominently advertise their omega-3 content.Except for five liver oil supplements, all samples (23) were duly labeled with claims on the levels of DHA and EPA in theproducts. The test found that a number of samples, however, contained DHA and EPA levels that were significantlylower than their claims. In the most notable case, a fish liver oil supplement was revealed to be as much as 88% short ofthe level of EPA it claimed. The EPA test result on the product indicated an amount of 29.6mg per capsule comparedwith 240mg each stated on its label. In another sample, the DHA result of 26mg per capsule fell also 71% short of theclaimed value of 90mg in each capsule.In some samples, trans fat72 was also detected (the sample with the highest amount had 40.6mg per capsule), and saturatedfat73 (the highest amount was 372mg per capsule). Taking into account both the test result (of the highest amountreached) and the maximum recommended dosage, one could take in at a maximum an amount of 162mg of trans fat daily,or 7.4% of the limit recommended by WHO/FAO. In the case of saturated fat, using the same calculation, one mayconsume a maximum amount of 1,488mg saturated fat daily, or 6.7% of the recommended WHO/FAO limit.Further, the fish liver oil samples were analyzed for contents of vitamins A and D. The results closely followed the claimson the label except for one sample, which was found to contain an amount of vitamin D 37% lower than its claim. On thetest to identify the presence of contaminants such as heavy metals, pesticides and industrial wastes polychlorinatedbiphenyls (PCB), the results were generally satisfactory, especially in pollutants.The Consumer Council subsequently referred its test findings on such label discrepancies to the authorities concerned forfollow-up action. Further, as part of the study, the Consumer Council also sought the comments of medical professionalson the health claims of fish oil and fish liver oil dietary supplements. In their opinion, the experts all agreed that theconsumption of fish and fish oil could alleviate ones cardiovascular problems. Scientific evidence has shown that intake68 Weihrauch J.L., et al., Journal of the American Oil Chemists’ Society (1977) 54:36-40.69 Goustard-Langelier B., et al., Lipids (1999) 34(1):5-16.70 Maki K.C., et al., Nutritional Research (2009) 29(9):609-615.71 Consumer Council of Hong Kong ( Trans fats (or trans fatty acids) are created in an industrial process that adds hydrogen to liquid vegetable oils to make them more solid. Trans fats raise your bad(LDL) cholesterol levels and lower your good (HDL) cholesterol levels.73 Eating foods that contain saturated fats raises the level of cholesterol in your blood.BURRILL INSTITUTIONAL RESEARCH 16 16
  • 17. Neptune Technologies & Bioressources, Inc. August 21, 2012of omega-3 fatty acids could lower blood pressure, reduce blood triglyceride levels and assist in preventing cardiovasculardiseases.However, the experts warned that excessive intake of omega-3 fatty acids could lead to gastrointestinal problems andhigher risk of bleeding. The daily recommended intake limit is a total of 3g of DHA and EPA. Further, excessive intakeof vitamins A and D could also lead to liver problems. The daily limit of vitamins A and D are respectively 10,000 IUand 2,000 IU. The limits for children, pregnant and lactating women should be lower. For pregnant and lactating women,it was stated that it is not considered necessary for them to consume vitamin A and D rich fish liver oil products if theirphysicians have already prescribed multi-vitamins.Neptune maintains a quality-assurance process that is QMP certified by the Canadian Food Inspection Agency (CFIA) tomanufacture NKO®. Additionally, the company has obtained Good Manufacturing Practices accreditation from HealthCanada.POTENTIAL MULTIPLE BENEFITSNeptune Krill Oil (NKO®) is extracted with a patented GMP-accredited process from Antarctic Krill (Euphasia superba),which is considered the most abundant biomass in the planet74.NKO® is distinct from other marine oils in that the omega-3 fatty acids are attached to phospholipids, which due to theiramphiphilic75 nature, act as superior delivery systems. Furthermore, naturally inherent potent antioxidants such asastaxanthin, attached to omega-3, confer additional stability and antioxidant strength. NKO® has been scientificallyproven to be safe for chronic use and effective for the management of dyslipidemia, chronic inflammatory conditions andcognitive disorders.Phospholipids – Life Building BlocksPhospholipids are integral to the construction of cell membranes and work cooperatively with omega-3 and antioxidants(see Exhibit 4, Page 9) to assist a variety of processes essential to life.The majority of EPA and DHA present in NKO® are structurally attached to phospholipid molecules, in the same mannerthey appear in human cell membranes. By weight, NKO® is comprised of at least 30% EPA and DHA and 40%phospholipids, mostly in the form of phosphatidylcholines. The EPA and DHA in fish oil are in the form oftryacylglicerols. As we previously discussed, it has been demonstrated that essential fatty acids in the form ofphospholipids are superior to those in the form of tryacylglycerols in increasing the bioavailability EPA and DHA 76.Comparison of animal and human studies demonstrated the absorption of phospholipid-bound long-chain PUFAs issuperior to non-phospholipid fish oils. A primate study demonstrated that twice as many phospholipid-bound FAsaccumulate in the brain compared to triglyceride-bound FAs77.A human trial analyzing the response of both overweight and obese patients to long-chain fatty acid supplementationdemonstrated that daily doses of 216mg EPA and 90mg DHA from krill oil provided more profound fatty acid elevationsthan daily doses of 212mg EPA and 178mg DHA derived from fish oil. At the end of the four-week trial, mean plasmaEPA levels were 377µmol/L in the krill oil group, as opposed to 293 µmol/L in the fish oil group. Although the krill oilsupplement provided half as much DHA as the fish oil, the plasma DHA was 476µmol/L in the krill oil group, comparedto 478µmol/L in the fish oil group at the end of this one-month trial78.74 Kock K.H., et al., Philosophical Transactions of the Royal Society of London Series B Biological Sciences (2007) 29;362(1488):2333-2349.75 Chemical compound possessing both hydrophilic (water-loving, polar) and lipophilic (fat-loving) properties.76 Cansell M., et al., Lipids (2003) 38(5):551-559.77 Wijendran V., et al., Pediatric Research (2002) 51(3):265-272.78 Maki K.C., et al., Nutritional Research (2009) 29(9):609-615.BURRILL INSTITUTIONAL RESEARCH 17 17
  • 18. Neptune Technologies & Bioressources, Inc. August 21, 2012Astaxanthin – Potential Antioxidant and Anti-Inflammatory EffectsAstaxanthin, a member of the carotenoid family, is an oxygenated reddish pigment present in microalgae, fungi, complexplants, seafood, flamingos and quail. It gives salmon, trout, and crustaceans such as shrimp, krill and lobster theirdistinctive reddish coloration79. It is an antioxidant with anti-inflammatory properties, which has been studied as apotential therapeutic agent in atherosclerotic cardiovascular disease80 and renal transplantation81.Humans and other animals cannot synthesize them and therefore are required to source them in their diet82. Carotenoidsare classified, according to their chemical structure, into carotenes and xanthophylls. Astaxanthin, which is a xanthophyll,contains two oxygenated groups on each ring structure (Exhibit 10), which is responsible for its enhanced antioxidantfeatures83.Exhibit 10: Molecular Structure of AstaxanthinSource: Fasset R.G., et al., Marine Drugs (2011) 9:447-465.In 1987, the FDA approved astaxanthin as a feed additive for use in the aquaculture industry and in 1999 it was approvedfor use as a dietary supplement (nutraceutical)84.Certain marine species, such as shrimp, have a limited capacity to convert closely related carotenoids into astaxanthin.The presence of this antioxidant in NKO® creates a natural protection against oxidation of the oil. Independent analysisperformed at Brunswick Laboratories with NKO® and published literature suggest that astaxanthin is significantly moreeffective as antioxidant than vitamin E85.Astaxanthin can reduce free radicals and protect the cell membrane phospholipids against free radical damage. Whenmeasuring the oxygen radical absorbance (ORAC) – a measure of a compound’s ability to block free radicals, NKO® was48 times more effective than fish oil and 34 times more effective than coenzyme Q1086.Oral supplementation with astaxanthin in studies in healthy human volunteers and patients with reflux esophagitisdemonstrated a significant reduction in oxidative stress, hyperlipidemia and biomarkers of inflammation. In a studyinvolving 24 healthy volunteers who ingested astaxanthin in doses from 1.8 to 21.6mg/day for two weeks, the LDL lagtime, as a measure of susceptibility of LDL to oxidation, was significantly greater in astaxanthin treated participantsindicating inhibition of the oxidation of LDL87.Plasma levels of 12- and 15-hydroxy fatty acids were significantly reduced in 40 healthy non-smoking Finnish malesgiven astaxanthin88 suggesting astaxanthin decreased the oxidation of fatty acids. The effects of dietary astaxanthin indoses of 0, 2 or 8mg/day, over eight weeks, on oxidative stress and inflammation were investigated in a double blind79 Hussein, G.; et al., Journal of Natural Products (2006) 69:443-449.80 Fasset R.G., et al., Marine Drugs (2011), 9:447-465.81 Fasset R.G., et al., BMC Nephrology (2008) 9:17.82 Sandmann, G. European Journal of Biochemistry (1994) 223:7-24.83 Guerin, M.; et al., Trends in Biotechnology (2003) 21, 210-216.84 Guerin M.; et al., Trends in Biotechnology (2003) 21, 210-216.85 Naguib Y.M., et al., Journal of Agricultural and Food Chemistry (2000) 48:1150-1154.86 Massrieh W. Lipid Technology (2008) 20(5):108-111.87 Iwamoto T.; et al., Journal of Atherosclerosis and Thrombosis (2000) 7:216-222.88 Karppi J.; et al., International Journal of Vitamine and Nutrition Research (2007):77:3-11.BURRILL INSTITUTIONAL RESEARCH 18 18
