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NEPT Catalyst Research | June 18, 2012

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Neptune Technologies & Bioresources, Inc. (NEPT) as covered by Catalyst Equity Research

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NEPT Catalyst Research | June 18, 2012

  1. 1. Joseph Pantginis, Ph.D., (646) 358-1907 jpantginis@roth.com Raluca Pancratov, Ph.D., (646) 358-1914 rpancratov@roth.com Sales (800) 933-6830, Trading (800) 933-6820 COMPANY NOTE | EQUITY RESEARCH | May 22, 2012Healthcare: BiotechnologyNeptune Technologies & Bioressources | NEPT - $2.91 - NASDAQ| BuyCompany UpdateStock Data NEPT: Further Steps to Strengthen IP and52-Week Low - High $2.02 - $4.66 Commercial Profile for NKOShares Out. (mil) 49.69Mkt. Cap.(mil) $144.6 Neptune filed for Reexamination of an Australian patent granted to its3-Mo. Avg. Vol. 108,092 competitor Aker. Neptune believes that the claims of Akers patent are12-Mo.Price Target $9.00 obvious, given previous opinions of the U.S. and European Patent Offices,Cash (mil) $17.7 and its activities do not infringe Akers IP Separately, Neptune obtained the .Tot. Debt (mil) $0.0 sustainability certification "Friend of the Sea" that can be extended to its krill EPS $ oil distributors. Yr Feb —2011— —2012E— —2013E— Event Curr Curr Neptune requested re-examination of the AU2008231570 Australian patent 1Q 0.01A (0.03)A (0.02)E granted to competitor Aker Biomarine, as it believes the claims of this patent 2Q 0.01A (0.04)A (0.02)E are obvious given prior publications and patents. According to Neptune, its 3Q 0.04A (0.01)A (0.01)E activities do not infringe its competitors patents, but the company believes that 4Q (0.04)A (0.01)E 0.02E YEAR 0.01A (0.09)E (0.03)E Akers claims are invalid, based on previously issued European and U.S. patent P/E NM NM NM office opinions. Separately, Neptune obtained a sustainability certification from the international organization "Friends of the Sea", which will enable the Revenue ($ millions) company and the distributors of NKO to label products as "eco-friendly". Yr Feb —2011— —2012E— —2013E— Impact Curr Curr We view as positive Neptunes proactive efforts to maintain its strong IP 1Q 4.2A 4.3A 5.2E position in Australia. We also believe Neptune benefits from key patents 2Q 4.1A 4.4A 5.3E 3Q 4.3A 5.1A 6.6E issued in the U.S. covering krill-derived omega-3 phospholipids, active and 4Q 4.1A 5.2E 9.5E enforceable even while undergoing re-examination by the USPTO at Akers YEAR 16.7A 18.9E 26.5E request. With the sustainability certification and eco-friendly label, NKO may see an expansion of its commercial profile, in our belief. Neptunes efforts in NEPT One-Year Price and Volume History this direction are further underscored by an active marketing and branding 1.2 5.50 strategy in North America with additions of key distributors and of a celebrity 1.0 5.00 4.50 spokesperson. The stock is poised for significant growth this year, in our 0.8 4.00 view, with key top line results from two ongoing Phase II CaPre clinical 0.6 3.50 studies conducted by Acasti in Canada. Data from an open label study in 0.4 3.00 2.50 hypertriglyceridemia are anticipated mid-year, and data from a randomized, 0.2 2.00 double blind Phase II study are expected by the end of 2012. These results, in 0.0 1.50 addition to clinical PK/PD data garnered to date by Acasti, will likely support Aug-11 Sep-11 Nov-11 Dec-11 May-12 Jun-11 Feb-12 Mar-12 Oct-11 Jan-12 Apr-12 Jul-11 Vol (m) Price the commencement of a potential pivotal trial in the U.S. by the end of 2012. Action We reiterate our Buy rating and $9 target. Based on the revenue growth potential for the multiple