In a largely undifferentiated market, product distinctiveness alone will not separate the leading product from competitors. Instead, marketing, distribution and human capital is what will determine whether the company thrives as an industry leader or struggles to seize market share. Throughout corporate history, there have been many success stories of fungible products that have become hits due to the portrayal of a marketing strategy. A perfect example is Pfizer's (NYSE:PFE) little blue pill, Viagra. Looking ahead, I believe Neptune (NASDAQ:NEPT) is founding a similar strategy that will push its premium Neptune Krill Oil (NKO) to become the industry-leading product in an otherwise undifferentiated nutraceutical market.
Viagra Success Story: A Marketing Tale
In 2012, Pfizer's Viagra accounted for the largest share, 45%, of the total erectile dysfunction drug market. How does the little blue pill manage to account for nearly half of the market share while other well known competitors like Cialis, Levitra and Stendra fight for the other half? All four drugs work by inhibiting the PDE-5 enzyme and allowing more blood flow to the penis which, in turn, causes an erection. Therefore, one cannot say with certainty that Viagra is a superior drug to competitors.
Originally, Viagra was marketed as an effective product for ED due to medical problems and organic causes like diabetes or prostate surgery. Had the drug been confined to use only in cases of ED due to secondary causes, it would have probably been a modest success for Pfizer. To grow the market, Pfizer had to make Viagra the treatment of choice for a much wider population. Thus, Pfizer had to create the impression that ED was a significant concern to all aging males.
This is the marketing plan Pfizer put into operation. Pfizer transformed Viagra into a lifestyle drug that would be the first choice of therapy for males, even if the cause of their impotence was associated to other lifestyle factors. ED can be linked to lifestyle factors such as obesity, excessive alcohol consumption, smoking and stress, just to name a few. Instead of altering one's way of life, Pfizer marketed Viagra as the sole solution. Pfizer's marketing campaign was aimed at raising awareness of the ED problem in the "majority" of males, while also narrowing the solution to a single option: Viagra. This marketing strategy was integral in expanding Viagra's overall wellness brand to younger males (aged 40+) instead of seniors only. Bigger and Better: How Pfizer Redefined Erectile Dysfunction, published by John Lexchin, accurately describes how Viagra influenced a sexual revolution due to the effects it had on society's attitude in the bedroom.
Pfizer's marketing thrived in turning Viagra into a lifestyle consumer product that achieves near $2B in revenues annually. Viagra's promotion has propelled the little blue pill to market leading status by owning nearly half of the ED market share. Though Pfizer's market dominance is expected to erode due to patent expiry, the Viagra case is an example of how a company can utilize marketing an undifferentiated product into generating revenues in the tens of billions.
Neptune Krill Oil: Undifferentiated, Yet On the Right Course
Neptune's recent moves indicate that the company is utilizing the right strategy to making its premium NKO product the market leader. Though krill oil has shown to have a greater absorption rate and longer effects than conventional fish oils, these distinctions have not been sufficient enough to differentiate the product from other sources of omega-3. Therefore, we can say that product differentiation amongst omega-3 competitors is scarce as traditional fish oils, despite being of lower-grade, have dominated the space since inception.
Similar to Pfizer and the Viagra example above, Neptune has to focus on aspects other than product superiority. I believe distribution and marketing of NKO will be two crucial operational facets that propel Neptune above competition. The global omega-3 ingredient market is expected to cross $4B by 2018, so to become a significant player in this field, Neptune management must market NKO as a lifestyle drug capable of improving overall wellness.
Neptune's Operational Plant Points to Increased Distribution
Neptune expects their newly reconstructed plant to be operational by mid to late March 2014. An additional three months will be needed to ramp up production, meaning the facility should reach the targeted production of 150 metric tons by 3Q of 2014. This signifies the importance of in-house production of Neptune's premium product, Neptune Krill Oil. As a result, the company will no longer face capacity restraints which allows Neptune to capture growth opportunities globally and expand their customer base.
The shortage of NKO supply caused by the 2012 facility explosion delayed NKO launch in many international countries. This has caused a backlog for the company which will be satisfied once their Sherbrooke plant becomes operational again. In addition, Neptune's distributors (who co-brand NKO as their own) will be able to satisfy the emerging demand of krill oil with a sufficient channel of supply. Having the ability to produce their own product instead of licensing through third parties will bring an influx of backlogged revenues while also improve gross margins. As production is restored to pre-incident levels by the end of 2014, Neptune will be well position to capitalize on revenue generating opportunities that could result in a top-line figure nearing an all time high of $30M.