  • 19. Neptune Technologies & Bioressources, Inc. August 21, 2012study in 14 healthy females89. Although these participants did not have oxidative stress or inflammation, those taking2mg/day had lower C-reactive protein (CRP)90 at week eight. There was also a decrease in DNA damage measured usingplasma 8-hydroxy-2′-deoxyguanosine after week four in those taking astaxanthin. Astaxanthin therefore appears safe,bioavailable when given orally and is suitable for further investigation in humans.Moreover, the safety, bioavailability and effects of astaxanthin on oxidative stress and inflammation that have relevanceto the pathophysiology of atherosclerotic cardiovascular disease, have been assessed in a small number of clinical studies.No adverse events have been reported and there is evidence of a reduction in biomarkers of oxidative stress andinflammation with astaxanthin administration. Experimental studies in several species using an ischemia-reperfusionmyocardial model demonstrated that astaxanthin protects the myocardium when administered both orally or intravenouslyprior to the induction of the ischemic event91.A double-blind randomized placebo-controlled clinical trial (Xanthin study by Fasset et al.) is currently being conductedto assess the effects of astaxanthin 8mg orally day on oxidative stress, inflammation and vascular function in patients thathave received a kidney transplant92. Patients in the study undertake measurements of surrogate markers of cardiovasculardisease including aortic pulse wave velocity, augmentation index, brachial forearm reactivity and carotid artery intima-media thickness. Depending on the results from this pilot study a large randomized controlled trial assessing majorcardiovascular outcomes such as myocardial infarction and death may be warranted.Experimental evidence suggests astaxanthin may have protective effects on cardiovascular disease when administeredprior to an induced ischemia-reperfusion event. In addition, there is evidence that astaxanthin may decrease oxidativestress and inflammation which are known accompaniments of many diseases.The unique molecular composition of krill oil, which is rich in phospholipids, omega-3 fatty acids, and diverseantioxidants, seems to surpass the profile of fish oils and may offer a superior approach toward the reduction of risk forcardiovascular disease.NKO® and HyperlipidemiaIn a recent study, the effect of NKO® on hyperlipidemia was investigated93. In this double-blind trial, 120 male andfemale subjects (mean age of 51±9.5 years) diagnosed with mild to high blood cholesterol (194-348mg/dL) andtriglycerides (204-354mg/dL) were enrolled. Subjects were randomly assigned to one of the following treatment groups:  (A) low-dose krill oil: 1g/d if body mass index (BMI) was under 30kg/m2 and 1.5g/d if BMI was over 30 kg/m2  (B) high-dose krill oil: 2g/d if BMI was under 30kg/m2 and 3g/d if BMI was over 30kg/m2  (C) 3g/d of fish oil containing 180 mg EPA and 120 mg DHA  (D) placebo containing microcrystalline celluloseAssigned treatments were given daily for 12 weeks. The primary endpoints measured were total cholesterol, triglycerides,LDL, and HDL at baseline and at 90 days. Fasting blood lipids and glucose were analyzed at baseline as well as 30 and90 days after study initiation for all groups, and at 180 days for the 30 patients in Group B.After 12 weeks of treatment, patients receiving 1g or 1.5g krill oil daily had a 13.4% and 13.7% decrease in mean totalcholesterol, from 236mg/dL and 231mg/dL to 204mg/dL (p=0.001) and 199mg/dL (p=0.001), respectively (Exhibit 11).89 Park J.S.; et al., Nutrition & Metabolism (2010) 7:18.90 Protein found in the blood, the levels of which rise in response to inflammation (it is an acute phase protein).91 Fasset R.G., et al., Marine Drugs (2011) 9:447-465.92 Fassett R.G.; at al., BMC Nephrology (2008) 9(17).93 Bunea R., et al., Alternative Medicine Review (2004) 9:420-428.BURRILL INSTITUTIONAL RESEARCH 19 19
  • 20. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 11: Results of Krill Oil (1g and 1.5g/day) on Lipids 1g Krill Oil mg/dL % Change p-value 1.5g Krill Oil mg/dL % Change p-valueTime (days) 0 90 Time (days) 0 90Total Cholesterol 235.83 204.12 -13.44% 0.001 Total Cholesterol 231.19 199.49 -13.71% 0.001LDL 167.78 114.05 -32.03% 0.001 LDL 164.74 105.93 -35.70% 0.001HDL 57.22 82.35 43.92% 0.001 HDL 58.76 83.89 42.76% 0.001Triglycerides 120.50 107.21 -11.03% 0.114 Triglycerides 126.7 111.64 -11.89% 0.113Source: Bunea R., et al., Alternative Medicine Review (2004) 9:420-428.The group of patients treated with 2g or 3g krill oil showed a significant respective reduction in mean total cholesterol of18.1% and 18%. Levels were reduced from a baseline of 247mg/dL and 251mg/dL to 203mg/dL (p=0.001) and206mg/dL (p=0.001), correspondingly (Exhibit 12).Exhibit 12: Results of Krill Oil (2g and 3g/day) on Lipids 2g Krill Oil mg/dL % Change p-value 3g Krill Oil mg/dL % Change p-valueTime (days) 0 90 Time (days) 0 90Total Cholesterol 247.42 202.58 -18.13% 0.001 Total Cholesterol 250.52 205.67 -17.90% 0.001LDL 182.86 114.43 -37.42% 0.001 LDL 172.81 105.16 -39.15% 0.001HDL 51.03 79.25 55.30% 0.001 HDL 64.18 102.45 59.64% 0.001Triglycerides 160.37 116.07 -27.62% 0.025 Triglycerides 152.77 112.27 -26.51% 0.028Source: Bunea R., et al., Alternative Medicine Review (2004) 9:420-428.In comparison, people receiving 3g fish oil had a mean reduction in total cholesterol of 5.9%, from a baseline 231mg/dLto 218mg/dL (p=0.001). Those enrolled in the placebo group showed a 9.1% increase in mean total cholesterol, from222mg/dL to 242mg/dL (p=0.001).A similar effect on LDL levels was observed in all groups. Krill oil at a daily dose of 1g, 1.5g, 2g, or 3g achievedsignificant reductions of LDL of 32%, 36%, 37%, and 39%, respectively (p=0.001). Results of patients treated daily with3g fish oil did not achieve a significant reduction in LDL (4.6%) after 12 weeks. Patients receiving placebo showed anegative effect, with a 13% increase in LDL levels.HDL was significantly increased in all patients receiving krill oil (p=0.001) or fish oil (p=0.002). HDL levels increasedfrom 57.2mg/dL to 82.4mg/dL (44% change) at krill oil 1g/day; 58.8mg/dL to 83.9mg/dL (43% increase) for krill oil 1.5g/day; 51mg/dL to 79.3mg/dL (55% increase) at krill oil 2g/day; and from 64.2mg/dL to 102.5mg/dL (59% increase) at adaily krill oil dose of 3g. Fish oil taken at 3g/day increased HDL from 56.6mg/dL to 59.03mg/dL (4.2% increase). Nosignificant decrease of HDL (p=0.850) was observed within the placebo group.Triglyceride reductions were not statistically significant in the 1g and 1.5g/day krill group (11% and 11.9% reduction,respectively). However, a daily dose of 2g and 3g krill oil resulted in significant 26.7% and 26.5% reduction oftriglycerides, respectively (Exhibit 12 and 13).BURRILL INSTITUTIONAL RESEARCH 20 20
  • 21. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 13: Cholesterol, LDL, HDL and TGs - Percentage Change from Baseline 70% 60% % Change from Baseline 50% 40% Placebo 30% 1g Kril Oil 20% 10% 1.5g Kril Oil 0% 2g Kril Oil -10% 3g Kril Oil -20% 3g Fish Oil -30% -40% -50% Total Cholesterol LDL HDL TriglyceridesSource: Bunea R., et al., Alternative Medicine Review (2004) 9:420-428 and Merchant Advisors.It is clearly demonstrated that krill oil considerably decreased total cholesterol, LDL, and triglycerides. In addition, it alsoincreased HDL levels. At lower and equal doses, krill oil was also more effective than fish oil in lowering glucose,triglycerides, and LDL from baseline levels.Additionally, blood glucose was reduced 6.3% in the 1g and 1.5g krill groups, and 5.6% in those taking 2g or 3g krilldaily. In comparison, there was a non-significant decrease in glucose for both the fish oil and placebo group. It isimportant to notice that the FDA has recently ordered that statins - the cholesterol-lowering drugs – must carry warningsabout increased risks of elevated blood sugar and possible transient memory and cognition problems. Therefore, loweringblood glucose could be seen as a plus for krill oil in managing cholesterol levels as compared to statins.Inflammatory Disease Management with NKO®Measurement of serum C-reactive protein (CRP) level is in widespread clinical use as a sensitive marker ofinflammation94. It appears to be a key player in the damaging effects of systemic inflammation and an easy andinexpensive screening test to assess inflammation-associated risk95.A double blinded, placebo controlled, randomized prospective study examined the effect of 300mg NKO® daily on CRPand functional testing scores for arthritis96. Ninety subjects with a diagnosis of cardiovascular disease and/or rheumatoidarthritis and/or osteoarthritis, with elevated CRP (>1mg/dL) for three consecutive weeks were enrolled in the trial. GroupA received NKO® (300mg daily) and Group B received a placebo. CRP and Western Ontario and McMaster Universities(WOMAC) osteoarthritis score were measured at baseline and days 7, 14 and 30. WOMAC is a questionnaire used toassess pain, stiffness, and physical function in patients with various inflammatory conditions, such as hip and/or kneeosteoarthritis, lower back pain, rheumatoid arthritis, etc97.After seven days of krill supplementation, CRP decreased by 19.3% compared to an increase by 15.7% observed in theplacebo group (p=0.049). After 14 and 30 days of treatment, CRP further decreased by 29.7% and 30.9%, respectively, inthe krill oil group while the placebo group experienced an increase of 32.1% by day 14 and a drop to 25.1% by day 30(p=0.001).94 Rhodes B., et al., Nature Reviews. Rheumatology (2011) 7(5):282-289. Epub 2011 Apr 5.95 Johansen J.S., et al., Rheumatology (1999) 38:618-626.96 Deutsch L. Journal of the American College of Nutrition ((2007) 26:39-48.97 INSTITUTIONAL RESEARCH 21 21
