November 15 2012
TLSR: Hugh, you own Neptune Technologies & Bioressources (NTB:TSX; NEPT:NASDAQ), and you also ownAcasti Pharma Inc. (APO:TSX), a majority-owned subsidiary of Neptune. The companies are tied together in development of krill oil products for high serum levels of lipids. They are not micro caps. And last week, an explosion and fire occurred at Neptune's production facility in Quebec. What is your expectation for the future of Neptune and Acasti?
HC: On Oct. 2 Neptune completed a $34M financing, and at that point the company's future never looked better. (I refer readers to my last research letter for a baseline view on Neptune and other core positions in the BluMont Innovation PE Strategy Fund I that apply the venture capital model to public companies.) Unfortunately, a horrendous tragedy befell the company on Nov. 8, when its plant in Sherbrooke, Quebec, exploded. The human tragedy is first and foremost in this horrible turn of events, with 19 workers injured and three killed. But it is the curse of financial analysts and portfolio managers that we need to somehow put those things aside as we grapple with the business aspects of such tragedies. With that in mind I refer your readers to a comment put out by Elemer Piros of Burrill and Company on Nov. 11.
For those not familiar with Elemer Piros: He was the #1 ranked biotech analyst in the U.S. in 2010. He initiated coverage on Neptune in August 2012 with a $7 target. The main takeaway from his comment on Neptune following the explosion was very encouraging from an investment standpoint. He ran a hypothetical worst-case scenario, in which Neptune proves unable to produce product for a full year, and found that this subtracted only $0.68/share from his net present value (NPV). Between this analysis, and Acasti stabilizing at levels higher than I was anticipating, I feel better about where Neptune might go when it reopens. Nothing, however, can make me feel better about the human tragedy involved.
Of course, there will be investors that panic out when the stock reopens, but there seem to be a good number of investors looking at this event to provide a compelling entry point.
TLSR: Amarin Corp.'s (AMRN:NASDAQ) Vascepa (icosapent ethyl) for hypertriglyceridemia has been approved by the FDA. Acasti's CaPre (a purified extract from krill oil) is currently in two phase 2 trials for that same indication. Will uptake and sales of Vascepa be a guide as to how much CaPre can be worth?
HC: First, let me say that it was a relief to read in Acasti's Nov. 12 press release that the company's ability to complete its two phase 2 trials, which are now well under way, is unaffected by the tragedy at Neptune's plant.
That said, I would point out that both Amarin's Vascepa and GSK's Lovaza (omega-3 acid ethyl esters) are guides to what Acasti's CaPre could be worth. We know that GSK sold more than $1B worth of Lovaza per year for several years, and that Reliant Pharmaceuticals Inc. (the company that sold and marketed Lovaza) was bought by GSK for $1.65B. We also know that investors have given Amarin a valuation ranging from $1-3B, on the basis of Vascepa being better than Lovaza in phase 3 trials. (Amarin still has no revenue.) If Acasti's CaPre can be shown to be better than Vascepa in clinical trials, you'd expect to see Acasti with a valuation above that of Amarin. Just for fun: A $1B valuation on Acasti would equate to $10/share, and a $3B valuation would equate to $30/share, after taking into account incremental dilution from the NASDAQ IPO required to raise money for Acasti's pivotal phase 3 trials.
An increasing number of investors in Neptune and Acasti are looking at CaPre as potentially better than Lovaza and Vascepa across all the lipid indications--triglycerides, low-density lipoproteins (LDLs) and high-density lipoproteins (HDLs). If that's the case, and particularly if we can lower LDL by more than 6-10%, we will have a real blockbuster on our hands.