Neptune Technologies (NEPT) has been a strong performer recently. The small-cap krill oil producer appreciated by over 27 percent in the last month, and is actually up about 40 percent since the start of 2013, but the company is still down about 33 percent over the last three months. This extreme volatility in NEPT shares is a manifestation of the sad disaster that hit the company late last year, and speculation over the potential negative consequences that may still stem from it, as well as the potential growth that could hit the krill oil industry in the coming years. The company's recent strength appears to indicate that investors are again becoming comfortable with this speculative equity.
NEPT shares were halted on November 8, following a fire and explosion at Neptune's production plan in Sherbrooke, Quebec. The incident killed two people and another 19 were hospitalized, including four with critical burns. The explosion also destroyed Neptune's production plant and its warehoused cache of krill oil product. When Neptune resumed trading in late November, the company immediately declined by about 30 percent and then subsequently appreciated by about 20 percent before stabilizing.
The company then remained range-bound for a couple of weeks, until the middle of December when it suffered an explosion of another kind that was brought about by short positions in the company and an onslaught of lawsuits against it. In the wake of these revelations, shares of Neptune declined by approximately 30 percent in two days. Since the start of 2013, though, shares of NEPT have performed well, as investors again allocate into this speculative equity.
One concern that was raised in December and which has since been alleviated was that NEPT might not receive insurance payments for its losses, including property damage, business interruption and general liability. On January 15, when reporting its third quarter results, Neptune also reported that the company received confirmation from its insurer that it will receive a first interim payment of $6 million relating to the explosion.
This reasonably rapid confirmation of coverage would indicate that Neptune is not having a terribly difficult time with its insurer. This is a highly promising update, as Neptune requires such insurance payments to rebuild its operations, and there was some speculation that such payments were not coming. In December, Neptune's Chief Financial Officer, André Godin, indicated that the company's policy was for $20 million. It is still unclear whether they will receive that total sum.
Another problematic front for Neptune has been the ongoing patent disputes between NEPT and Aker BioMarine as well as Schiff Nutritional (SHF), two larger competitors that also market krill oil. Neptune and Aker have been battling in both the United States and Australia. Neptune appears to be winning its U.S. disputes against Aker and 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, which was promising for the company. 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. Then last week, Neptune announced that the U.S. Patent & Trademark allowed a second continuation patent application directed towards a capsule comprising an Antarctic krill oil extract comprising a phospholipid suitable for human consumption. This more recent continuation claim, according to Neptune, covers most, if not all, krill oil products presently sold in the U.S. market.
Still, most investors in Neptune are not allocating there because of the company's neutraceutical business, and many likely acknowledge that whether or not Neptune has the perfect patent, the krill oil business is ripe for becoming more crowded and competitive. Most investors in NEPT actually likely care very little about its neutraceutical business, and instead allocated into the clearly speculative equity for its potential approval of a krill oil based pharmaceutical.
Neptune has two subsidiaries, Acasti Pharma (ACST), which it majority owns, and NeuroBioPharm, which NEPT began to spin-off last year. Through these subsidiaries, the company is engaged in the research, development and commercialization of natural, marine-derived krill extracts for various possible applications.
Krill oil contains 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. Further studies are needed to confirm the efficacy of krill oil, as well as medical potency versus fish oil, but 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 substantially similarly 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, the antioxidant, astaxanthin, is present in krill oil while it is absent in fish oil. Further, though not related to efficacy, krill oil is more concentrated and allows for smaller capsules, which are easier to swallow. Easier to swallow pills are generally preferred, and especially so by arthritic and inflamed elderly individuals, which is precisely the market for omega-3-based prescription drugs.
If Neptune can find success, in the form of U.S. Food and Drug Administration approval of a krill oil prescription drug, NEPTs drug would become a competitor to omega-3-based pharmaceuticals such as Lovaza, by GlaxoSmithKline (GSK), and Vascepa, by Amarin (AMRN). Both Lovaza and Vascepa are prescribed to lower triglyceride and cholesterol levels. Neptune's majority-owned Acasti subsidiary is currently in phase II trials with CaPre, a krill oil based drug candidate that is targeting a similar class of users.
These omega-3 drugs generally supplement and/or compete with widely prescribed and well-known statins, including Pfizer's (PFE) Lipitor and Merck's (MRK) Zocor. The statin class of drugs has been a multi-billion dollar group for years, while the omega-3 class is still in its infancy, though rapidly growing. Moreover, it is entirely possible that these omega-3 drugs will gain approval for other and further conditions. Beyond triglycerides and cholesterol, omega-3 drugs may gain popularity as anti-inflammatory medications, including treating arthritic conditions.
While Acasti has its focus on cardiovascular conditions, Neptune's other subsidiary, NeuroBioPharm, hopes develop proprietary pharmaceuticals that target neurological conditions, such as attention deficit hyperactivity disorder ("ADHD"), Alzheimer's disease and other conditions that result in cognitive decline. These markets are also substantial.
Neptune continues to be a highly 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. While such an event is unlikely to occur in the near term, Neptune continues to move forward towards this goal. Further, now that the company has confirmed that its insurer will cover its losses related to the explosion of its plant, and potentially for lost business, Neptune should be able to get its act back in order in the first half of 2013.
All of this indicates that some positive tailwinds may hit NEPT in the near term, especially as the company rebuilds its operations and provides status updates, and as Acasti prepares to enter Phase III trials for CaPre. Similarly, any future insurance payments, and even notice of them, will also be positive news. Nonetheless, NEPT shares have gained approximately 40 percent since the start of 2013, and it is highly possible that shares might sell off in the near term as some lucky recent investors realize their gains.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.