  • 22. Neptune Technologies & Bioressources, Inc. August 21, 2012When comparing krill supplementation to the placebo group, differences at day 7 (p=0.049), day 14 (p=0.004) and day 30(p=0.008) were all statistically significant.By day 7, WOMAC results showed that the NKO® group significantly reduced pain scores (28.9% reduction, p=0.050),stiffness scores (20.3% reduction, p=0.001), and functional impairment scores 22.8% (p=0.008) when compared toplacebo. NKO® also showed significant reduction in all three WOMAC scores by day 14 and day 30.Premenstrual SyndromeSampalis et al., compared the effectiveness of NKO® to fish oil on various functional parameters in premenstrualsyndrome (PMS), as well as the total consumption of analgesics for pain and discomfort associated with PMS98 in adouble blind, randomized clinical trial. In this 90-day study, 70 patients of reproductive age were assigned to take 2g krilloil daily (800mg phospholipids, 600mg EPA and DHA, n=36) or 2g fish oil daily (600mg EPA and DHA at a 3:2 ratio,n=34) for the first 30 days of the trial. In the final 60 days, both groups were taking the assigned treatment eight daysprior to and two days during menstruation. Questionnaires were completed and analgesic medication intakes weremeasured at baseline, 45 and 90 days.After 45 and 90 days, the NKO® group showed significant improvements from baseline (p<0.001 for all parameters) inbreast tenderness, joint pain, weight gain, abdominal pain, swelling, and bloating, as well as feelings of beingoverwhelmed, stressed, irritable, and depressed. The fish oil group demonstrated significant improvements from baseline(p=0.04) only for weight gain and abdominal pain after 45 days. Symptoms of stress, weight gain, abdominal pain andswelling were improved by 90 days of treatment with fish oil.The consumption of analgesic medication was decreased by 50% from baseline in the NKO ® group after 90 days oftreatment. A similar decrease in pain reliever consumption was seen in the fish oil group. At the end of the study, thecomparative analysis between groups showed that women taking NKO® consumed significantly fewer pain relieversduring the 10 days of treatment than women receiving fish oil (p<0.03).Previous studies have shown a beneficial effect of omega-3 PUFAs on dysmenorrea (menstrual pain)99. This is probablydue to the fact that menstrual pain and cramps are caused by inflammation mediated by omega-6 PUFA-derivedeicosanoids100.CNS Effects of NKO®NKO® may also be useful for the treatment of ADHD. Attention deficit hyperactivity disorder is a neurobiological illness,prevalent in about 8% of all children that usually persists in adulthood101. Its core symptoms include inattention,impulsivity, and hyperactivity, all of which affect daily living, family interactions, social interactions, and academicachievements.Several studies have indicated reduced blood concentrations of highly unsaturated fatty acids in ADHD childrencompared to controls102. The NKO® study was designed as a pilot, uncontrolled, open-label study to evaluate the safetyand effectiveness of NKO® in the treatment of ADHD. Thirty patients (mean age of 23±12 years) diagnosed with ADHDwere enrolled in the trial. The subjects were administered 500mg NKO® daily and the Barkley executive functionsscores103 were observed. After completing the treatment, patients exhibited a statistically significant improvement inbehavioral inhibition, self-control and executive functions104. These results are compelling; however, further studies areneeded to better understand dosage and long-term safety and efficacy of the treatment.98 Sampalis F., et al., Alternative Medicine Review (2003) 8:171-179.99 Deutch B. European Journal of Clinical Nutrition (1995) 49:508-516.100 Harel Z., et al., American Journal of Obstetrics & Gynecology (1996) 174:1335-1338.101 Pliszka S., et al., Journal of the American Academy of Child and Adolescent Psychiatry (2007); 46(7):894-921.102 Richardson A.J. International Review of Psychiatry (2006) 8:155-172.103 The Barkley Deficits in Executive Functioning Scale (BDEFS) is an empirically based tool for evaluating dimensions of adult executive functioning in daily life.104 Massrieh W. Lipid Technology (2008) 20(5):108-111.BURRILL INSTITUTIONAL RESEARCH 22 22
  • 23. Neptune Technologies & Bioressources, Inc. August 21, 2012GLOBAL OMEGA-3 MARKET POISED TO GROWWorldwide Omega-3 Consumer Product Market is Worth $13BA report from the Global Organization for EPA and DHA (GOED) suggests that the entire omega-3 market (includingraw materials, oil and concentrates, supplements, food and beverage products, beauty products, and pet food) has reached$13B worldwide105:  About $180MM is derived from raw materials  $1.28B is generated from refined oils and concentrates  $13.1B is comprised by consumer products: o food and beverage products (excluding fish) o health and beauty care products (including supplements) o pet productsThe structure of the omega-3 market is fairly complex. There are several companies, many joint ventures and strategicalliances involved at multiple levels within the industry.Throughout the world, the number of consumers who are aware of omega-3 fatty acids and their broad role in health ishigh (Exhibit 14, 15). The number of people who are specifically consuming omega-3 for health has increaseddramatically over the past few years. Nine percent of grocery shoppers buy high omega-3 food or beverage products in atypical grocery shopping trip, and the percentage of adults who take fish oil supplements has risen from 8% in 2006 to17% in 2011106. Increasing consumption is driven by:  expanding medical, governmental, and public awareness of omega-3 and its wide range of health benefits  continued consumer receptiveness to functional food and supplement products  positive mainstream and trade media reports  increased market participation by major marketersExhibit 14: U.S. Consumer Awareness of Omega-3, 1998-2008 80% 70% 76% 71% 60% 57% 55% 63% 60% 50% 55% 57% 49% 40% 46% Awareness 43% 29% 29% Believe Health Benefits 30% 27% 30% 33% 31% 25% 28% 20% 21% 22% 10% 16% 0% 1998 2001 2002 2003 2004 2005 2008 1999 2000 2006 2007Source: GOED105 GOED Report 2008.106 Omega-3: Global Product Trends and Opportunities. Packaged Facts, 2011.BURRILL INSTITUTIONAL RESEARCH 23 23
  • 24. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 15: Consumer Awareness of Omega-3 by Country, 2009 France 82% 40% United States 88% 33% Germany 90% 31% Total Awareness Italy 93% Believe Health Benefits 39% Sapin 96% 47% United Kingdom 99% 36% 0% 50% 100% 150%Source: GOEDMore and more, customers consider health and beauty care products an extension of the food/beverage they consume.This attitude has created a new range of nutritional products expanding from whole foods and fortified/functional foods tonutritional supplements and personal care products107. Exhibit 16 shows some of the reasons why people buy health foodsand/or beverages.Exhibit 16: Why Do People Purchase Healthy Foods/Beverages 35% 31% 30% 25% 21% 20% 15% 15% 11% 9% 10% 5% 5% 2% 0%Source: Future of Omega-3 Functional Foods GOED Exchange January 2011Consumer demand for omega-3 products is set to continue to grow steadily over the 2012-2015 period. Growth wouldinfluence the activities of manufacturers and marketers worldwide in supplying omega-3 products across variouscategories and segments of consumer packaged goods. The market for omega-3 products would remain lively andopportunity-rich for years to come. What is now a $13B industry is probably far from reaching its full potential108.107 Packaged Facts 2011.108 Omega-3: Global Product Trends and Opportunities 2011.BURRILL INSTITUTIONAL RESEARCH 24 24
  • 25. Neptune Technologies & Bioressources, Inc. August 21, 2012Omega-3 Dietary Supplement Industry Has Grown FastCurrently omega-3 is positioned as the number one consumer supplement choice109, and its sales have grownexponentially over the years. Globally, sales of omega-3 dietary supplements grew from $1.8B in 2007 to $2.8B in 2009,according to data from GOED. In the U.S. alone, sales in the omega-3 supplements category have increased from$40MM in 1995 to $1B in 2009 - a 26% compound annual growth rate110 (Exhibit 17).Exhibit 17: Omega-3 Supplement Sales in the U.S. from 1995-2009 U.S. Omega-3 Dietary Supplement Sales ($ in Millions) $1,200 $1,000 $800 $600 $400 $200 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Source: GOED Estimates, Nutrition Business Journal.The market of omega-3 supplements in the U.S. is forecasted to grow to approximately $2.8B in 2015 according to Frostand Sullivan111.The Nascent Krill SectorCurrently, the major source of omega-3 fatty acids is fish oil. However, one of the new products in the industry - krill oil– has already captured 2% of the omega-3 supplements’ market and is forecasted to exceed 5% of the market over thenext three years111 even as public awareness about krill remains relatively low.Antarctic krill is protected by an international treaty. Quotas have been determined for annual limit of capture. Thecurrent Convention on the Conservation of Antarctic Marine Living Resources treaty allows 6.55 MMT (million metrictons) to be caught in major geographical areas112. The average catch over the last 10 years has been about 120,000 MT(metric tons)113.Since krill decompose very quickly, it is either dried aboard the vessel and brought back to a land-based plant for oilextraction or enzymatically digested and then the oil is isolated. For oil extraction, Neptune uses its Neptune Ocean109 Survey of Vitamin and Supplement Users 2011.110 GOED Estimates, Nutrition Business Journal.111 Global Analysis of the Marine and Algae Omega-3 Ingredients Market, Frost and Sullivan.112 FAO, 2009.BURRILL INSTITUTIONAL RESEARCH 25 25