krill oil initiatives, we believe Neptune warrants a higher valuation. We believe that the Neptune/Acasti story has been significantly de-risked based on the success of the overall omega-3 market, with both Lovaza and AMR101 as well as multiple published studies setting the stage for Neptune’s anticipated commercialization success. Intraday price: $2.97, 9:52am ET, 5/22/12 Important Disclosures & Regulation AC Certification(s) are located on page 6 to 7 of this report. Roth Capital Partners, LLC | 888 San Clemente Drive | Newport Beach CA 92660 | 949 720 5700 | Member FINRA/SIPC
  2. 2. NEPTUNE TECHNOLOGIES & BIORESSOURCES Company Note - May 22, 2012 VALUATION We reiterate our Buy rating and $9.00 price target. Our valuation of Neptune is based on a sum of the parts analysis: s Probability weighted clinical net present value (NPV) model of the pharmaceutical, CaPre, initial cardiovascular opportunity with Neptune’s Acasti subsidiary. s A discounted earnings valuation on Neptune’s core revenue and earnings on the sale of bulk krill oil (primarily NKO currently). Factors that could impede shares of Neptune from reaching our price target include negative data readouts from ongoing clinical studies, any perceived delays in the CaPre regulatory path as well as Neptunes ability to continue to fund its operations and monetize its expansion plans for NKO manufacturing. RISKS s Capacity expansion. Neptune is currently at or near full capacity in the manufacturing of NKO. The company is now in the expansion phase for its Sherbrooke Canada facility with the goal of taking the current capacity of 130,000 kg per year to >400,000 kg per year in 2014 and approximately doubled over the next year. In line with this capacity expansion is the expectation for increased revenue growth. Any potential delays in the timelines in building out the expansion could have a deleterious effect on the company’s business model. s Time behind the competition. The medical benefits of omega-3’s, specifically pharmaceutical grade formulations (Lovaza, AMR101, CaPre) have been shown in multiple clinical trials. Drugs such as Lovaza have laid important groundwork as the market prepares for additional and differentiated products. To this end, AMR101 has the potential to significantly impact Lovaza’s market share, in our belief. Neptune/Acasti’s CaPre is entering a large Phase II study in high triglyceride patients. Therefore the product is several years behind AMR101 for potential commercialization. s Market perception and education for differentiated profile of krill oil (NKO/CaPre). While potential CaPre pharmaceutical sales should be driven by physician prescribing habits for patients with high triglycerides, we believe patients still need to be educated about the differentiation of krill oil compared to the multitude of omega-3 products available both off the shelf and through Lovaza and potentially AMR101 prescriptions. While we do not believe this is a large risk for the company, Neptune/Acasti will need to be cognizant of addressing the market properly. s Financing and clinical trial risks. As with all drug development companies the need to continually fund drug development exists. Should Neptune not be able to secure sufficient funding to grow its underlying business, it could significantly impact the valuation of the shares. The company does have the potential to offset this risk by having a revenue stream which is expected to grow from the sale of bulk krill oil to distributors and subsidiaries. Additionally the pharmaceutical development pathway being pursued by Acasti and NeuroBioPharm are critical to Neptunes success. Any failed or inconclusive clinical trials could