Smart Investors Spot Clear Upside In Neptune's Recovery Action Plan Print
By A.J. Deniken, Contributor   
Wednesday, 19 December 2012 05:14

icon_bottombouncerNeptune Technologies & Bioresources, Inc. (NASDQ: NEPT) has seen its stock fall 45% from its closing price on November 7th. 

On November 8th, Neptune suffered a tragedy, in which their manufacturing facility and inventory were completely destroyed in an explosion that also took the lives of 3 of their employees and injured several others.  The tragic explosion has left the Company without manufacturing facilities and inventory of their flagship Neptune Krill Oil product.  Neptune’s stock price has been falling since and the rate of decline has accelerated in the last few days.  On November 26th, Neptune put out an action plan which management will use as a guideline for returning to normalized business.  With the stock down significantly and the management fighting hard for the future of the Company the question investors find themselves asking is can Neptune recover?

Contrary to some recent positions, Neptune is anything but dead in the water. Investors should look at the business from today forward. If investors take an inventory, they will see that the Company has many valuable assets, plenty of cash on hand, two pharmaceutical subsidiaries, and a plan to move forward from the tragedy to rebuild an efficient, growing and profitable business.  Neptune’s core business, krill oil neutraceuticals, is a growing business that has a large and growing market, growing 70% in 2012 by some estimates, and has been a profitable business segment for Neptune for the last three years. 

Below are the key points from Neptune’s recently unveiled Action Plan:

1.  Resuming its neutraceutical operations and certain levels of sales of its Neptune Krill Oil(R) products to customers in the short term; 

Maintaining key customer relationships and market share, particularly until production of Neptune Krill Oil(R) products can reach pre-incident levels;

Reconstructing an operational plant using the expansion facility that was under completion and certain existing equipment in the expansion, which expansion and equipment do not appear to have suffered considerable damages from the incident;

4. Pursuing partnerships and/or arrangements with one or more strategic partners for the outsourcing of production for Neptune Krill Oil(R) products, both as an interim measure to ensure certain levels of production prior to its new plant being fully operational and as a longer-term strategy to diversify sources and means of production; and

5. P
rudently managing its financial resources while continuing its product development and clinical trials, including defending its patents and intellectual property and supporting as planned the pharmaceutical development of its two subsidiaries, Acasti Pharma Inc. ("Acasti") and NeuroBioPharm Inc. ("NeuroBio"), whose operations have not been interrupted as a result of the incident.

Looking at the Action Plan there are many details that need to be addressed to make it successful.   The primary issue is how to serve their customer base, maintain market share and customers while the rebuilding is taking place.  The rebuilding of the manufacturing facility is key.  In a conversation with the management we asked the important question of not just how long, but what is actually in place?  Neptune was in the process of expanding the Sherbrooke manufacturing facility when the accident occurred.  The facility was about 8 weeks from coming on line.  This first expansion was planned to be a doubling the of capacity of the plant from 150,000kg/year to 300,000kg/year.  A second expansion was to take the plant to 500,000kg/year.  The fact is that the production line of the first expansion was completed.  What this new facility had was the back-end of the process in the manufacturing; this line was to be supplied by the existing front-end process, which is the extraction process.  The front-end of the operation was destroyed.  Neptune is on their way to building the new front-end processing, with machinery ordered and plenty of space available in the expansion facility.  The back-end process equipment already in place is more sophisticated, costly and time consuming equipment, which gives the management confidence they can have the Sherbrooke plant back up and operational in the previously stated six months.  The bottom line on the plant is that much of it is already in place. 

Going back to the plan, items 1, 2, and 4 can be grouped together.  This goes back to the question of how to serve the customer base and maintain market share and customers during the six months until Sherbrooke is operational.  Management has been active in the development of potential manufacturing partners.  These potential partners have been identified and management has engaged in discussions.  Management’s job number one in these discussions is to find available capacity and supply their current customer base and fulfill the current orders.  Due to fulfilling these orders on short notice through other suppliers, Neptune will be able to maintain there revenues, but the margins will be greatly reduced for at least two quarters.  The important fact is Neptune should be able to continue its business with minimal issues for their customers until Sherbrooke is ready to go. 

A benefit of this process is Neptune will have access to multiple suppliers of their formulation of Neptune Krill Oil (NKO).  In the long run, not only will Neptune have the safety of supply diversification, but they will have the potential to outsource the majority of their manufacturing needs.  Neptune will be able to focus on product development, intellectual property development, marketing and the pharmaceutical subsidiaries, while decreasing overall cost and expanding margins.  These relationships may also make the next planned expansion of Sherbrooke to 500,000kg/year unnecessary, saving Neptune up to $5 million of dollars in capital expenditures (according to the October 3rd funding use of proceeds).  At the very least these future partners will alleviate the need for further expansions beyond the 500,000kg/year planned expansion.  In 2004 when Neptune began producing NKO, there were no producers from which to acquire outsourced product and Neptune had to build their own manufacturing facilities.  Now, just over 8 years later, there are many manufacturers willing to go into krill oil manufacturing as krill oil has established a growing global market.

Item number 5 in the action plan has many facets.  “Prudently managing its financial resources,” pretty much sums it up.  In October 2nd Neptune announced the closing of a $34.1 million financing that was led by RBC Capital Markets and JMP Securities, two well-respected brokerage firms.  The investors in the offering were primarily institutional investors.  The current cash position per share is $0.70/share.  This is a significant amount of cash to have on hand to bridge the six months until the manufacturing factory reopens.  On top of that, the Company also has both property damage and business interruption insurance.  In an article released by Reuters, André Godin, CFO of Neptune, stated that the factory was insured for about $20 million and the money would be used to optimize the existing expansion facility at Sherbrooke.  Mr. Godin went on to say that the factory would come online in about six months.  The business interruption insurance will provide some compensation to the company to help cover losses incurred from the immediate outsourcing needs.  These two insurance policies will help limit the impact on the shareholders from this accident, to some extent. 

Item five also discusses “continuing its product development and clinical trials, including defending its patents and intellectual property and supporting as planned the pharmaceutical development of its two subsidiaries, Acasti Pharma Inc. ("Acasti") and NeuroBioPharm Inc. ("NeuroBio").”  These are important issues as it signifies it is still business as usual for the rest of the Company and its subsidiaries.  These items mentioned are also valuation creators for Neptune, as all are important assets to the Company.  A proper valuation analysis, which is not the purpose of this article, would show that the intellectual property of Neptune has substantial value, as the Company has successfully defended and proven the IP’s viability and worth in court several times against competitors’ claims. 

More importantly, Acasti Parma Inc. just 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).  This news increases the value of Acasti, and as a stand-alone it is possible that Acasti is worth more that the current market cap of Neptune. 

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. 

Shortly after Sherbrooke restarts, Neptune overall will be farther ahead as a business, than they were when the accident occurred, with a more efficient structure. 

Neptune could also be more valuable if management executes on its plan.  Some of the current institutional investors have acknowledged, for this article, that they are buyers of the stock at these levels and other are watching closely for potential entry points into the stock. 

Neptune had a market cap of around $250 million, and was growing, at the time the funding in October, and now the Company has a market cap of $100 million.  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. 

There is still some execution risk and the stock is speculative, but Neptune has too many assets, not to further investigate the potential of investing in Neptune based upon the real facts of this Company.   It is reasonable to conclude that the stock price can return to levels prior to the accident over the course of the next 12 months, which would be a very attractive potential ROI for investors from the previous closing price of $1.71/share.

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