  • 26. Neptune Technologies & Bioressources, Inc. August 21, 2012Extract™ process. It is a patented and proprietary cold extraction method for optimal preservation of the bioactiveproperties of all krill components. Due to this exclusive extraction process, NKO® is free of heavy metals, PCBs, dioxinsand pesticides. Since its stability is supported by a high, natural antioxidant, NKO® contains no preservatives.While there are no official figures for the value of krill supply for human consumption, this nascent and rapidly growingsector is estimated to be ~$100MM with a 20% annual growth rate114. According to the FAO 2009 Yearbook, the amountof krill captured in 2009 corresponded to only 0.14% of the world total fishery and aquaculture production (Exhibit 18).Exhibit 18: Krill Capture vs. World Total Fish and Aquaculture Capture 180 93,000 World Total (Tons in Thousands) 160 Krill (Tons in Thousands) 92,000 140 91,000 120 100 90,000 Krill, planktonic crustaceans 80 89,000 World Total 60 88,000 40 87,000 20 0 86,000Source: Fishery and Aquaculture Statistics Annual Yearbook. FAO (Food and Agriculture Organization) 2009.The fact that currently there is low awareness of krill as a source of omega-3 for human consumption only underscores itsprospects for further growth. Krill would probably be a significant source of omega-3 in coming years, as more scientificstudies support the health enhancement properties of this tiny crustacean. In addition, the public is being educated aboutthe possible benefits associated with phospholipids and astaxanthin, which differentiates krill from other sources ofomega-3.EXPANDING THE NEPTUNE PORTFOLIONeptune introduced a new pipeline of novel formulations containing its proprietary marine omega-3 phospholipidstargeting specific health applications. The company pre-launched its new product, Eco Krill OilTM (EKO™) in September2011 at VitaFood (Private, Not Rated) in Paris. EKO™ is a product similar to NKO ® with slightly lower concentrationsand a lower selling price.Moreover, EKO™ sells at a lower price than most competing krill oil products and presents better specifications thanmost of the competitor’s products. Neptune is also testing industry feedback of a new biomass extract generated from thecompany’s research and development program targeting new cognitive health indications.Functional foods are an exciting current trend in the food and nutrition field. The International Food Information Council(IFIC) considers functional foods to include any food or food component that may have health benefits beyond basicnutrition115. Pilot commercial products are also being developed for functional food applications, such as juice, fruitberries, fruit paste and protein bars for both human and animal health. A daily therapeutic dose of 300mg to 500mg is114 Krill is set for continued omega-3 stardom, 2011.115 INSTITUTIONAL RESEARCH 26 26
  • 27. Neptune Technologies & Bioressources, Inc. August 21, 2012incorporated into a single serving size of these different food products. These clinical trials, performed in Europe byNeptune’s multinational partners Yoplait and Nestlé, have been completed. Results are expected before the end of 1Q13.In the European Union, all health claims for functional foods, whether made in advertising or labeling, are required toundergo pre-market scientific review and approval. Therefore, Neptune is waiting on trial results that could establishvaluable claims in neurology, inflammatory disorders or premenstrual syndrome.Neptune has entered into a multi-year partnership with former NFL (National Football League) Super Bowl Championand Hall-of Fame quarterback, John Elway. John Elway was the second most prolific passer in NFL history. We believehis addition to Neptune’s team could strengthen Neptune’s krill health claims and increase awareness of the product.TAPPING CHINA, THE FASTEST GROWING OMEGA-3 MARKETChina’s consumption of EPA- and DHA-rich oils, which currently is totaling 10,095t, is soon set to overtake WesternEurope which accounts for 12,284t, according to research conducted by market analysts Frost & Sullivan and the GlobalOrganization for EPA and DHA (GOED). China is already ahead of Southeast Asia and Australia, and New Zealandwhich consume 5,853t and 4,951t respectively. The Asian market now represents more than 30% of all omega-3 marketworldwide, China being the largest player in Asia.During 3Q11, Neptune announced the conclusion of a Memorandum of Understanding (MOU) with Shanghai KaiChuangDeep Sea Fisheries Co., Ltd. (SKFC, Not Rated) to form a 50%/50% Joint Venture, the Neptune-SKFC Biotechnology.The Joint Venture would manufacture and market Neptune’s krill products in Asia, the worldwide leading market foromega-3 products.SKFC is a publicly listed company in China and is 43% owned by Shanghai Fisheries General Corporation (SFGC), thelargest Chinese deepwater fishing company - owned by the Government of China. In total, SFGC is involved with morethan 30 wholly-owned or JV companies. They are specializing in pelagic fishing, fishing vessels, fishing machinery, freshgrocery and storage services. Overseas JV companies, cooperative enterprises and representative offices were establishedin over 10 foreign countries or regions, forming a pattern of oversea-oriented economy. SKFC has also the largest fleet ofvessels of krill harvesting in the Antarctic Ocean, which should assure supply to Neptune-SKFC Biotechnology and toNeptune (Exhibit 19).Exhibit 19: Shanghai Kai Chuang Deep Sea Fisheries Co. Ltd. - Shanghai/ChinaSource: initial cost of the project is expected to be $30MM. It would include the construction of a production facility usingNeptune Proprietary Production Technology in China, as well as the development of a robust commercial distributionBURRILL INSTITUTIONAL RESEARCH 27 27
  • 28. Neptune Technologies & Bioressources, Inc. August 21, 2012network for Asia. SKFC would supply all the raw material and Neptune would provide a license to Neptune-SKFCBiotechnology allowing it rights of use of its Production Technology IP for the Asian Market. Neptune is entitled toreceive a significant upfront payment, as well as royalty payments. The MOU is subject to approval by the boards of eachparty, as well as by Chinese regulators.In our opinion, Neptune’ strategy to partner with the largest player in the fishing industry, in one of the world’s fastestomega-3 growing market would smooth marketing challenges. Furthermore, krill is already an established food source insome Asian regions, which could also play a role in facilitating NKO® commercialization.KRILL OIL: A PRESCRIPTION DRUG?Lovaza™ – The First Omega-3 FDA ApprovedLovaza™/Omacor® is a combination of ethyl esters of omega-3 PUFAs, principally EPA and DHA. It is indicated as anadjunct to diet to reduce TG levels in adult patients with severe hypertriglyceridemia (≥500mg/dL). Lovaza™ wasdeveloped by Pronova BioPharma (PRON.OL, Not Rated) and marketed in the U.S. initially by Reliant Pharmaceuticals.Reliant was acquired by GlaxoSmithKline (GSK, Not Rated) in 2007.Lovaza™ is the first and only FDA-approved, prescription omega-3 fatty acid product. It is composed of approximately90% omega-3 PUFAs (465mg EPA, 375mg DHA, and >60mg of other omega-3s), for a total of 900mg of omega-3 fattyacids per 1g capsule. It is naturally derived through a patented process that consistently creates a highly concentrated andpurified prescription medicine116.The approval was based on the results of two placebo-controlled, randomized, double-blind, parallel-group studies of 84adult patients (42 on Lovaza™, 42 on placebo) with very high triglyceride levels. The effects of Lovaza™ 4g daily inchanging major lipoproteins lipid parameters were assessed for the groups receiving Lovaza™ or placebo. Patients whosebaseline triglyceride levels were between 500mg/dL and 2,000mg/dL were enrolled in these two studies of 6 and 16weeks duration (Exhibit 20).Exhibit 20: Median Baseline and Percent Change from Baseline in Lipid Parameters in Patients with Very HighTG Levels (≥500 mg/dL) LOVAZA Placebo Parameter N = 42 N = 42 % Difference Baseline (mg/dL) % Change Baseline (mg/dL) % Change TG 816 -44.9 788 6.7 -51.6 Non-HDL-C 271 -13.8 292 -3.6 -10.2 TC 296 -9.7 314 -1.7 -8 VLDL-C 175 -41.7 175 -0.9 -40.8 HDL-C 22 9.1 24 0 9.1 LDL-C 89 44.5 108 -4.8 49.3Source: Lovaza™ Prescription Label.% Change = Median Percent Change from Baseline; Difference = LOVAZA™ Median % Change – Placebo Median %Change; TC = Total CholesterolThe median triglyceride (TG) and LDL-C levels in these patients were 792mg/dL and 100mg/dL, respectively. MedianHDL-C level was 23mg/dL.In the Lovaza™ group, while VLDL and non–HDL levels decreased (41.7% and 13.8%, respectively) compared withbaseline, median LDL cholesterol levels increased by 44.5%. Patients should be monitored to ensure that LDLcholesterol levels do not increase excessively.116 Lovaza™ Prescription Label.BURRILL INSTITUTIONAL RESEARCH 28 28
