Shares of Neptune Technologies and Bioresources (Nasdaq: NEPT) rose from $2.30 to close at $2.52 (+5.0%) on Wednesday after we introduced our premium subscribers to the company. NEPT could easily be one of the most compelling undervalued stocks we have come across for some time. The story is simultaneously complex, yet appealingly simple.
Those who take Omega-3 supplements, fish oil, or GSK’s “pharmaceuticalized fish oil” prescription drug Lovaza will likely “get” Neptune's story very quickly. After hearing this story I began to research the published data and I am convinced that this stock has multiple shots at becoming a winner.
Let me start by telling you that Neptune has a wide variety of patented substances and processes, focusing on developing and selling Omega-3 phospholipids (derived from krill) in 3 different markets: dietary supplements (nutraceuticals); food/beverage ingredients; and pharmaceuticals.
Neptune’s Omega-3 nutraceutical, Neptune Krill Oil (NKO) has shown efficacy in human trials in 3 key areas: 1) triglyceride and good-and-bad-cholesterol management (hyperlipidemia), 2) inflammation/arthritis, and 3) adult ADHD. A 120-patient human trial showed that NKO reduced LDL (bad cholesterol) by 33.9%, reduced triglycerides by 11.5%, and increased HDL (good cholesterol) by 43.3%. Anyone who knows the cholesterol/hyperlipidemia space knows that finding a single substance that has these effects (with NO toxicity) is like finding the Holy Grail—and NKO has no toxicity (it has GRAS status from the FDA).
It should be noted that the Chairman of the Scientific Advisory Board of one of Neptune’s two pharmaceutical subsidiaries (discussed in more detail below) is Dr Steven Nissen, a globally recognized leader in heart disease and LDL/HDL who appears on CNBC from time to time, and who (more importantly) is the Chairman of the Cleveland Clinic’s department of Cardiovascular Medicine, and Past President of the American College of Cardiology.) It is difficult to find someone of higher standing and credibility in the cardiovascular medicine and drug development field.
From an investment standpoint, one of the great things about Neptune is that it has the blue-sky upside of a biotech pursuing (through its two subsidiaries Acasti Pharmaceuticals and NeuroBiopharm) multiple blockbuster applications in drug development, including 1) triglyceride and cholesterol management (hyperlipidemia), 2) diabetes management, and 3) neurological applications (such as ADHD and Alzheimers), yet it avoids the classic pitfall of a cash-burning biotech (running out of money) because Neptune is already generating cashflow and earnings from the sale of their nutraceutical Omega-3 product, Neptune Krill Oil (NKO), while the subsidiary developing the cardiovascular drugs, Acasti Pharma, is scheduled to start generating revenues from the sales of its Medical Food and OTC products in the very near term.
A key element of the story is that Neptune Krill Oil (NKO) which appears to be the best source of Omega-3s available today. In a future piece I plan to go into this aspect of the story in detail, but let's start with this:
- Krill oil is the only source of Omega-3s that carries the Omega-3s on phospholipids (which is why krill oil Omega-3s are so much more bio-available and efficacious than fish oil or flax oil Omega-3s), and
- Neptune’s NKO is the source of Omega-3s that also naturally carries the highest amount of a powerful antioxidant (astaxanthin) attached to the Omega-3s (which is why Neptune’s krill oil is superior to any other krill oil; fish oil does not contain any astaxanthin.)
- Those who take fish oil (or Lovaza) often experience fishy burps and reflux; this does not happen with krill oil (This is not a therapeutic advantage, but it is certainly an important element of patient comfort and patient compliance.)
I am going to try and simplify the story by presenting Neptune value on a 3-year, sum-of-4-parts basis.
In 3 years:
- The cardiovascular/cholesterol-focused pharmaceutical subsidiary could have a value to Neptune of $15/share or more--based on superiority to GSK’s billion dollar per year “pharmaceuticalized fish oil” drug Lovaza, and parallels with Amarin Corp (AMRN on NASDAQ).
- The cashflow generating nutraceutical business could have a value in the $5-$10/share range based on a growth-company earnings multiple.
- The food ingredients business could have a value to Neptune in the $5-$10/share range, based on publicly traded comparables.
- Neptune’s neurologically-focused pharmaceutical subsidiary Neurobiopharm could have a value to Neptune equal to or exceeding the value of their cardiovascular/hyperlipidemia focused pharma sub.
