Earlier this week, an article was written by a disclosed shorter of Neptune Technologies (NEPT) (NTB.TO) claiming that the company was being pumped by others and that it was ripe to fall. The often repetitive and questionably frequently bolded manifesto quickly became a self fulfilling prophesy, as NEPT declined by approximately 30.5% in the wake of its publication, over the last two days. This is in response to it. I am not a holder of NEPT or any of its subsidiaries, and acknowledge NEPT is a highly speculative equity.
NEPT shares were halted on November 8, in the wake of a fire and explosion at Neptune's production plan in Sherbrooke, Quebec. The incident killed two people and sent 19 to hospital, including four with critical burns, and destroyed Neptune's production plant as well as its stored products. NEPT again began to trade in late November. The company immediately declined by about 30% upon resuming trading, only to quickly appreciate by about 20% before stabilizing. The company remained range-bound for the following two weeks, until this week, when the company suffered an explosion of another kind that was brought about by the above-mentioned shorter.
Despite some legitimate claims stated and often boldly restated in the lengthy bashing article, it bears noting that the some 26-page piece chose to gloss over many of the most important issues relating to Neptune, while going into great depth on tangentially related matters. For example, the article dedicated several pages to a retail brokerage firm that apparently promoted NEPT, John Thomas Financial, but the article quickly comments and moves on when addressing matters such as NEPT's potential insurance payouts and patents. In contrast to the multiple pages worth of attacks actually thrown at John Thomas Financial, just a few brief paragraphs address NEPT's patents and/or the insurance coverage of its recently exploded plant.
To this point, a section titled "Assessment of prospects for any insurance payouts" seems to assess rather little and merely state "the possibility that Neptune will not receive insurance proceeds needs to be carefully considered." Yes, that is what an assessment would be…considering such possibilities and providing a probability of the company being paid by insurance, or being denied, and providing an appraisal or evaluation of the potential payout. No such assessment existed, though the illusion of one was most certainly perpetrated.
The shorter did at least pause to consider the ongoing patent dispute between NEOT and Aker BioMarine, a larger competitor that also produces krill oil, but only to conclude, "both sides are saying that the other is trying to patent something that cannot be patented. This is simply a tactic for preventing one another from selling in major markets."
While it is true that these companies are trying to prevent their competition from selling competing products, that does not mean that either claim is without merit. And so far, Neptune appears to be winning its U.S. disputes against Aker as well as Schiff Nutritional (SHF). This summer the U.S. Patent and Trademark Office allowed one of NEPT's continuation patent applications regarding krill extracts comprising a phospholipid suitable for human consumption. Further, in November, Neptune filed opposition papers against Aker Biomarine's Australian patent for making krill meal, arguing that the process is not new or inventive.
One great truth within the short-seller's declaration was that Neptune has not made money off of its neutraceutical business, and that the krill oil business is getting more crowded and competitive. While these points are legitimate, they fail to account for the fact that most investors in NEPT care very little for its neutraceutical business, but instead allocated into what they know to be a highly speculative equity for the potential approval of a krill oil based pharmaceutical.
Through Neptune's subsidiaries, Acasti Pharma (ACPHF), which it majority owns, and NeuroBioPharm (which NEPT recently began to spin-off), the company is engaged in the research, development and commercialization of natural, marine-derived krill extracts. Krill oil contains nutrients, including omega-3 fatty acids and astaxanthin, an antioxidant.
Studies have indicated that krill oil might be more effective than fish oil at reducing dangerously high cholesterol levels, and also effective at diminishing symptoms of arthritis and inflammatory conditions, among other disorders. More studies are needed to confirm the efficacy of krill oil and its potency versus fish oil, and such studies are likely forthcoming. Nonetheless, to the extent that both fish and krill oils contain omega-3 fatty acids, if these fatty acids are the basis for fish oil's efficacy then krill oil is likely to also be found effective. In theory, krill oil could be a superior basis for an omega-3 treatment. Krill oil carries omega-3s on phospholipids, while fish oil carries them on triglycerides. Additionally, krill oil carries an antioxidant, astaxanthin, which is absent in fish oil.
Investors in NEPT are primarily speculating that NEPT can enter the pharmaceutical market with krill oil-based treatments that would be competitors to omega-3-based pharmaceuticals such as Lovaza, by GlaxoSmithKline (GSK), and Vascepa, by Amarin (AMRN), both of which are prescribed to lower triglycerides and cholesterol. Such drugs supplement and/or compete against statin drugs like Pfizer's (PFE) Lipitor and Merck's (MRK) Zocor. While the statin class of drugs is a multi-billion dollar group, the omega-3 class is still in its infancy.
Neptune's majority-owned Acasti subsidiary is currently in phase II trials with a krill oil based drug candidate named CaPre. Neptune provided an update in regards to the phase II trials on Monday, which was published rather briefly before the short-seller's declaration against the company.
Another factor claimed by the shorter was that NEPT would not be again producing krill oil until 2014. NEPT's Chief Financial Officer, André Godin, told Reuters on Tuesday that production would restart next year, with another factory in Sherbrooke coming on line in about six months, and that the company also intends on diversifying the source of production and that NEPT is in negotiation with several industrial partners to have production outside Canada. Mr. Godin also indicated that the destroyed plant was insured for $20 million and added that the short-seller's claim that NEPT only had 10 remaining employees was inaccurate, instead claiming that after cutting 70 jobs in November, NEPT still had about 50 employees.
NEPT is a speculative equity and one that will likely find its future success or failure tied to its ability to get a krill oil-based prescription drug brought to market. The company had the misfortune of quite literally blowing up its production plant, only to quite figuratively have its equity blown up by an emboldened shorter. This equity will certainly have a volatile near term and is clearly not one for the faint of heart (unlike its krill oil). But if the CaPre finds itself approved, NEPT should benefit comparably to how any small-cap biotech would if it were to have a potential blockbuster approved.