  • 29. Neptune Technologies & Bioressources, Inc. August 21, 2012In persons with hypertriglyceridemia, levels of LDL-C alone do not adequately represent the risk associated withatherogenic117 lipoproteins118. Thus, in addition to the primary goal of LDL-C reduction, the National CholesterolEducation Program Adult Treatment Panel III (NCEP ATP III) guidelines have identified non-HDL-C as a secondarytarget of therapy in persons with serum TG levels ≥200 mg/dL.In patients with very high triglycerides (≥500 mg/dL) the NCEP guidelines recommend lowering the very hightriglycerides as the primary objective of lipid management, and treating LDL-C and non-HDL-C levels as secondaryobjectives.Treatment goals may not be reached with statin monotherapy alone. Davidson et al. evaluated the effects on non-HDL-Cand other variables of adding Lovaza™ to stable statin therapy in patients with persistent hypertriglyceridemia (COMBOSstudy). This was a multicenter, randomized, double-blind, placebo-controlled, parallel-group study in adults who hadreceived >8 weeks of stable statin therapy and had mean fasting TG levels >200mg and <500mg/dL and mean low-densitylipoprotein cholesterol levels <10% above their NCEP ATP III goal. The main outcome measure was the percent changein non-HDL-C from baseline to the end of treatment. At the end of treatment, the median percent change in non-HDL-Cwas significantly greater with Lovaza™ plus simvastatin compared with placebo plus simvastatin (-9.0% vs. -2.2%,respectively; p<0.001). Lovaza™ plus simvastatin was associated with significant reductions in TG (29.5% vs. 6.3%) andVLDL-C (27.5% vs. 7.2%), and a significant increase in HDL-C (3.4% vs. -1.2%)119.Overall, at a typical dose of four capsules/day, Lovaza™/Omacor® significantly lowers plasma triglyceride levels either asmonotherapy or in combination with 3-hydroxy-3-methylglutaryl coenzyme A (HMG-CoA) reductase inhibitors (statins)or fibrates. However, it is important to note that the FDA did not approve Lovaza™ for use in patients taking statinswhose triglyceride levels remain elevated.Pronova BioPharma, the manufacturer, has a global network of license and distribution partners of Lovaza™/Omacor ®that includes: GlaxoSmithKline in the U.S., Takeda Pharmaceutical (4502, Not Rated) in Japan, Prospa (Private, NotRated) in Italy and Abbott (ABT, Not Rated) in UK, Germany and others. The combined sales force from this network,focused on Lovaza™/Omacor®, is approximately 2,650 sales representatives. The drug was launched in 2005 in the U.S.and in major European markets.IMS Health reports that global end-user sales of the product have increased from $144MM in 2005 to $1.1B in 2009globally ($758MM in the U.S. alone), achieving blockbuster status. According to market research firm Wolters Kluwer,U.S. sales of Lovaza™ topped $1B in 2011 (Exhibit 21).Recently, Pronova entered into an agreement with Apotex Corp. and Apotex Inc. (Private, Not Rated) to settle their patentlitigation in the U.S. related to Lovaza™. Pronova granted Apotex a license to enter the U.S. market with a genericversion of Lovaza in 1Q15, or earlier depending on circumstances.117 Induces formation of deposits especially in the innermost layer of arterial walls.118 Third Report of the National Cholesterol Education Program (NCEP). Circulation (2002) 106:3143-3421.119 Davidson M.H., et al., Clinical Therapeutics (2007) 29(7):1354-1367.BURRILL INSTITUTIONAL RESEARCH 29 29
  • 30. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 21: U.S. Lovaza™ sales 2007-2011 Lovaza™ U.S. Sales ($ in Millions) $1,400 $1,200 $1,000 $800 $600 Integrated WAC Dollars $400 $200 $0 2007 2008 2009 2010 2011Source: Wolters Kluwer Prescription Health Database.Vascepa was NextAmarin (AMRN, Not Rated) has developed Vascepa (fka AMR101), an omega-3 PUFA containing >96% EPA ethyl esterand no DHA, as a prescription drug.In July, 2012, the company received FDA approval of Vascepa for use in the treatment of patients with very hightriglycerides (≥500mg/dL), the patient population studied in Amarin’s MARINE trial. The NDA included efficacy andsafety data from both the MARINE and ANCHOR Phase 3 trials of AMR101.The Multicenter, plAcebo-controlled, Randomized, double-blINd, 12-week study with an open-label Extension(MARINE) was a Phase 3 study. 229 patients with fasting TG >500mg/dl and <2,000mg/dl (with or without backgroundstatin therapy) were randomized to three groups: (1) AMR101 4g/day, (2) AMR101 2g/day, or (3) placebo.The primary endpoint was the placebo-corrected median percentage of change in TG from baseline to week 12. AMR1014g/day reduced the placebo-corrected TG levels by 33.1% (n=76, p<0.0001) and AMR101 2g/day by 19.7% (n=73,p<0.0051). For a baseline TG level >750 mg/dl, AMR101 4g/day reduced the placebo-corrected TG levels by 45.4%(n=28, p<0.0001) and AMR101 2g/day by 32.9% (n=28, p<0.0016). AMR101 did not significantly increase the placebo-corrected median LDL cholesterol levels at 4g/day (-2.3%) or 2g/day (+5.2%; both statistically non-significant).AMR101 significantly reduced non–HDL-C, apolipoprotein B (apo B), lipoprotein-associated phospholipase A2 (Lp-PLA2), VLDL-C, and total cholesterol (TC). AMR101 was generally well tolerated, with a safety profile similar to that ofthe placebo (Exhibit 22).BURRILL INSTITUTIONAL RESEARCH 30 30
  • 31. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 22: Change in Lipid Levels, Baseline to Week 12 (Intent-to-Treat Population).Source: Bays H.E., et al., American Journal of Cardiology (2011) 108:682-690.In conclusion, AMR101 significantly reduced the TG levels and improved other lipid parameters in patients with veryhigh TG levels, without significantly increasing LDL-C. As we discussed, the increase in LDL cholesterol can presenttreatment challenges. According to current treatment guidelines, LDL cholesterol is the main target for cholesterol-lowering therapy for the prevention of coronary heart disease120,121. Therapeutic interventions that increase LDL-C, suchas Lovaza™ and fibrates, might hamper the achievement of lipid treatment targets.The second Phase 3 trial (ANCHOR) was designed to demonstrate that AMR101 is effective in reducing triglyceridelevels in patients with moderate-high triglycerides (≥200 and <500mg/dL) without increasing LDL-C levels in patients onstatin therapy. 702 patients with mixed dyslipidemia (two or more lipid disorders) were enrolled.The primary endpoint for triglyceride change was achieved at both 4g and 2g per day with median placebo-adjustedreductions in triglyceride levels of 21.5% (p<0.0001) and 10.1% (p=0.0005) for the 4g and 2g per day dose groups,respectively.Although the market for high hyperlipidemia is much smaller than mixed dyslipidemia, and despite the uncertaintiesrelated to its patent portfolio, Amarin’s current market capitalization is ~$1.7B.In addition, we are aware of other pharmaceutical companies that are developing products that, if approved, wouldcompete with CaPre®. These include a free fatty acid form of omega-3 (Epanova™, comprised of 55% EPA and 20%DHA) which is being developed by Omthera Pharmaceuticals. (Private, Not Rated) and Epax (Private, Not Rated). Epaxhas completed a Phase 3 study of the omega-3 based drug candidate AKR963 for hypertriglyceridemia (patients with hightryclycerides). Epax is a 50/50 joint venture between Aker BioMarine and Lindsay Goldberg (Private, Not Rated).CaPre® – The Perfect Lipid Trifecta?In August 2008, Neptune transferred an exclusive worldwide license to its subsidiary, Acasti, to research and develop newactive pharmaceutical ingredients (APIs) based on Neptune’s proprietary omega‐3 PUFAs extracted from krill. Thisallows Neptune to set apart its cardiovascular pharmaceuticals activities from its nutraceutical business.120 Grundy S.M., et al., Circulation (2004) 110:227-239.121 Third NCEP Report. Circulation (2002);106:3143-3421.BURRILL INSTITUTIONAL RESEARCH 31 31
  • 32. Neptune Technologies & Bioressources, Inc. August 21, 2012Acasti initiated research aiming towards IND/clinical trial application (CTA) allowance by the FDA and Health Canada,respectively. The company is developing a pipeline targeting treatments for chronic cardiovascular disorders within theOTC, medical food and prescription drug markets.Hypertriglyceridemia is commonly associated with the highly atherogenic lipid triad: (1) an increase in large triglyceride-rich VLDL particles, (2) a reduction in large HDL-C particles, and increased levels of atherogenic small dense LDL-C122.Preclinical and initial clinical testing already demonstrated that NKO® appears to have an effect in reducing LDL andtriglycerides, as well as increasing HDL levels123. CaPre®, which is Acasti’s clinical candidate, is a concentrated form ofNKO®.In preclinical trials, blood lipids were monitored in two animal models to assess and compared the efficacy of CaPre ® andthe current marketed drug Lovaza™ over a 12-week treatment period. Results have shown that:  a low daily human equivalent dose of CaPre® 1g seems to reduce LDL-C by 40% and increase HDL-C by 180% in a normal rat model, while 4g of Lovaza™ did not show any significant effect  a lower daily human equivalent dose of CaPre® 0.5g appears to be as efficient as 4g of Lovaza™ in reducing triglycerides levels by 40-50% in obese rats with severe diabetes and high triglyceridesTherefore, a lower dose (0.5g – 1g) of CaPre® might be more effective than 4g of Lovaza™ (Exhibit 23). Results areeven more remarkable considering the fact that 1g