Neptune's Crisis Could Mean It's Time To Acquire This Speculative Equity

| About: Neptune Technologies (NEPT)
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On Tuesday, November 27, Neptune Technologies & Bioressources Inc. (NASDAQ:NEPT) declined by about 25 percent. This was the first day that NEPT shares were traded since trading was 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.

This singular event has ravaged shares in the company. In addition to Tuesday's sell-off, shares declined by about ten percent on the 8th, prior to being halted. On Wednesday, November 28, NEPT shares appreciated by 10% as investors decided to bet on the small-cap. Nonetheless, shares are still about half of where they were trading at the start of July, and though the company is in some ways just a portion of what it then was, with the rest reduced to ashes, it appears worthwhile to analyze NEPT as a potential value and growth investment, as well as a possible acquisition target.

Through its Neptune's subsidiaries, Acasti Pharma (ACPHF) and NeuroBioPharm (which NEPT has begun 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. Neptune's subsidiaries are researching the application of krill oil in the pharmaceutical market.

More studies are needed to confirm the efficacy of krill oil and its potency versus fish oil, and such studies are likely forthcoming. Still, the supplement has already become a popular choice within the health food community. Though krill oil is generally a costlier supplement than fish oil, some consumers prefer it not only because of its believed more potent, but also because the capsules are smaller and easier for older and troubled takers to swallow.

Beyond testing, other concerns could affect future krill usage. As a whole, krill is arguably the largest biomass in the world and the harvesting of Antarctic krill is relatively new. Because krill are so low on the food chain, yet so high in number, the tiny crustacean is considered fundamental to the survival of almost every species of animal above it on the food chain.

Krill harvesting is currently being done in a manner that is believed sustainable, but that opinion may change, and especially so if the harvesting rates began to spike. Currently, the vast majority is harvested for feed for fish farms, with the harvesting for krill oil still being relatively new and insignificant. Both uses could grow over time, potentially causing ecological damage or raising concern of such damage that results in the further curtailing of krill harvesting.

As krill oil continues to grow in popularity, Neptune should also grow. Similarly, one would expect that competition would also correspondingly grow. To thwart such competition, patent wars have emerged amongst the producers of krill oil. Neptune is the only company to have a patented krill oil composition in the United States, and has begun litigating alleged infringement of its patents by companies such as Aker Biomarine and Schiff Nutritional (SHF). Similarly, Neptune and Aker are locked in an Australian patent dispute.

So far, Neptune appears to be winning its U.S. disputes, and 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. Earlier this November, Neptune filed opposition papers against Aker Biomarine's Australian patent for making krill meal, arguing that the process is not new or inventive.

Continued success at defending its patented process may allow Neptune to not only maintain a dominant position in the nutraceutical krill oil market, but also potentially enter the pharmaceutical market with krill oil-based treatments that would be competitors to Lovaza, by GlaxoSmithKline (NYSE:GSK), and Vascepa, by Amarin (NASDAQ:AMRN), both of which are omega-3 based and prescribed to lower triglycerides and cholesterol. Such drugs supplement and/or compete against statin drugs such as Lipitor, by Pfizer (NYSE:PFE), among others.

Neptune's majority-owned (57%) subsidiary, Acasti, is currently in phase II trials with a krill oil based drug candidate named CaPre. 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. These differences should bode well for the efficacy of CaPre. One negative issue could be that krill oil contains DHA, which is known to increase LDL cholesterol and/or interfere with its reduction. This is why many investors are waiting out the ongoing clinical trial.

Despite these promising trends, NEPT's near-term business is problematic. The recent explosion effectively destroyed both its production facility and its warehouse of product. Prior to the event, Neptune had already initiated construction plans to double the company's production capacity by 2013. The company also indicated that it had already received orders that nearly fully utilized production capacity. Now, NEPT can neither meet those orders with new or prior production.

Neptune intends to reconstruct an operational plant using the expansion facility and certain existing equipment in the expansion, to the extent that they are usable, though additional construction and equipment will likely be necessary. The company has indicated it has insurance in place to cover property damage, business interruption and general liability up to specified amounts and subject to limited deductibles and certain exclusions. The precise costs involved in restoring production and the extent of insurance coverage will likely take several months before being known.

Another issue is timing. Neptune cannot begin its reconstruction plans until cleared to do so by the government, including the completion of an investigation into the cause of the accident and the obtaining of the permits required for the construction. Neptune indicated that it expects that the new plant may be operational within a range of six to nine months. This may be optimistic, given the need for government clearance and that the coming winter months may slow things down. In the interim, Neptune has announced 70 temporary layoffs of undetermined duration and salary reductions of 20% as it gets its business back on track.

Despite NEPT's serious problem caused by the explosion of its production facility, the company should be able to survive this setback and continue to produce product to meet growing demand. Simultaneously, any positive indications coming out of the CaPre phase II trial should be a significant catalyst for krill oil supplement demand, as well as the potential pharmaceutical future for the business. While the next two quarters appear likely to be dismal, as the company continues to work through its recent tragedy, NEPT should make its way through this bad patch and continue to grow substantially so long as krill oil continues to catch on and take market share from fish oil.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.