Neptune
Technologies and Bioressources
TSX:
NTB – NASDAQ: NEPT
Basic
Shares: 60.0 million
Fully
Diluted: 67.5 million
**************************************
Acasti Pharma
TSX V:
APO
NASDAQ: ACST
Shares Outstanding: 79.4
million
Fully Diluted: 91.4
million
*****************************
Late Friday, long time proponent of Neptune & Acasti,
Hugh Cleland, Portfolio Manager Blumont Capital, circulated his thoughts on
the recent share price volatility experienced by the krill oil producers and
what he views as reasonable share price targets in the coming years. The
following is a full copy of his report.
NEPTUNE: Acasti reported excellent Phase II open label
results, Neptune has a new 10%+ shareholder, and there are at least a couple of major
Neptune-specific catalysts ahead in the coming weeks and months.
The tragic explosion of November 8, 2012 has cast a long
shadow, but we got some great news from Neptune in the May 22 press release and the May 23
conference call: the class action lawsuits are dead, once and for all, and Neptune has received
all necessary permits to restart construction on the new production plant in Sherbrooke.
(This new plant will be a modified version of the facility which was only 2-3 months from
completion at the time of the November 8th explosion, and which was largely undamaged by the
explosion.) We also learned that 3 production-outsourcing options are under consideration, and
management originally guided that they expect to make a decision on how to proceed with
respect to outsourcing by the end of August. (I am now expecting an announcement on this by the
end of September.)
What the market doesn’t seem to have figured out from these
developments is that, by the end of 2013, we should have visibility on Neptune’s production
capacity getting into the 600,000kg to 1million kg/year range1. I expect that the announcement
of a significant outsourcing deal, plus more confidence in the completion of Neptune’s own
production facilities, will add $2/share or more to Neptune’s share price by the end of the year,
meaning we will probably break to new 5-year highs, just on the basis of Neptune-specific
events. The developments at Acasti (discussed in detail below) should provide a springboard for
another dramatic step-up in value in Neptune’s stock by the end of the year, and during 2014.
On a 3-year basis, I would expect to see this stock somewhere in the $15-$30 range.
For those who are interested, I have provided a link to the
initiation report from the latest US analyst to pick-up coverage:
Eye-opening addition to the Neptune and Acasti shareholder
base: George Haywood
George Haywood now owns 6,857,762 shares, or 11.39% of
Neptune. These shares were accumulated for his personal account, and were accumulated
in the open market between December of 2012 and now. He has also accumulated about
1.5million shares of Acasti, and I
am guessing he will buy more in the weeks and months ahead.
George Haywood is a remarkable individual. He was the head
of corporate bond trading for
Lehman Brothers from 1987-1994, then headed up corporate and
high yield bond investing at hedge fund Moore Capital Management from 1994-1998. Since
1998, he has been managing his own money—very successfully I might add. I will dig more
into his history when I have time, but from the conversations I have had with him about
his past, and how he came to be an investor in Neptune, it is clear he likes to get deeply
involved with companies, establishing big positions, and then helping the companies in a variety
of ways—on a few occasions, going as far as joining the Board. Of the many big wins he has
had, the two that have the most relevance to Neptune are Martek (formerly MATK on NASDSAQ;
acquired by DSM in 2011), and Sarepta Therapeutics (SRPT on NASDAQ).
Sarepta is a biotech stock that—based at least in part on
the additions that George helped make to the Board and management—was one of the
top-performing NASDAQ stocks in 2012, as it traded in the $3-$6 range for much of the year, before
hitting a high of $45; in 2013, it has traded in a range of $24 to $47.
Martek is particularly relevant because it was the first
publicly traded Omega-3 stock.
(Martek’s marine algae-derived DHA is now in almost 90% of
DHA-enriched baby formula sold in North America.) George was an early investor in Martek,
and became close to the founders before declaring a 5%+ stake in May of 1999 when the stock
traded in a range of $6-$12. He exited in the $40-$60 range in 2003. George even used
Martek’s founders as part of his due diligence on Neptune, and he has commented to me more than
once that he considers Neptune to be his “next Martek”. If George is right about that, it
will make my 3-year target range of $15-$30 look conservative.