Understanding Neptune’s Cardiovascular Subsidiary, Acasti
This part of Neptune has the clearest visibility to having a $1billion+ valuation on its own. In 3 years, this part of Neptune could very well be where Amarin Corp (Nasdaq:AMRN) is today, with a market cap in the $1billion-$1.5billion range. That range of values for Acasti translates into $13-$19/share in value to Neptune shares. It is important to note that both AMRN and this part of Neptune derive their value from their superiority to Lovaza, GSK's $1.2Billion/year "pharmaceuticalized fish oil" drug which is the gold standard for treating high triglycerides. This is important to note because if AMR-101 runs into trouble in its second Phase III trial, it does NOT mean the value of this part of Neptune is lessened, because this part of Neptune derives its value from its clear superiority to GSK’s Lovaza. Thus, Lovaza will still be a blockbuster drug, selling over $1billion/year, regardless of what happens to AMR-101 in the clinic. Indeed, Neptune/Acasti appear to be sitting in a win-win situation: if AMR-101 runs into trouble in the clinic, CaPre will be the only drug candidate clearly superior to Lovaza; if AMR-101 is ultimately successful, that still doesn’t change the fact that there is very strong evidence to suggest that CaPre will be superior to AMR-101, and the publicly traded AMRN will provide a clear benchmark of value for Neptune.
Looking at Neptune's human trial results with NKO, together with the pre-clincial results with CaPre (Acasti's drug candidate) mean we should have a very high degree of confidence that CaPre will be superior to both Lovaza and Amarin’s AMR-101. Indeed, looking at the table inserted below, it is clear that Amarin’s AMR-101 is one increment better than Lovaza (AMR-101 has about the same effect on triglycerides, but does not increase LDL). Neptune’s CaPre, however, appears likely to be at least two increments better than Lovaza (we can have almost 100% confidence that CaPre will lower LDL and raise HDL, while Lovaza does neither), and perhaps three (CaPre’s results from head-to-head pre-clinical trials with Lovaza demonstrate that CaPre lowers triglycerides substantially more than Lovaza.) Similarly, we can have a very high degree of confidence that CaPre will be two increments better than Amarin’s AMR-101. (A possible fourth increment of improvement over Lovaza—and third over ARM-101—is that the lower dose, smaller capsule size, and absence of fishy burps and reflux of CaPre relative to both Lovaza and AMR-101 is known to increase patient compliance, leading to an overall more successful drug.)
M&A transactions in the cholesterol/hyperlipidemia space further buttress my contention that this part of Neptune will have a value of well over $1billion, and possibly closer to $2billion:
- Reliant Pharmaceuticals (the developer of Lovaza) was bought by GSK in 2009 for US$1.65billion. (It is truly remarkable that GSK was able to increase sales of Lovaza to over $1billion within less than 2 years of acquiring Reliant!)
- GSK bought Sirtris Pharmaceuticals for $720million (after only seeing the Phase I results).
- Abbott bought KOS Pharmaceuticals for $3.7billion in 2006 (primarily to get KOS’s HDL-boosting drug Niaspan.) It is notable that Niaspan is also simply a “pharmaceuticalized nutraceutical”, in that Niaspan is simply “pharmaceuticalized Niacin”—the dietary supplement that you can buy in any health food or drug store.
- Pfizer bought Esperion for US$1.2billion in 2003, after successful Phase IIb results for Esperion’s HDL-boosting drug candidate were published in November of 2003.
One of the notable aspects of this part of Neptune is how early in the drug development process significant value can be created—witness the acquisition of Sirtris for US$720million after Phase I trial results were published, and witness the acquisition of Esperion for US$1.2billion after PhaseIIb results were published. Publicly traded comps have also highlighted significant value creation as cholesterol management drug development companies enter PhaseIIb: a development stage biotech company that had a drug candidate that looked promising for boosting HDL (good cholesterol) had a market cap of around $150million for much of January and February 2010, when all of a sudden (in part because of positive statements by Dr Steven Nissen) the market became aware that this company had a drug candidate that was just beginning Phase IIb trials, and the market cap shot up to almost $400million. This part of the parallel with Neptune is quite encouraging, considering Neptune’s cardiovascular/cholesterol-focused sub is about to enter a 300-patient Phase IIb trial, sometime in the next 2 months, and Neptune’s total market cap is currently only $100million.