of CaPre® contains 8.9x less EPA and 11.1x less DHA than therecommended 4g daily dose of Lovaza™. This difference in activity might be due to the superior bioavailability that hasbeen suggested for phospholipid-bound omega-3 PUFAs in krill oil, as opposed to the omega-3 acid ethyl ester inLovaza™.Exhibit 23: CaPre® - Comparative Composition CaPre® Lovaza™ AMR101® omega-3 omega-3 API components (EPA+DHA) (EPA+DHA) ethyl EPA ethyl esters phospholipids esters Total phospholipids per 1000 mg 660mg 0 0 Total Omega-3 per 1000 mg 377mg 900mg 990mg EPA 210mg 465mg 960mg DHA 135mg 375mg 0 Astaxanthin 5mg 0 0 Dosage / day 1-2x 0.5g 4x 1g 2-4x 1gSource: Acasti Presentation 2011 and Burrill Merchant Advisors.These preclinical data suggests that CaPre® potentially offers a more complete lipid management in dyslipidemic patientsthan its competitors Lovaza™ and Vascepa:  Lovaza™ lowers triglycerides but negatively affects LDL (increases LDL)  Vascepa is better than Lovaza™ - it lowers triglycerides with little impact on LDL levels  CaPre® has been shown to not only lower triglycerides substantially more than Lovaza, but to also have a positive impact on cholesterol management by lowering LDL and increasing HDL (the perfect lipid trifecta)During the F3Q12, Acasti has initiated a Phase 2 clinical trial to investigate the use of CaPre ® as a treatment for patientswith dyslipidemia. The company enrolled its first patient in October 2011. This is a randomized, double blind, placebo122 Manage Care Dossier of Lovaza.123 Bunea R., et al., Alternative Medical Review (2004) 9(4):420-428.BURRILL INSTITUTIONAL RESEARCH 32 32
  • 33. Neptune Technologies & Bioressources, Inc. August 21, 2012controlled trial to assess the safety and efficacy of CaPre® in patients with high triglyceride levels (200-499mg/dL), whichdistinguishes CaPre® from prescription drug fish oils labeled only to treat patients with severe (very high) levels oftriglycerides (>500mg/dL), such as Lovaza™ and Vascepa.Therefore, the TRIFECTA trial124 (TRIal For Efficacy of Capre® on hyperTriglyceridemiA) is aimed to determine whetherCaPre®, given at doses 1g or 2g for 12 weeks, has an effect on fasting plasma triglycerides in patients withhypertriglyceridemia (200-877mg/dL) as compared to a placebo. The primary endpoint is the percentage change intriglycerides between the baseline and the 12-week assessment. The company estimated to enroll ~400 patients.In order to speed up its development, Acasti has started and advanced its preclinical Good Laboratory Practices (GLP)program. The company has also filed for an open‐label clinical trial in Canada. The objective of this parallel study is toevaluate the dose-dependent effect on fasting plasma triglycerides of an eight-week treatment with CaPre® given atincreasing doses from 0.5g to 1g, from 1g to 2g and 2g to 4g or a stable dose of 4g in patients with highhypertriglyceridemia as compared to the standard of care alone125. The primary outcome is to measure the percent changein fasting blood circulating serum TGs between baseline, and four and eight weeks of treatment.The open-label design and shorter treatment period of this study would enable a faster recruitment and earlier outcomedata than the company’s double-blinded phase 2 clinical trial conducted simultaneously. Moreover, it would allow Acastito prepare to file an IND with the FDA to enter into U.S. clinical trials. Results from the open-label trial are expected bylate-2012.Secondary outcome measures for the open label trial are as follows:  Absolute change in fasting plasma TGs between baseline, and four and eight weeks of treatment  Percentage of patients achieving target TG fasting plasma levels (TG<1.7mmol/L, or 150mg/dL))  Absolute change in fasting plasma LDL-C, VLDL-C, HDL-C, total cholesterol, hs-CRP126 and non-HDL between baseline, and four and eight weeks of treatment  Percentage change in fasting plasma concentrations of LDL-C, VLDL-C, HDL-C, total cholesterol, hs-CRP and non-HDL between baseline and four and eight weeks of treatment  Calculated ratios between baseline, and four and eight weeks of treatment o Total cholesterol/HDL-C o LDL-C/HDL-C o TGs/HDL-C  Absolute and percent change in fasting plasma concentrations of biomarkers between baseline and four and eight weeks of treatment o Glycated Hemoglobin (HbA1c) o Glucose o Creatinine phosphokinase (CPK)We believe that results from CaPre® clinical trials are valuable value drivers for Neptune. If the previous preclinicalprofile of CaPre® is confirmed in clinical trials, it would not only further validate Neptune’s NKO®, but would also fosterthe launch of new functional/medical food products. We are looking forward to seeing the interim results from the openlabel trial, expected to be released in mid-2012.NUTRACEUTICAL COMPETITION - AKER BIOMARINEIn our view, Aker Biomarine is one of Neptune’s closest competitor in the nutraceutical business. Superba™ is Aker’sbrand name for krill oil products for human consumption. The Norwegian firm has generated approximately124 High sensitive C-reactive protein.BURRILL INSTITUTIONAL RESEARCH 33 33
  • 34. Neptune Technologies & Bioressources, Inc. August 21, 2012NOK330MM (~$56MM) in sales from krill oil in 2011, mainly due to Superba™. Sale of Superba™ krill reached arecord‐high in 4Q11 (70 MT), which suggests growing demand for global omega-3 phospholipid formulations. Aker hasan exclusive agreement with Schiff Nutrition International (Private, Not Rated) to distribute the product in the U.S.INTELLECTUAL PROPERTYOn October 5, 2011 Neptune announced that the USPTO had granted Neptune a new patent (8,030,348) covering omega-3 phospholipids comprising polyunsaturated fatty acids, one of the main bioactive ingredients in all recognized krill oils.The patent was granted for the U.S. market and would be valid until 2025. The 348 patent covers novel omega-3 fatty acidphospholipid compositions suitable for human consumption, synthetic and/or natural, including compositions extractedfrom marine and aquatic biomasses (despite the extraction process). The 348 patent protects NKO®, as well as oils andpowders extracted from krill, containing marine phospholipids linked to EPA and/or DHA, distributed and/or sold in theU.S. market (Exhibit 24).Exhibit 24: Neptune Intellectual Property Program Summary Issued Pending Extraction Process Method of extracting lipids from Marine and Aquatic animal tissues 33 2 Krill oil (Europe) Krill and/or Marine extracts for prevention and/or treatment of cardiovascular diseases 20 0 Krill and/or Marine extracts for prevention and/or treatment of arthritis, skin cancer, Marine oil 1 29 diabetes, premenstrual syndrome and transdermal transport Natural marine source phospholipids comprising flavonoids, polyunsatured fatty acids Phospholipids/ Novel flavonoid 25 2 and their applicationsSource: Neptune 2012 presentation.On October 6, 2011, Neptune filed complaints in the U.S. District Court for the District of Delaware alleging infringementof its issued patent. The action was filed against the Norwegian peer firm Aker Biomarine ASA (AKBM.OL, Not Rated).Neptune has also launched separate infringement actions against Enzymotec Limited. (Private, Not Rated), EnzymotecUSA, Inc. (Private, Not Rated), Health Resources, LLC (Private, Not Rated) and Azantis, Inc. (Private, NotRated).On November 16, 2011, the USPTO issued another U.S. patent (8,057,825) to Neptune that protects and provides Neptunewith the exclusive use of krill extracts in the U.S., as a method for reducing cholesterol, platelet adhesion and plaqueformation.Aker BioMarine filed for patent reexamination in the U.S. against both Neptune patents – 348 composition of matter and825 method of use patents. For the 348 patent, the court has ordered a stay of the litigation until the USPTO concludes itsreexamination process, which could last 18 months. We are cautiously optimistic that the patents’ claims would bereassured by the USPTO. We see minor business risk from the reexamination process as opposed to a higher upside if thelitigation turns out to be favorable to Neptune. Although the USPTO grants approximately 95% of all requests forreexamination, in most cases, it confirms the validity of the claims in the patent or grants amended claims.INCREASING MANUFACTURING CAPACITY AND DISTRIBUTIONIn March 2012, Neptune announced that the company has finalized its expansion plans at its Sherbooke plant, which at acost of $20MM would create at least 40 new jobs. Neptune would triple its production capacity with the expansion of theSherbrooke plant. The first phase is expected to be completed by November 2012. The excavation began in December2011.For its expansion project, Neptune counted on the financial support from various key players: the Provincial Government,via Investissement Quebec, ($4.1MM in grants + tax credits); the Federal Government, via Canada EconomicDevelopment ($3.5MM via an interest-free loan); Desjardins Business Center ($9MM mortgage loan), and SherbrookeBURRILL INSTITUTIONAL RESEARCH 34 34
