|By A.J. Deniken, Contributor|
|Tuesday, 15 January 2013 03:25|
We note that management sees this call as an “opportunity,” and we expect that we will find management is making progress on their action plan on most if not all fronts. In our December 19th, 2012 article on Neptune, “Smart Investors Spot Profitable Upside in Neptune’s Recovery Plan” we stated the Company has ongoing value as a reaction to the precipitous fall in the stock price, “The facts are simple; Neptune will have the Sherbrook up and running in about six months. The Company should be able to maintain supplies to customers and maintain revenues for a business segment that has been profitable for 3 years. Neptune has valuable assets; plenty of cash and the losses will be offset to some extent by insurance further preserving shareholder value. When the plant reopens, Neptune should be able to produce nearly as much in revenues as the September quarter. The Company will have new manufacturing partners, and there will be no constraints holding back Neptune from growing as much as their marketing efforts will allow. Acasti Pharma will be further along in its Phase II and preparing for its Phase III.” This quote gives us subjects to focus upon in the upcoming call. We will go through each below.
The first thing we will be looking for is how the rebuilding process at the Sherbrooke plant is proceeding. We expect that the plant is proceeding on schedule, although construction during the Canadian Winter can be difficult. Along with the rebuilding update could be an insurance update. Management has stated that they have property insurance for around $20 million. Management also stated they have Business Interruption Insurance that could offset some of their losses due to the accident. One point that management probably will not touch upon regarding the facility are the rumors that they did not have proper permitting for the expansion as these rumors have been proven false.
More important will be an update regarding the Company’s ability to fulfill its customers’ orders of Neptune Krill Oil (NKO) and maintain revenue levels. We believe that there will be some falloff of revenues in the quarterly announcement, but not nearly a drastic as some might expect. The important fact to watch for is how the Company has been able to secure product manufacturing and maintain reliable delivery of product to customers without their own manufacturing facility. Management has spoken in the past about establishing new relationships with global manufacturing partners, and seeing them come to fruition should give investors comfort that the Company will be able to meet near-term product deliveries and grow long-term. As we stated in the previous article, we expect the gross margins to be well off in the quarter.
We believe that Neptune will be able to leverage their new outsourced manufacturing relationships to allow the company to grow more quickly in the future by outsourcing the majority of their manufacturing needs. With established manufacturing relationships, Neptune will not have to continue to grow their own manufacturing capabilities. This will save Neptune major capital expenditures in the future, as they were planning to grow the Sherbrooke facility to 500,000kg/year by 2014. This third plant expansion, with an expected price tag of $5 million, may no longer be necessary. We do not expect management to address this as it is our expectation of further manufacturing expansion, which can help Neptune accelerate their growth over time.
Lastly, we believe that management will give an update on the pharmaceutical divisions. In December Acasti Pharma gave a positive update on CaPre® that seemed to be disregarded by the investment community. Acasti released interim data on its Phase II double blinded, placebo controlled clinical study for CaPre®. The data showed a statistically significant 25% (p<0.05) reduction in triglycerides after eight weeks of treatment in 19 patients with baseline triglyceride levels between 204 and 476mg/dl. CaPre® also decreased Low Density Lipoprotein (LDL), Very Low Density Lipoprotein (VLDL) and non-HDL lipids and increased High Density Lipoprotein (HDL). An update on next steps and recent progress for Acasti would be in line. Since the pharmaceutical divisions are seen to be major value creators for the Company an update on the neurology division should be included in the call.
We stated in the last article, “We see a path for the Company to again produce at the sales and margin levels of the September quarter beginning in about six months, and it is possible for Neptune to reclaim its lost value over the course of the next 12 months.” When we wrote the last article the stock was at $1.71/share; as of the close on Monday, the stock price was $2.40 a rise of over 35% in just under a month. If the news from the call is positive, it is reasonable to conclude that the stock price can return to its pre-accident levels which would be another 100% up from here.