significantly impact Neptunes shares. COMPANY DESCRIPTION Neptune Technologies & Bioressources Inc. researches, develops and commercializes proprietary bioactive ingredients and products with the goal of superior added-value and clinically proven health benefits. The Company extracts a range of bioactive ingredients such as novel proprietary omega-3 phospholipids from abundant yet underexploited marine biomass including Krill, a cold deep water zooplankton. Neptune’s first commercially available product is Neptune Krill Oil (NKO®), which represents marine based omega-3 phospholipids with potential in cardiovascular, cognitive and anti-inflammatory disorders. Neptune is pursuing market opportunities in the nutraceutical market including dietary supplements and functional foods. The Company is also pursuing opportunities in the pharmaceutical market through its pharmaceutical subsidiaries, Acasti and NeuroBioPharm (including medical food, over-the-counter and prescription drug applications). Page 2 of 7
  3. 3. NEPTUNE TECHNOLOGIES & BIORESSOURCES Company Note - May 22, 2012 Page 3 of 7
  4. 4. NEPTUNE TECHNOLOGIES & BIORESSOURCES Company Note - May 22, 2012 (Cdn$ in millions except per share data) - February fiscal year Profit & Loss 2010A 2011A 2012E 2013E 2014E 2015E 2016E License and milestone 0.0 0.0 0.0 1.0 1.8 4.5 8.2 Contract manufacturing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Product and royalty 12.7 16.7 18.9 25.5 34.6 37.3 42.7 Other revenues 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Revenues 12.7 16.7 18.9 26.5 36.4 41.8 50.9 CoGS 11.2 13.9 9.1 12.8 17.3 18.7 21.4 Gross Profit 1.5 2.8 9.8 13.8 19.1 23.2 29.6 Gross margin 12% 17% 52% 52% 52% 55% 58% G&A 0.0 0.0 10.8 11.1 11.2 11.3 11.6 R&D 2.7 2.5 5.3 5.5 5.6 5.7 5.7 Other op ex 1.9 2.1 (0.0) 0.0 0.0 0.0 0.0 EBIT (3.1) (1.8) (6.2) (2.9) 2.3 6.2 12.3 EBIT margin nm nm nm nm 6% 15% 24% Depreciation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Amortisation Intangibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA (3.1) (1.8) (6.2) (2.9) 2.3 6.2 12.3 EBITDA margin nm nm nm nm 6% 15% 24% Non operating expenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest Income/Other 2.3 2.8 2.4 2.0 0.4 0.6 1.1 Interest expense 0.7 0.4 0.4 0.4 0.2 0.2 0.2 EBT (1.5) 0.5 (4.3) (1.3) 2.5 6.5 13.2 EBT margin nm 3% nm nm 7% 16% 26% Provision for taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.7 Net Income (1.5) 0.5 (4.3) (1.3) 2.5 6.5 12.5 Participation of preffered stock (0.0) (0.0) 0.0 0.0 0.0 0.0 0.0 Net Income to common (1.5) 0.5 (4.3) (1.3) 2.5 6.5 12.5 net margin nm 3% nm nm 7% 16% 25% NoSH -basic 37.9 40.5 49.6 50.0 50.5 55.0 55.5 NoSH-diluted 37.9 41.1 49.6 52.0 53.5 59.0 60.0 EPS - basic (0.04) 0.01 (0.09) (0.03) 0.05 0.12 0.23 EPS - diluted (0.04) 0.01 (0.09) (0.02) 0.05 0.11 0.21 Source: Company documents and ROTH Capital Partners estimates Page 4 of 7
  5. 5. NEPTUNE TECHNOLOGIES & BIORESSOURCES Company Note - May 22, 2012 Quarterly P&L May Aug Nov Feb May Aug Nov Feb February fiscal year (Cdn$) Q112A Q212A H112A Q312A 9M12A Q412E FY12E Q113E Q213E H113E Q313E 9M13E Q413E FY13E License and milestone 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 1.00 1.0 Contract manufacturing 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.0 Product and royalty 4.28 4.35 8.64 5.12 13.76 5.16 18.9 5.20 5.25 10.45 6.55 17.00 8.54 25.5 Other revenues 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.0 Revenues 4.28 4.35 8.64 5.12 13.76 5.16 18.9 5.20 5.25 10.45 6.55 17.00 9.54 26.5 CoGS 2.06 2.13 4.19 2.39 6.58 2.52 9.1 2.55 2.56 5.11 3.20 8.31 4.46 12.8 Gross Profit 2.22 2.22 4.45 2.73 7.17 2.65 9.8 2.65 2.69 5.34 3.35 8.69 5.08 13.8 Gross margin 52% 