  • 35. Neptune Technologies & Bioressources, Inc. August 21, 2012Innopole ($200K grant). All the contributions exceed $17M with the balance being provided by Neptunes workingcapital.The production capacity would increase from 150,000kg to 300,000Kg per year by the end of FY2013, in order to meetthe increasing demand for the company’s products. The project would entail a second Phase, aiming to increase capacityfrom 300,000Kg to 450,000Kg by the end of FY2014 (Exhibit 25). According to management, expanding capacity to450,000Kg would mean ~$75MM in revenues.Exhibit 25: Production Capacity Plans Production Capacity (000 Kg) 500 450 400 350 300 250 Capacity (000 Kg) 200 150 100 50 0 FY2011 FY2012 FY2013E FY2014ESource: Neptune 2012 presentation.On February 15, 2012, Neptune announced that Jamieson Laboratories (Private, Not Rated) is initiatingcommercialization of NKO® in the Canadian Food, Drug and Mass Market (FDM) retail channel coast to coast. Jamiesonis the number one distributor in Canada with an overwhelming presence in the Canadian mass-market. This newpartnership represents a substantial opportunity in Neptune’s growth strategy. Moreover, Neptune secured newdistribution agreements in the U.S. The company is introducing nutraceutical products into key U.S. retailers such asWal-Mart (WMT, Not Rated), Walgreen (WAG, Not Rated), CVS (CVS, Not Rated), Rite Aid (RAD, Not Rated), andothers.VALUATIONOur valuation yields a Target Price of $7/share, based on a sum of the parts analysis (Exhibit 26): (1) Probability weighted NPV model of CaPre®, the drug candidate in development by Acasti (Neptune’s subsidiary) (2) DCF valuation on Neptune’s nutraceutical businessExhibit 26: Sum of the Parts Analysis Summary Per share Business Operation NPV (in MM) % Ownership value Acasti Pharma $205 58% $2 Nutraceuticals $251 100% $5 Neptune Target Price $7Source: Burrill Merchant Advisors estimatesCaPre® - Potential Blockbuster Product from AcastiPart of our valuation of Neptune is based on our probability-weighted NPV model on CaPre®, Acasti’s clinical candidatefor the treatment of severe (very high) hypertriglyceridemia. We assume that CaPre ® is launched in 2016 and ramps up toBURRILL INSTITUTIONAL RESEARCH 35 35
  • 36. Neptune Technologies & Bioressources, Inc. August 21, 2012approximately $1B in sales by 2019. At steady state, we assume net margins to be approximately 25% of sales. Applyingan annual discount rate of 15% for the commercial risk associated with the drug, and a 33% probability of success, wearrive at a total NPV of $205MM for CaPre®. We calculate a ~$120MM value to Neptune, in order to account for its 58%ownership of Acasti. To calculate our NPV/share for this component, we used a fully diluted share count of 55MM.CaPre®’s valuation yields an NPV of approximately $120MM (or $2/share) to Neptune (Exhibit 28, Page 41).We believe that CaPre® has a potential upside to our valuation due to its differentiated profile compared to fish oil, and thesize of the hypertriglyceridemia market in the U.S. More importantly, Acasti may seek the mixed dyslipidemia indicationwith CaPre®. The mixed dyslipidemia market is much larger than the very high hypertriglyceridemia market.Upon completion and successful outcome of CaPre® Phase 2 development, the value attributed to this program could risefrom $120MM to $240MM, boosting Neptune’s target value from $7 to $9/share.Nutraceutical BusinessWe performed a discounted cash flow analysis (DCF) analysis for the nutraceutical business. We assume that revenuesfrom the core business (primarily NKO®) ramps up to approximately $75MM in sales by FY2016 (CAGR=42% betweenFY2013 and FY2016), supported by Neptune’s manufacturing expansion and increased demand for the company’sproducts. Net margins are expected to increase from the current 10% to 20% by FY2017, assuming economies of scalethrough higher operational efficiencies. We assume 15% growth rate between F2017 and F2023. We apply a 5%terminal growth rate beyond FY2023. Applying an annual discount rate of 14% for the commercial risk associated withthe business, and assuming a cash position of $26MM by the end of FY2013 (incl. warrant and option exercises), wearrive at a NPV of $250MM for the nutraceutical business, or $5/share. To calculate our NPV/share for the nutraceuticalcomponent, we used a fully diluted share count of 55MM (Exhibit 27, Page 40).BURRILL INSTITUTIONAL RESEARCH 36 36
  • 37. Neptune Technologies & Bioressources, Inc. August 21, 2012EXECUTIVE BIOGRAPHYHenri Harland, Chief Executive Officer (CEO) & PresidentMr. Henri Harland, visionary and founder of Neptune Technologies & Bioressources Inc., has served as a director and thePresident and Chief Executive Officer of the Company since its incorporation in 1998. He has been involved in the krillresearch project since 1991 and was a pioneer in foreseeing its nutraceutical and pharmaceutical applications and potentialrole in nutrigenomics. Mr. Harland’s vision, passion, dedication, creativity and leadership, over an extended period oftime, resulted in building Neptune and creating the remarkable product that Neptune Krill Oil is today. Since 1998, he hasheld the position of President and Chief Executive Officer of Groupe Conseil Harland inc., a financial engineering group.From May 1992 to September 1997, Mr. Harland was a director and acted as Vice‐president of Corporate Developmentand Chief Financial Officer of SignalGene inc. (SGI, Not Rated) - formerly Société Algène Biotechnologies Inc. - apublicly traded biotechnology corporation.Tina Sampalis M.D., Ph.D., Chief Scientific Officer (CSO)Dr. Sampalis joined Neptune Technologies in 2000 and holds the position of Chief Scientific Officer. Dr. Sampalis is anOncology Surgeon, trained in Physiology at McGill University, Medicine at the University of Patras (Greece),Dermatology at Göttingen University (Germany) and Marselisborg University (Denmark), Pediatric, General andOncology Surgery at the University of Athens (Greece), graduate training (PhD) in Surgical Research at the University ofAthens and a second PhD in Epidemiology and Experimental Surgery at McGill University. She has received severalinternational scholarships and awards for her work on the clinical implementation of retinols skin and breast cancerincluding the Helen Hutchison Award for geriatric medicine. Her work on Scintimammography resulted in herappointment at the International Educational Speakers Bureau, the Canadian and U.S. Faculty of Medical Speakers forBreast Imaging. As an international scholar she leads the development and implementation of innovative micro‐invasiveand stereotactic robotic surgical techniques for breast cancer, for which a USA and Canadian patent application has beenfiled. She is a member of the American Association of Naturopathic Medicine. Dr. Sampalis has published in multiplepeer reviewed publications.André Godin, Chief Financial Officer (CFO)Mr. André Godin, C.A. has a Bachelor in Administration and is has been a Member of the Canadian Institute of CharteredAccountants since 1988. He has more than 10 years experience in the Biotech/Pharma industry as former President of aDietary Supplement Company and as a Corporate Controller for a pharmaceutical company in OTC products. Mr. Godinhas been Vice‐President, Administration and Finance for Neptune Technologies & Bioressources Inc. since 2003.Michel Chartrand, Chief Operating Officer (COO)Mr. Michel Chartrand is Chief Operating Officer of the Company. He was from July 2009 to July 2011, theVice‐President of Retail Partner Solutions at McKesson Canada. From 2004 to 2009, Mr. Michel Chartrand was thePresident and Chief Executive Officer of Groupe PharmEssor inc. (Private, Not Rated) which regroups Gestion SantéServices Obonsoins inc. and Groupe Essaim inc., two important Quebec pharmacy franchisors. From 1998 to 2004, Mr.Chartrand was the Executive Vice President of Gestion Santé Services Obonsoins inc.BURRILL INSTITUTIONAL RESEARCH 37 37
  • 38. Neptune Technologies & Bioressources, Inc. August 21, 2012 Exhibit 27: Neptune’s NPV Model Nutraceutical Business NPV Model - Nutraceutical Business All figures in thousands (except per share figures) Year F2013E F2014E F2015E F2016E F2017E F2018E F2019E F2020E F2021E F2022E F2023E Product sales1,2 $26,000 $35,000 $50,000 $75,000 $87,000 $100,000 $115,000 $132,000 $151,000 $174,000 $200,000 Revenue growth 36% 43% 50% 15% 15% 15% 15% 15% 15% 15% Operating expenses3 23,130 30,450 42,500 61,500 69,000 79,350 91,253 104,940 120,681 138,784 159,601 Operating expense margin 90% 87% 85% 82% 80% 80% 80% 80% 80% 80% 80% EAT3 2,570 4,550 7,500 13,500 17,250 19,838 22,813 26,235 30,170 34,696 39,900 Terminal value 487,155 NPV of EAT4 94,268 PV terminal value 136,108 NPV nutraceutical business 230,376 Cash by FYE13 26,361 Debt by FYE13 4,000 Total NPV nutraceutical business 252,737 Neptune 58% Ownership Acasti 119,082 Total NPV 371,819 Neptune Price Target 7 Notes 1 Annual growth F2013-F2017 based on manufacturing expansion and product demand (CAGR=34%) 2 Annual growth in F2018-F2023 based on Frost and Sullivan Omega-3 Market Research 2011 3 Operating expense margin for F2013E based on Pronova Biopharma margins; assuming gradual decrease in operating expenses as a % of sales (economies of scale, higher operating efficiency): 87% in F2014; 85% in F2015; 82% in F2016; 80% in F2017 4 Discount rate based on Neptunes WAAC - Bloomberg Source: Company Reports and Burrill Merchant Advisors estimatesBURRILL INSTITUTIONAL RESEARCH 38 38
  • 39. Neptune Technologies & Bioressources, Inc. August 21, 2012 Exhibit 28: CaPre® NPV: Neptunes 58% Ownership NPV Model CaPre® All figures in thousands (except per share figures) Year 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Product sales1 $137,195 $592,841 $683,098 $1,009,049 $1,147,286 $1,160,000 $1,160,000 $580,000 Operating expenses (75% of sales) $102,896 $444,631 $512,324 $756,787 $860,464 $870,000 $870,000 $435,000 Net income (25% profit margin) $34,299 $148,210 $170,775 $252,262 $286,821 $290,000 $290,000 $145,000 Net income*Likelihood of Success = EAT of: $11,319 $48,909 $56,356 $83,247 $94,651 $95,700 $95,700 $47,850 NPV of EAT 205,314 $236,111 271,527 Cash by YE12 Total NPV $205,314 Neptune 58% Ownership $119,082 Note 1 Product sales based on sales of Lovaza™ in the U.S. Source: Company Reports and Burrill Merchant Advisors estimatesBURRILL INSTITUTIONAL RESEARCH 39 39