ACASTI: the Phase II open label clinical data support my
long-standing contention that Acasti could ultimately have a value in the $1billion
to $5billion range.
On August 13, Acasti released “best in class” data from
their Phase II open label trial, which
tested the effect of CaPre (Acasti’s phospholipid Omega-3
drug candidate) on triglycerides, and other blood lipid components, including LDL (bad
cholesterol) and HDL (good cholesterol). In a population for which 88% of the patients started the trial
with "mild-to-moderate" hypertriglyceridemia (“HIGH triglycerides”; TG
200-499mg/dL), a 4g/day dose of CaPre caused three primary effects after two months:
1) A decline of 21.6% in triglycerides;
2) A decline of 8.3% in LDL (and, more importantly, a
decrease in non-HDL cholesterol of
14.3%); and
3) An increase of 11.1% in HDL.
On the back of this data, Doug Loe, PhD, the biotech analyst
at US-based EuroPacific Securities, raised his 1-year target on Acasti from $4.75 to
$6.75—because he saw the data as a significant risk-reduction event for Acasti, and therefore
lowered the discount rate he uses to calculate Acasti’s NPV from 30% to 20%. (It’s worth noting
that a reduction in the discount rate to 15% boosts Acasti’s NPV to $10.78/share; I would
expect events that will allow Doug to reduce his discount rate to 15% to occur in the next 4-6
months.)
Statements from the report that bear highlighting include:
1) “magnitude of triglyceride reductions from baseline were
strong for this patient population”.
2) “relative magnitude of triglyceride reductions compared
to alternative lipid-lowering
therapies was equally strong”.
3) “LDL/HDL data is industry-leading for any Omega-3
formulation we have reviewed”.
A link to the report in its entirety is here:
In my view (and more importantly in the view of Dr. Harlan
Waksal), we have the best in class Omega-3 drug, and—based on the LDL and HDL effects—we may
even have something quite special. Based on a variety of industry benchmarks
(including the $1.65billion acquisition of Reliant by GSK to obtain fish oil drug Lovaza), the best in
class Omega-3 drug should be worth over $1billion, and potentially a lot more. Dr. Waksal
believes that if the data from the Phase III pivotal trial looks as good as the open label data, then
it means CaPre should be a billion dollar drug, and that—once positive clinical outcome data is
out for the Omega-3 drugs—we have a drug that could sell upwards of $5billion per year.
So, why did the stock decline after the data came out?
The lack of a statistically significant number of subjects
with a starting point of VERY HIGH
triglycerides (TG >= 500mg/dL) created more confusion and
uncertainty than I would have expected. In my view, that effect is significantly overdone
now, and as the confusion and uncertainty are lifted, the stock should begin lifting
again. This really was the only frustrating
aspect to the open label data we saw—it didn't have a
statistically significant number of VERY HIGH triglycerides patients so that investors could easily
do an apples-to-apples comparison with the other Omega-3 drugs. The data that investors are
most familiar with from the other Omega-3 drugs are from VERY HIGH triglycerides populations,
where declines in triglycerides levels are always higher on average than those seen in HIGH
triglycerides populations; in HIGH triglycerides populations, across all 3 of the main lipid
components (triglycerides, LDL and HDL), the data from Acasti’s CaPre is better than the data
from Amarin’s Vascepa, and Omthera’s Epanova, and is infinitely superior to GSK’s
Lovaza in the HDL and LDL readings.
(Lovaza actually increases bad cholesterol, and has no
impact whatsoever on HDL.)
Here is the extrapolation that the market has so far been
unwilling to make: based on what we know about Omega-3, an Omega-3 drug that is superior in HIGH
triglycerides populations will be superior in VERY HIGH triglycerides populations. I have
been immersed in Omega-3 science and data since 2005 when I first purchased shares of NTB, so
I don’t really even look at this as an extrapolation—I see it almost as fact. Some agree; others
need more time to get there.