Establishing Marketing Avenues for Future Growth
As mentioned above, I do not think the superiority of NKO as a product will lead Neptune to market-leading status. However, the right marketing and distribution of NKO will impact consumer awareness enough to make NKO a player in the $4B nutraceutical industry. Similar to Viagra, NKO must be presented as a lifestyle choice that improves overall wellness. Neptune must accomplish this, though, while minimizing marketing budget as they are miniature in size when compared to Pfizer.
During their last conference call, management hinted at ongoing discussions with Jameison, Canada's leading nutraceutical distributor, to continue the supply of NKO. Such an agreement, and others similar in nature, will be crucial for Neptune as they will assist in exposing the public to their product at a cost that the distributor will cover. Additionally, the infringement settlements Neptune has reached with other competitors will prove to be beneficial in spreading the word on krill oil. With other krill oil companies marketing their own products, Neptune benefits in two ways. First, the benefits of krill oil are out in the open as awareness spreads. Second, Neptune pockets royalties from sales. In essence, through these settlements, Neptune will receive some compensation and free marketing.
Neptune confirmed its marketing focus when the company appointed John Moretz as a special advisor. Moretz is Managing Director for Kathy Ireland, the $2B business that features former swimsuit model Kathy Ireland. In 1993, with her best modeling years behind her, Moretz approached Ireland to start her own clothing line. From then on, Ireland, with Moretz doing the heavy lifting, was on her way to becoming the mogul she is today. In 2011, Moretz served as Chairman and CEO of Gold Toe Moretz prior to its $350M acquisition by Gildan Activewear (NYSE:GIL). Gold Toe Moretz, by the way, was a sock company (a fungible product) that had sales of $280M in 2010. The experience Moretz brings with growing businesses into global presences, especially those with undifferentiated products, bodes very well for Neptune's future plans with NKO.
$25M Offering a Long Term Strategic Move
Last week, Neptune announced it had priced a public offering of 10M newly issued common shares at $2.50 per share. Obviously, like many other investors, I was not happy to see my Neptune investment drop in value. With Neptune's 200 day moving average at $3.20, a financing at $2.50 was at a 22% discount. I would have liked to see this discount be a little less steep, but having a long term outlook, I looked to the impact this would have on future operations.
With the production facility launch sometime within the next month, an enlarged marketing budget was expected. Neptune intends to allocate the net proceeds from its offering as follows:
- $10M for sales, marketing and distribution of krill oil products
- $5M to support subsidiary NeuroBioPharm in development of its candidates
- $5M to finance the start-up and ramp-up of new production facility
- $2M to the intellectual property portfolio (ex. legal expenses)
It was encouraging to see more than half of the offering allocated towards near term operations that will generate revenue. Neptune should have an approximate cash balance of $25-$30M, which should be enough to fund the company until expected profitability sometime in 2015. With Neptune anticipating an increase in production to pre-2012 incident levels, sufficient marketing and production facility costs will require necessary funds, which Neptune did not originally have. Instead of penny-pinching, as an investor, I would rather the re-launch of NKO be done properly. This is why I believe that in the long term, this strategic move to dilute will pay off.
Valuation and Associated Risks
Neptune is currently sporting a market cap that is hovering around $160M. The last time Neptune's cap was in this same range was late 2013, when the company was surrounded by legal risks due to the 2012 plant explosion and infringement cases with other krill oil competitors. Currently, the majority of legal concerns have been settled. The ongoing infringement case with Enzymotec (NASDAQ:ENZY) still poses a risk to Neptune investors since the companies have reached an impasse. Over the next two months, the companies expect to attempt a mutually satisfactory agreement. With the production plant nearing operational capacity and a subsequent product launch blueprint, a $150M valuation presents great upside for investors.
With the recent offering, Neptune investors have endured the economic pain that financing risk inflicts. This, however, has taken this specific threat off the table for prospective investors. Ultimately, the success of NKO comes down to execution. If Neptune management is able to successfully re-launch NKO, investors will reap the rewards. Otherwise, activist top shareholders like George Haywood and Perceptive Advisors may be forced to bring change.
Through Viagra, Pfizer proved the importance marketing had in making an undifferentiated product the industry leader. Neptune is facing a similar situation in which they need to execute a strategy that could yield a leading nutraceutical product. The recent tactical moves have de-risked some operational concerns for Neptune and indicated that the company is on the right course to distinguish their rather undifferentiated product from competition.