Understanding Neptune’s nutraceutical business (selling NKO)
In the meantime, as we wait for value creation and recognition in the cardiovascular pharma subsidiary, the nutraceutical business will continue to generate accelerating earnings and cashflow, as Neptune expands their existing sales channel, and launches products with companies like Bayer. Indeed, with sales in the related-but-distinct global fish oil market topping $2billion already—and krill oil demonstrably superior to fish oil on every marker of cardiovascular or inflammatory disease—it seems quite feasible that Neptune should be able to grow their revenue from NKO sales to over $100mm within 3-5 years, at a 15% net margin. $15mm in earnings times a 20+ mulitple = $300mm+ market cap from that part of the business alone. (It is notable that Neptune has been cash flow AND net income positive in each of the past 3 quarters, despite the drag from the spending on Acasti’s drug candidate.)
I mentioned a product launch with Bayer. Actually, a Bayer NKO-based dietary supplement was “soft launched” in Q1 of 2010. But all Bayer did at the time was put up a web-site and phone number from which you could order the new product. Basically, Bayer has spent a year figuring out how they want to approach a “hard” launch, the timing of which is still uncertain. The Bayer-Neptune product is currently only available in the US, but hopefully that will change as Bayer ramps up its sales and marketing efforts over the course of 2011. The latest news from the Bayer front came a few days ago: http://yhoo.it/bayernews
Understanding the food ingredients business
Frankly, this is a part of Neptune that investors have given up on: because it has been so long since the company has communicated about the deals with Nestle and Yoplait, investors assume the deals are dead. In fact, they have just been in stealth mode, progressing through clinical trials with the food products. (This aspect of Neptune requires a separate piece on the technical/regulatory issues around food products sold with Omega-3s.) The great thing is: if Yoplait and/or Nestle decide to launch food products with Neptune ingredients, it is easy to see value creation along the lines of Burcon Nutrascience Corporation (BU on the TSX) or Bioexx Specialty Proteins (BXI on the TSX). Both Burcon and Bioexx are pre-revenue, and yet have market caps in the $300-$500million range. If Neptune’s food ingredients business were to be ascribed that kind of valuation, it would be worth $6-$10/share to Neptune, on its own.
Understanding the second pharma subsidiary, NeuroBiopharm
This 90%-owned subsidiary is one of the free call options embedded in Neptune. Neurobiopharm is going after applications in ADHD and Alzheimers. Currently, investors have completely forgotten about this part of Neptune (if they even knew about it in the first place). Within the next few months, we should have results from an Alzheimer's trial. If this subsidiary "hits", it could be another $1billion+ piece of the puzzle on its own.
One of the exciting aspects of Neptune is that more parts may become visible as more data emerges on NKO and CaPre’s effects on various other health indications. For example, if enough data emerges on the anti-inflammatory/arthritis benefits, perhaps the market will begin to ascribe a separate bucket of value to that indication, and Neptune (or a subsidiary) might begin to run FDA-compliant trials with a drug candidate for that indication. One of the most exciting (and completely unaccounted for in Neptune’s valuation) aspects of Neptune is the data that has been seen on glucose regulation. See the press release from November 4, 2010, which suggests that diabetes management may be an indication to explore in depth in the future.
Framing Neptune as an investment vehicle
Neptune is comprised of:
- A cashflow and earnings generating core that gives the stock more “substance” than most biotechs
- A cardiovascular pharma sub with enormous bluesky that only a handful of investors are watching (and are still undervaluing), and
- Multiple, free call options on a range of opportunities and businesses that on their own could be worth hundreds of millions of dollars (or billions in the case of NeuroBiopharm or a diabetes indication.)
Indeed, right now, investors are getting a free call option on the existing food ingredients business; a free call option on the existing NeuroBiopharm subsidiary; and they are getting free call options on any other indication that the company decides to pursue, whether it is diabetes-related, or inflammation/arthritis-related, or some indication that the company isn’t even aware of yet.
Some key press releases from the past six months:
- November 29, 2010: Neptune Technologies & Bioressources Inc. Reports Completion of Acasti Pharma Comparative Benchmarking Program versus Lovaza: http://bit.ly/versusloveza
- November 4, 2010 release presenting the head-to-head (CaPre versus Lovaza) data in glucose tolerance and regulation: http://bit.ly/clucosestudy
- September 29, 2010 release laying out the health claims that Health Canada has approved for Neptune’s nutraceutical, NKO: http://bit.ly/ia4HxG
Neptune has layers of complexity that will require the publishing of further, more “technical” pieces over the coming months, but has a simplicity and enormity of opportunity that is more compelling.
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