  • 40. Neptune Technologies & Bioressources, Inc. August 21, 2012 FINANCIALS Exhibit 29: Neptune Technologies & Bioressources (NEPT) - Historical Income Statements, Financial Projections Source: Company Reports and Burrill Merchant Advisors estimatesBURRILL INSTITUTIONAL RESEARCH 40 40
  • 41. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 30: Neptune Technologies & Bioressources (NEPT) – Balance Sheet BALANCE SHEET $ in thousands FY ends February F2011A F1Q12A F2Q12A F3Q12A F4Q12A F1Q13A Assets Current assets: Cash 3,502 3,672 4,317 3,765 3,570 Short-term investments 3,513 9,931 9,491 13,430 12,711 9,386 Trade and other receivables 5,627 5,925 7,301 6,143 8,621 9,290 Tax credits receivable 645 244 498 636 1,216 1,411 Inventories 4,545 6,683 6,647 7,129 6,833 8,947 Prepaid expenses 969 256 265 191 430 539 Total current assets 15,298 26,541 27,874 31,845 33,576 33,143 Government grant receivable 150 100 100 100 50 Property, plant and equipment 6,086 6,009 6,147 6,564 7,552 11,788 Intangible assets 1,269 1,264 1,273 1,279 1,358 1,501 Investment tax credit receivable 1,200 1,200 Deferred tax asset 1,000 1,000 Total assets 22,803 33,914 35,394 39,788 44,736 48,632 Liabilities and Shareholders’ Equity Current liabilities Bank overdraft 40 1,752 Loans and borrowings 1,615 983 972 964 2,909 8,036 Trade and other payables 3,258 3,895 3,968 3,566 4,971 908 Advance payments 824 844 851 835 813 796 Current portion of long-term debt Total current liabilities 5,737 5,722 5,791 5,366 8,693 11,493 Loans and borrowings 3,800 3,554 3,321 3,078 2,845 4,354 Convertible debentures Debenture conversion options Private placement warrants 950 740 564 574 Total liabilities 9,537 10,226 9,851 9,008 12,112 15,847 Shareholders’ equity Capital stock, warrants and rights 31,253 42,561 46,211 46,616 46,585 46,885 Contributed surplus and subsidiary options 9,472 9,910 8,281 13,148 13,157 14,103 Déficit (28,586) (31,616) (32,002) (32,347) (31,973) (32,957) Total equity attributable to non-controlling interest 1,128 2,833 3,053 3,363 4,855 4,753 Liabilities and Shareholders’ Equity 22,803 33,914 35,394 39,788 44,736 48,632Source: Company ReportsBURRILL INSTITUTIONAL RESEARCH 41
  • 42. Neptune Technologies & Bioressources, Inc. August 21, 2012Exhibit 31: Neptune Technologies & Bioressources Inc. (NEPT) - Financing History Security Date Shares Price Gross Proceeds Shares 05-02-2011 2,722,222 $2.25 $6,125,000 Shares 05-02-2011 3,062,835 $2.15 $6,585,095 Shares 10-13-2010 1,430,541 $1.85 $2,646,500 Shares 11-24-2006 1,500,000 $3.00 $4,500,000 Shares 01-18-2006 4,619,000 $1.00 $4,619,000 Shares 07-14-2004 3,275,922 $0.20 $655,184 Shares 05-30-2003 5,940,675 $0.67 $3,959,673 Shares 07-05-2001 5,000,000 $1.00 $5,000,000 Total 27,551,195 $1.24 $34,090,452Source: Company ReportsExhibit 32: Neptune Technologies & Bioressources Inc. (NEPT) – Capital Structure Total Cash Number of Expiration FY 2012 - (29th February 2012) Exercise Price Value of shares Date Exercise PriceCapitalizationCommon Stock Outstanding 49,688,843 N/A N/A N/AOptions - Outstanding 3,768,000 $2.46 2-28-2014 $ 9,269,280Options- Available for Grant 2,378,560 N/A N/A N/AWarrants - Employees and Directors -Warrants - Non-Employees - Series E Broker Warrants - Warrant issued to lender - Warrant issued with Private placement (in USD) 680,556 $2.75 11-3-2012 $ 1,871,529 Warrant issued with Private placement 765,709 $2.65 11-3-2012 $ 2,029,129Other securities:Sum of Shares Outstanding, Outstanding Options,Options Available for Grant, Outstanding WarrantsFully Diluted Shares 57,281,668Source: Company ReportsBURRILL INSTITUTIONAL RESEARCH 42
  • 43. Neptune Technologies & Bioressources, Inc. August 21, 2012BURRILL MERCHANT ADVISORS RATING SYSTEM: Burrill Merchant Advisors employs a three tier ratingsystem for evaluating both the potential return and risk associated with owning common equity shares of rated firms. Theexpected return of any given equity is temeasured on a RELATIVE basis of other companies in the same sector, asdefined by First Call. The price objective is calculated to estimate the potential movement in price a given equity couldachieve given certain targets are met over a defined time horizon. Price objectives are subject to exogenous factorsincluding industry events and market volatility. The risk assessment evaluates the company specific risk and accounts forthe following factors, maturity of market, maturity of technology, maturity of firm, cash utilization, and valuationconsiderations. Potential factors contributing to risk: relatively undefined market, new technologies, immature firm, highcash burn rates, intrinsic value weighted toward future earnings or events.RETURN ASSESSMENT  Market Outperform (Buy): The common stock of the company is expected to outperform a passive index comprised of all the common stock of companies within the same sector, as defined by First Call.  Market Perform (Hold): The common stock of the company is expected to mimic the performance of a passive index comprised of all the common stock of companies within the same sector, as defined by First Call.  Market Underperform (Sell): The common stock of the company is expected to underperform a passive index comprised of all the common stock of companies within the same sector, as defined by First Call.RISK ASSESSMENT  Speculative - The common stock risk level is significantly greater than market risk. The stock price of these equities is exceptionally volatile.  Aggressive - The common stock risk level is materially higher than market level risk. The stock price is typically more volatile than the general market.  Moderate - The common stock is moderately risky, or equivalent to stock market risk. The stock price volatility is typically in-line with movements in the general market.BURRILL INSTITUTIONAL RESEARCH 43
  • 44. Neptune Technologies & Bioressources, Inc. August 21, 2012 $6 Rating and Price Target History for: Neptune Technologies & Bioressources (NEPT) as of 8/19/12 $5 $4 $3 $2 $1 $0 8/19/09 11/19/09 2/19/10 5/19/10 8/19/10 11/19/10 2/19/11 5/19/11 8/19/11 11/19/11 2/19/12 5/19/12 8/19/12RATING SUMMARY Distribution of Ratings Table IB Serv./Past 12 MosRating Count Percent Count PercentMarket Outperform (MO) 2 100% 0 0%Market Perform (MP) 0 0% 0 0%Market Underperform (MU) 0 0% 0 0%Total 2 100% 0 0%BURRILL INSTITUTIONAL RESEARCH 44
  • 45. Neptune Technologies & Bioressources, Inc. August 21, 2012Investment Banking Services include, but are not limited to, acting as a manager/co-manager in the underwriting orplacement of securities, acting as financial advisor, and/or providing corporate finance or capital markets-related servicesto a company or one of itsADDITIONAL DISCLOSURESBurrill Merchant Advisors. (the "Firm") is a member of FINRA and SIPC and a registered U.S. Broker-Dealer.ANALYST CERTIFICATIONI, Elemer Piros, Ph.D., hereby certify that the views expressed in this research report accurately reflect my personal viewsabout the subject company(ies) and its (their) securities.None of the research analysts or the research analysts household has a financial interest in the securities of NeptuneTechnologies & Bioressources, Inc. (including, without limitation, any option, right, warrant, future, long or shortposition).As of June 30, 2012 neither the Firm nor its affiliates beneficially own 1% or more of any class of common equitysecurities of Neptune Technologies & Bioressources, Inc.Neither the research analyst nor the Firm has any material conflict of interest with Neptune Technologies &Bioressources, Inc., of which the research analyst knows or has reason to know at the time of publication of this researchreport.The research analyst principally responsible for preparation of the report does not receive compensation that is based uponany specific investment banking services or transaction but is compensated based on factors including total revenue andprofitability of the Firm, a substantial portion of which is derived from investment banking services.The Firm or its affiliates did not receive compensation from Neptune Technologies & Bioressources, Inc. for anyinvestment banking services within twelve months before, but intends to seek compensation from the companiesmentioned in this report for investment banking services within three months, following publication of the research report.Neither the research analyst nor any member of the research analysts household nor the Firm serves as an officer, directoror advisory board member of Neptune Technologies & Bioressources, Inc.The Firm does not make a market in Neptune Technologies & Bioressources, Inc. securities as of the date of this researchreport.Any opinions expressed herein are statements of our judgment as of the date of publication and are subject to changewithout notice.Reproduction without written permission is prohibited. The closing prices of securities mentioned in this report are as ofAugust 20 2012.Additional information is available to clients upon written request. For complete research report on Neptune Technologies& Bioressources, Inc., please call (415) 591-5453.Readers are advised that this analysis report is issued solely for informational purposes and is not to be construed as anoffer to sell or the solicitation of an offer to buy. The information contained herein is based on sources which we believeto be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary ofthe available data. Past performance is no guarantee of future results.BURRILL INSTITUTIONAL RESEARCH 45