What's Next For Amarin Investors?
It's been an emotional and financial rollercoaster for Amarin (NASDAQ:AMRN), with the hype surrounding Vascepa leaving investors deep underwater, gasping for air.
Since attaining FDA approval for its lead product on July 26 last year, shares began and continued to tumble, with the negative FDA advisory committee panel meeting dealing a near coup de grace to the proverbial Pequod. Consequently, Amarin's high-profile failure has served to largely sour investors on companies with fish-oil or similar products. Enter Neptune Technologies & Bioresources (NASDAQ:NEPT), a similar company that is significantly de-risked and poised for double to triple digit returns over the next year.
Unless otherwise noted, financial statistics and managerial commentary cited in this article will come from the following:
- Neptune's Annual Information Form for Fiscal Year Ended 2/28/2013
- Neptune's Management Analysis of the Financial Situation and Operating Results for Six-month periods ended August 31,2013 and 2012
- Neptune's Management Discussion and Analysis of the Financial Situation and Operating Results for the Three-month and Six-month periods ended August 31, 2012
- Neptune's Analysis of the Financial Situation and Operating Results for the Six-month periods ended August 31, 2013 and 2012
Neptune Business Overview
Neptune is a Canada-based company that markets krill oil and derivative products. The company has been public since 2001, first on the Canadian Venture Exchange, later becoming NASDAQ listed in 2008. Over the past decade, Neptune has done well in establishing itself as a nutraceutical player with its krill oil products, but in recent years the company has taken large strides in casting its net in deeper seas.
In addition to its established (and growing) nutraceutical segment, Neptune has positioned itself to profit immensely from pharmaceutical-quality formulations of its krill oil foundation through majority owned subsidiaries, Acasti (NASDAQ:ACST) and NeuroBioPharm (Private). As such, Neptune falls into a unique niche within biotech business models, where investors can ride comfortably on Neptune's already revenue generating nutraceutical arm, setting up the pharmaceutical arm run by Acasti as essentially a free call option with potentially major upside. In addition to this inherent asymmetric risk/reward profile, shares of Neptune have continued to be overshadowed by the unfortunate factory fire that occurred in November of 2012, as the company continues to execute on its recovery, further accentuating an already attractive risk/reward profile.
Neptune's Nutraceutical Arm: Already Generates More Revenue Than Amarin
In comparison to Amarin's current valuation of $345 million (from its 2013 peak north of a billion), Neptune currently trades at a valuation of $178.53 million. To arrive at their respective enterprise values, consider the following:
(These figures are from each company's most recently released financial filings)
- Amarin has $225.88 million in Cash and Equivalents, Neptune has $19.91 million.
- Amarin has $239.84 million in Long Term Debt, Neptune has a little under $2 million.
As such, Amarin's EV is roughly $360 million, while Neptune's EV is $160 million. Now, let's consider the companies' trailing twelve month revenues. Despite the large discrepancy in valuation, Neptune surprisingly generates more revenue- $23.49 million to Amarin's $16.49 million. Keep in mind that Neptune's revenue result solely from its nutraceutical arm, while Amarin benefits from pharmaceutical exposure. Moreover, take into account that Neptune's revenue is still recovering from the diminished production that resulted following the factory fire of its main production plant. Using the figures arrived at above results in EV/revenue ratios of 6.81 for Neptune and 21.83 for Amarin. As it currently stands, it's fairly obvious there is a massive disconnect in valuation between the two.
Now the diehard Amarin bulls out there may already be protesting, "That's an unfair comparison, Amarin has a much larger opportunity and an established presence in the prescription sale market." Although this is true, I feel it only serves to bolster my case. Amarin's prescription-level product, Vascepa, has been FDA-approved for over 15 months, and sales have continued to disappoint investors. What continued to prop up Amarin's valuation for most of 2013 was the expectation that Amarin would be able to receive accelerated approval for Vascepa's sNDA into an expanded market. This has since been shot down by the 9-2 FDA advisory committee decision, leaving Vascepa in its current addressable population pool until 2016. Meanwhile, Neptune may soon be able to indirectly enter the pharmaceutical arena through its subsidiary Acasti, which I will discuss later into this article.