Another factor in the decline since the results came out was
uncertainty created by purchase
warrants that were scheduled to expire on October 8th. They
have now been exercised: my
understanding is that insiders sold just enough stock to
cover the exercise price of the warrants, and to cover the cash tax liability resulting from
the exercise, but net added to their position in the stock substantially. Great news: George
Haywood was among the buyers of the stock from the warrant exercise. This source of pressure and
uncertainty is now behind us.
An upcoming FDA advisory committee meeting regarding
Amarin’s HIGH triglycerides
indication has also caused uncertainty in some investors’
minds.
GSK’s Lovaza and Amarin’s Vascepa have already been approved
for use in patients with VERY HIGH triglycerides. But Amarin has applied for, and is still
awaiting final FDA approval for the HIGH triglycerides indication. The expectation is that
approval of the HIGH triglycerides indication will expand the market for Vascepa (and Acasti’s
CaPre) dramatically, because there are about 7 times more patients with HIGH triglycerides in
the USA than with VERY HIGH triglycerides (13% of the population, versus less than 2% of
the population). Some investors think that if the FDA does not approve HIGH triglycerides as
an indication, that it will be a hit to Acasti’s stock. I don’t think this would necessarily be the
case, for at least 4 reasons:
1) I would argue that any hit we might have taken from that
decision has already been more-than-accounted-for by the move in Acasti’s stock from
its recent high of $4.32 to the current level.
2) GSK’s Lovaza was able to attain sales of $1.2billion/year
while only having approval for the VERY HIGH indication. In fact, most of the prescriptions
written for Lovaza are “offlabel” i.e., most of the Lovaza prescriptions are written for
people with HIGH triglycerides, as opposed to people with VERY HIGH
triglycerides. (The point being that
an Omega-3 drug does NOT need to have HIGH triglycerides
approved as an indication
to have lots of HIGH triglycerides patients use it, and end
up with sales over $1billion.)
3) As I have thought about Acasti’s future in the past (and
now), I actually never assumed
that HIGH triglycerides would be approved as an indication,
because I have always known that it was not a slam-dunk that the FDA would approve
HIGH triglycerides as an indication.
I have always believed that being the “best in
class” Omega-3 drug would result in having sales of over $1billion, even based upon
CaPre “only” having FDA approval for the VERY HIGH triglycerides indication—because
“off label” prescriptions would get us to that level. Now that this Phase II data has
shown that we (with a very high probability) have the best Omega-3 drug in the HIGH
triglycerides area, we know that Acasti—with the right pharma marketing partner—should
be able to sell over $1billion of CaPre, even if the VERY HIGH triglycerides
label is all that we end up having.
4) Simply put: if the FDA decides that the only indication
that any company can get is for
VERY HIGH triglycerides, then it is a slam-dunk that the
company with the best HIGH
triglycerides data will—with the right pharma partner—get
the most sales. The great thing is that Acasti has the best data in the HIGH
triglycerides population.
The bottom line is that Acasti wins, regardless of whether
the FDA advisory committee approves the HIGH triglycerides indication or not.
It may take a while for investors to grapple with the
nuances around these issues—therein lies the current opportunity for investors willing to step in
now. Nonetheless, we have now seen clinical data which reaffirms my belief that CaPre will be,
at least, the “best-in-class” Omega-3 drug, and may even be something truly special. Remembering
that GSK acquired Reliant (to acquire Lovaza) for $1.65billion in 2008, and then ramped
sales of Lovaza to over $1billion within 2 years, I expect that pivotal Phase III results
which once and for all confer “best-inclass” Omega-3 drug status upon CaPre should result in a takeout of
Acasti for somewhere over $1billion (over $10/share), and perhaps somewhere in the
multi-billion area. It is this logic and these facts which underpin my expectation that Acasti will
be trading somewhere in the $10- $30 range within 1-2 years.
1 Getting to the stated objective of 600,000kg/year will
occur through a combination of the stated 150,000kg/year of “internal” capacity, and an outsourcing deal, which will be
decided upon soon. If they decide to enter into a second outsourcing deal of a similar size, that would give
visibility to capacity closer to 1million kg/year.