51% 51% 53% 52% 51% 52% 51% 51% 51% 51% 51% 53% 52% G&A 2.46 2.75 5.21 2.88 8.09 2.69 10.8 2.70 2.75 5.45 2.77 8.22 2.89 11.1 R&D 0.74 1.50 2.23 1.71 3.94 1.33 5.3 1.35 1.37 2.72 1.40 4.12 1.42 5.5 Other op ex -0.01 0.00 -0.01 0.00 -0.01 0.00 (0.0) 0.00 0.00 0.00 0.00 0.00 0.00 0.0 EBITDA (1.0) (2.0) (3.0) (1.9) (4.8) (1.4) (6.2) (1.4) (1.4) (2.8) (0.8) (3.6) 0.8 (2.9) EBITDA margin nm nm Non operating expenses 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.0 Net Interest Income/Other 0.14 0.25 0.40 1.36 1.75 0.65 2.4 0.50 0.50 1.00 0.50 1.50 0.50 2.0 Interest expense 0.44 0.00 0.44 0.00 0.44 0.00 0.4 0.00 0.00 0.00 0.00 0.00 0.40 0.4 EBT (1.3) (1.8) (3.0) (0.5) (3.5) (0.7) (4.3) (0.9) (0.9) (1.8) (0.3) (2.1) 0.9 (1.3) EBT margin nm nm Provision for taxes 0.00 0.00 0.00 0.00 0.00 0.00 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.0 Participation of preferred stock Net Income to common (1.3) (1.8) (3.0) (0.5) (3.5) (0.7) (4.3) (0.9) (0.9) (1.8) (0.3) (2.1) 0.9 (1.3) net margin nm nm NoSH-basic 48.3 49.0 48.69 49.58 48.99 49.10 49.60 50.0 50.0 50.00 50.00 50.00 50.00 50.00 NoSH-diluted 48.3 49.0 48.69 49.58 48.99 50.00 49.60 50.0 50.0 50.00 50.00 50.00 52.00 52.00 EPS - basic (0.03) (0.04) (0.06) (0.01) (0.07) (0.01) (0.09) (0.02) (0.02) (0.04) (0.01) (0.04) 0.02 (0.03) EPS - diluted (0.03) (0.04) (0.06) (0.01) (0.07) (0.01) (0.09) (0.02) (0.02) (0.04) (0.01) (0.04) 0.02 (0.02) Source: Company documents and ROTH Capital Partners estimates Page 5 of 7
  6. 6. NEPTUNE TECHNOLOGIES & BIORESSOURCES Company Note - May 22, 2012 Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Disclosures: ROTH makes a market in shares of Neptune Technologies & Bioressources and as such, buys and sells from customers on a principal basis. On September 28, 2010, ROTH changed its rating system in order to replace the Hold rating with Neutral. On May 26, 2011, ROTH changed its rating system in order to incorporate coverage that is Under Review. Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first note written during the past three years. Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliate received compensation for investment banking services in the past 12 month. Distribution of IB Services Firmwide IB Serv./Past 12 Mos. as of 05/22/12 Rating Count Percent Count Percent Buy [B] 185 70.34 59 31.89 Neutral [N] 61 23.19 6 9.84 Sell [S] 1 0.38 0 0 Under Review [UR] 16 6.08 8 50.00 Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at any given point in time, our investment rating on a stock and its implied price movement may not correspond to the stated 12- month price target. Ratings System Definitions - ROTH employs a rating system based on the following: Buy: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return of at least 10% over the next 12 months. Neutral: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return between negative 10% and 10% over the next 12 months. Sell: A rating, which at the time it is instituted and or reiterated, that indicates an expectation that the price will depreciate by more than 10% over the next 12 months. Under Review [UR]: A rating, which at the time it is instituted and or reiterated, indicates the temporary removal of the prior rating, price target and estimates for the security. Prior rating, price target and estimates should no longer be relied upon for UR-rated securities. Not Covered [NC]: ROTH does not publish research or have an opinion about this security. Page 6 of 7
  7. 7. NEPTUNE TECHNOLOGIES & BIORESSOURCES Company Note - May 22, 2012 ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright 2012. Member: FINRA/SIPC. Page 7 of 7

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