Unlocking Overlooked Value As Neptune Recovers From Factory Fire Aftermath
Before launching into a discussion of the more exciting pharmaceutical aspect of Neptune's business, let's examine the strong underlying and often-overlooked fundamentals of the nutraceutical core business.
Neptune's core business revolves around Neptune Krill Oil (NKO), its proprietary krill oil product produced from its patented extraction process for krill. Similar to other fish oil products, NKO contains omega 3 fatty acids (Both EPA and DHA), which have been shown to have positive effects on human triglyceride and cholesterol levels. What differentiates krill oil from fish oil is that the fatty acids are bonded to phospholipids instead of triglycerides (fish oil). For those with a background in biology, I'm sure you are aware that phospholipids are the primary building blocks in the cell wall of humans. As such, krill oil is hypothesized to have a greater uptake in humans, correspondingly increasing bioavailability. In fact, clinical studies have shown that krill oil is more readily utilized by the body than fish oil. Therefore, Neptune is able to tap into the massive $1.1 billion market opportunity present in fish oil, with a meaningfully differentiated product. Transparency Market Research expects this market to grow to $1.8 billion by the year 2018 as consumers continue to increase demand for products containing omega 3 fatty acids.
As stated multiple times, the November 2012 factory fire negatively affected Neptune's core nutraceutical business. This impacted the company's production capability, resulting in lowered revenues and margins as the company scrambled to secure outside production. Neptune's management team has effectively dealt with the aftermath, evidenced by revenue steadily returning to pre-factory fire levels. More importantly, the plant is expected to reopen this coming February with an initial annual production capacity of 150 metric tons. In addition, Neptune has secured a strategic non-exclusive krill oil manufacturing and supply agreement with Rimfrost (a Norway-based fish-oil company) giving Neptune the right to purchase up to 800 metric tons of krill oil during the first three-year term of the renewable agreement. This should significantly alleviate any possible supply constraints as Neptune continues to ramp up Krill oil sales.
In the last two quarters alone, Neptune has generated 11.4 million CAD ($10.716 million) in revenue. With vastly improved infrastructure in place, what can be expected of Neptune's revenue heading into the rest of 2014?
With the new plant opening next month with production of 150 metric tons/year of NKO and the Rimfrost agreement providing another 800MTs over a three-year period (266MT/year), what does initial annual production of 416MT/year equate into? For starters, each kilogram of NKO sells for $130. Given that 1 metric ton is 1,000 kilograms, this results in maximum initial revenue potential of $54 million, but of course, there are margins…
Neptune: King Of Krill (NYSEARCA:OIL)
Given that 266MT are sourced from Rimfrost, I am assuming margins in the ballpark of 15%. Although this may seem exceptionally rich, consider the recent patent settlement between Neptune and its krill-oil competitors (Rimfrost included). The drawn out patent settlement resulted in a resounding victory for Neptune. As part of the settlement, Neptune granted a worldwide, non-exclusive, royalty-bearing license to Aker while simultaneously receiving an addition non-refundable one-time payment for the manufacture and sale of krill products. This attests to the strength of Neptune's IP protection and corresponding ability to command stronger pricing power in regards to its NKO product.
On the company's internally produced NKO of 150MT, I attribute the company's EBITDA margin of 45%, as derived from filings prior to the factory fire. This nets a rough EBITDA figure of $17,952,000 (Neptune's $8,775,000 + Rimfrost's $9,177,000), if I factor in Amarin's EV/Revenue ratio listed earlier of 21.83 (Note: Normally, I should be applying the EV/EBITDA. However, in the case of Amarin the EV/EBITDA is a negative number…) I arrive at a valuation of $391,892,160. Subtracting the debt of $2 million and adding the cash of $20 million, and then dividing this figure by the outstanding share count results in $6.41/share. Of course, this just goes to show the excessive valuation attributed to Amarin currently, however, if we attribute a more rational multiple of, let's say, 15 results in $4.40/share on the nutraceutical arm alone for the year of 2014 provided the winds blow favorably for Neptune.
Keep in mind this fails to include the upfront payment and royalties from Aker and other parties, only sweetening the deal for Neptune. In addition, the non-exclusive agreements in place appear to foreshadow the possibility of other supply agreements heading into the future, which would allow for continued ramp up of sales going forward.
Expanding To The Pharmaceutical Market With Acasti
On top of its nutraceutical foundation, Neptune also has the potential to tap into the significant pharmaceutical market with its majority owned subsidiary Acasti. Neptune currently owns roughly 50% of ACST, which is currently valued at $117 million.
Acasti develops a pharmaceutical-strength formulation of Neptune's krill oil product named CaPre, which is currently in a Phase 2 clinical trial for approval in the same indication as Amarin's Vascepa, Glaxo's (NYSE:GSK) Lovaza, and AstraZeneca's (NYSE:AZN) Epanova (formerly owned by Omthera, but was acquired by AstraZeneca last year for $323 million) fish oil products. Data from Acasti's completed COLT Trial (Randomized, open-label, dose ranging, multi-center) in August 2013 appears to indicate, that if results continue to hold, CaPre could easily take best-in-class within the pharmaceutical fish oil arena for patients with high triglyceride levels.
In the COLT trial, in a patient population where 88% began the study with "mild-to-moderate" hypertriglyceridemia (TG 200-499/dL), a 4g/day dose of CaPre for two months resulted in the following:
- A statistically significant reduction of 21.6% in triglycerides
- A decline of 8.3% in LDL (bad cholesterol), a decrease in non-HDL cholesterol of 14.3%
- An increase of 11.1% in HDL (good cholesterol)
This results in what can be called a trifecta of positive effects on patients with high triglyceride levels. To my knowledge no other FDA approved fish oil product has been able to achieve all three effects. In contrast to GSK's Lovaza, which has been shown to potentially raise bad cholesterol nearly 40-50%. Lovaza currently does sales of $1.2 billion in the very high triglyceride indication. With unparalleled improvements in cholesterol profile over the competition, approval in the same indication could easily result in a shift to CaPre over its competitors.
Although there was a lack of a statistically significant number of patients with very high triglyceride levels (TG >500/dL), which makes comparisons to competing products difficult, I am confident that the benefits shown will be shown within the "very-high" patient group, and replication of the same results in the second phase 2 "TRIFECTA" study and future phase 3 studies should result in significant appreciation on the same order Amarin received few years prior. Also, Acasti may even benefit from its "late-starter" status into the pharmaceutical fish oil market. Given that the approval pathway for fish oil supplements in the very-high triglyceride is very well defined, this should result in a relatively straightforward path for approval.
Valuation and Conclusion
As far as I can tell, both entities are fully financed well into 2016. Neptune is currently in a position to organically drive its own growth and the upfront payments and royalties from its competition only serves to bolster this statement. With money arriving from Aker and Enzymotec, the core nutraceutical business provides a strong level of safety for investors, easily justifying current share price of ~$2.90 as the company continues to move past the horrific factory fire, when share price was above $5.
Acasti recently pulled the trigger on a public raise for $23 million for 18.4 million units. Each unit consisted of one share and one warrant with an exercise price of $1.50. This allows Acasti to raise an addition $27.6 million in the future, resulting in potentially 50.6 million in cash to drive continued development in prescription-strength krill oil. If Acasti is able to execute on its strategy for CaPre by attaining FDA approval, valuation should be able to rival Amarin's prior to its FDA advisory panel blow up, in the range of $800-1.2 billion by 2016. Correspondingly resulting in Acasti being valued at $10-15/share.
Using a simple SOTP model results in the following:
- $4.40/share from Neptune's core business
- $3.78/share from Neptune's Acasti Subsidiary ($800 million discounted 3 years at 20% times 50% (Neptune's stake) divided by Neptune's Outstanding shares)
This results in a net present value of $8.18/share, which does not include royalty and upfront payments. Even if both Neptune and Acasti under-delivers by 50%, this still results in a value of $4.09/share, if Neptune is able to deliver while Acasti fails outright, this results in $4.40/share. I believe this demonstrates the significantly de-risked profile of Neptune's business model, at the very worst- you have 30% upside while having your hand in 50% of what is potentially what Amarin could've been.
To me, the answer is clear: Sell Amarin and buy Neptune.
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.