12th July 2019
BUY KHIRON LIFE Fair Value CAD4 SCIENCES Share price EUR1.90 Bloomberg / Reuters KHRN CN/KHRN.V
Consumer, Brands & Retail Cannabis
Bold Ambition
Khiron is set up to be a leader in the Latin American medicinal and branded CPG cannabis markets. From its base in Colombia it is spreading out into Mexico, Peru, Chile, Uruguay and Brazil. Supported by a strong team of seasoned entrepreneurs (and a knowledgeable Board that includes former President of Mexico, Vicente Fox), the company is aiming to take a first mover advantage in the medicinal cannabis and CBD- based branded Consumer packaged goods. We initiate the stock with Buy and a fair value of CAD4.0 per share offering a 100% upside. Its position in medically-validated cannabis products is most advanced in Colombia where the company is fully licensed for the cultivation, production, domestic distribution, and international export of both THC and CBD medical cannabis. It is currently preparing the market for its medicinal cannabis products (to be launched in H2 2019) through in-person clinic consultations, medical association alliances, alliances with pharmacies, health insurance and providing physicians with a variety of cannabis education platforms. In order to accelerate the market development and its own market position, the company has already bought the ILANS clinics in Colombia but we expect more to come. The advantage of running its own neuropathic clinic is that it is much easier to educate doctors in the uses of medicinal cannabis and to switch patients towards the use of medicinal cannabis. Meanwhile, the company’s own developed CBD ski- care brand Kuida is leading the efforts in the health & wellness category. Khiron is also entering Mexico, Peru, Chile, Uruguay and Brazil with the same approach: on the one hand preparing the market for its medicinal cannabis products through alliances with medical associations, JVs with clinics, distribution agreements with wholesalers and pharmacy chains; on the other hand looking for opportunities to enter the market ahead of competition based on compassionate use rules for medicinal cannabis, or with its CBD-based skin and pet care product range. The company has formed a JV with Dixie Brands that will allow Khiron to sell Dixie Brands’ various products (Dixie, Aceso, Therabis and Synergy) in the food & beverages, supplement and pet category across Latin America. It will also benefit from Dixie Brands efforts to plug Kuida in its network for distribution throughout the US. Nikolaas Faes |33(0) 6 11 12 44 44| [email protected]
Fiscal year end 31/12 2017 2018 2019e 2020e 2021e 2022e KHIRON LIFE SCIENCES Financial Summary EPS (CAD) -0.14 -0.42 -0.4 -0.2 0.1 0.3 Restated EPS (CAD) -0.10 -0.34 -0.4 -0.2 0.1 0.3 % change - - -4.1% -56.7% - 245.5% BUY FCF (CAD) -0.11 -0.41 -0.4 -0.2 0.0 0.3 Net dividend (CAD) 0.00 0.00 0.0 0.0 0.0 0.0 Fair Value CAD4 Average yearly Price 2.51 1.18 - - - - Avg. Number of shares, diluted (m) 27.8 48.5 111.0 121.1 121.1 121.1 Historical Entreprise value (CADm) 68 50 - - - - Share price EUR1.90 Valuation (x) EV/Sales - 55.8x 22.94x 6.37x 2.35x 1.15x EV/EBITDA -18.0x -2.5x NM NM 17.0x 5.4x Market Cap. EUR216m EV/EBIT -24.6x -3.0x NM NM 25.7x 6.6x P/E -25.3x -4.0x NM NM 22.9x 6.6x EPS 3Y CAGR NM FCF yield (%) -431.1% -3016.0% NM NM 1.0% 13.5% Net dividend yield (%) 0.0% 0.0% NM NM NM NM Profit & Loss Account (EURm) Revenues 0 1 11 44 128 256 Change (%) - - 1112% 310% 189% 100% Adjusted EBITDA -3 -17 -33 -23 18 55 EBIT -4 -20 -37 -28 12 45 Change (%) - - -87% -25% - 281% Financial results 0 0 0 0 0 0 Pre-Tax profits -4 -20 -37 -28 12 45 Exceptionals 0 0 0 0 0 0 Tax 0 0 -6 6 -3 -12 Minority interests 0 0 0 0 0 0 Net profit -4 -20 -44 -22 8 33 Restated net profit -3 -17 -40 -19 10 35 Change (%) - - -138.2% -52.7% - 245.5% Cash Flow Statement (EURm) Operating cash flows -3 -17 -33 -23 18 55 Change in working capital 0 1 -2 -7 -30 -40 Capex, net 0 -4 -8 -10 -12 -12 Free Cash flow -3 -19 -43 -40 -24 3 Financial investments, net 0 -5 0 0 0 0 Dividends 0 0 0 0 0 0 Capital increase 5 38 25 5 3 0 Other 0 0 -6 6 -3 -12 Change in net debt - 11 -37 -5 5 15 Net debt (+)/cash (-) -2 -13 24 29 24 9 Balance Sheet (EURm) Tangible fixed assets 0 10 17 25 33 37 Intangibles assets 0 7 7 7 7 7 Cash & equivalents 2 19 19 19 19 19 current assets 1 5 6 24 77 141 Other assets 0 0 0 0 0 0 Total assets 3 40 48 75 135 204 L & ST Debt 0 3 27 56 80 89 Provisions 0 0 0 0 0 0 Others liabilities 1 12 11 22 44 69 Minority interests 0 0 0 0 0 0 Shareholders' funds 2 26 11 -2 12 46 Total Liabilities 3 40 48 75 135 204 Ratios Nikolaas Faes Gross margin - 0.0% 20.0% 50.0% 65.0% 65.0% EBITDA margin - -2231.3% -338.7% -58.2% 12.3% 20.6% 33(0) 6 11 12 44 44 Net debt/EBITDA (x) - 0.8 -20.6% -141.9% 385.1% 132.2% Operating margin - -1862.4% -306.3% -55.9% 10.7% 18.2% [email protected] Tax rate - 0.4% 17.4% 25.0% 25.0% 25.0% Net margin - -1871.3% -367.6% -42.4% 7.9% 13.6% ROE - -65.3% -353.6% 792.0% 86.8% 75.8% ROCE - -420.4% -266.3% -104.8% 22.1% 47.6% Gearing - -64% 67% -1540% 523% 152% FCF/EBIT - 0.9 131.9% 122.6% -234.4% -19.6% Dividend payout - 0.0% 0.0% 0.0% 0.0% 0.0%
Source: Company Data; Bryan, Garnier & Co ests.
EXECUTIVE SUMMARY
Khiron is a Canadian integrated cannabis company with its core Khiron est une société canadienne intégrée de cannabis dont les operations in Latin America. From its base in Colombia it is activités principales sont situées en Amérique latine. Depuis sa base spreading out into Mexico, Peru, Chile, Uruguay and Brazil. colombienne, elle s’étend au Mexique, au Pérou, au Chili, en Khiron is led by co‐founder and Chief Executive Officer, Alvaro Uruguay et au Brésil. Khiron est dirigée par Alvaro Torres, Torres, together with an experienced hands-on executive team, cofondateur et CEO, entouré d’une équipe de direction and a knowledgeable Board that includes former President of expérimentée et d’un conseil d'administration qualifié comprenant Mexico, Vicente Fox. un ancien président du Mexique, Vicente Fox. La société s’est donnée comme mission d’améliorer la qualité de vie The company’s mission is to improve the quality of life of people des personnes en développant des produits à base de cannabis de by developing high-quality cannabis-based branded products in grande qualité aussi bien dans les catégories médicale et santé que the medical and health & wellness categories across Latin Bien-être en Amérique latine. America. Bien implantée en Colombie dans les produits de cannabis Its position in medically-validated cannabis products is mostly médicalement validés, où la société est autorisée à cultiver, produire advanced in Colombia where the company is fully licensed for et distribuer sur le marché intérieur et exporter à l'échelle the cultivation, production, domestic distribution, and internationale du cannabis médical (THC et CBD). Khiron y est international export of both THC and CBD medical cannabis. également autorisé à vendre des produits cosmétiques à base de Khiron is also licensed to sell CBD-based cosmeceutical products CBD. in Colombia. Un solide plan marketing visant à fidéliser la marque et les préférences des patients est déjà développé et mis en œuvre qui lui A robust marketing plan aimed at brand loyalty and patients permettra de montrer l’intérêt pour ses produits, nécessaire pour preference is already developed and implemented and will allow obtenir un quota de production. Grâce à des alliances stratégiques it to demonstrate demand for its products, which is needed to avec des organisations de patients telles qu'ACMI et ACN et à leur receive production quota. Through strategic alliances with and approbation, la société a déjà accès à un réseau de 500 000 patients. endorsements of patient organizations such as ACMI and ACN the La société développe également sa présence dans le commerce de company has already access to a network of 500,000 patients. détail par le biais de JV avec des cliniques qui lui permettront Next the company is also developing a retail presence through d’avoir accès aux médecins et aux patients. Conformément à cette JVs with clinics that will allow it access to doctors and patients. stratégie, la société a acquis ILANS, une clinique de neuropathie basée à Bogota comptant environ 120 000 patients et 60 médecins. Consistent with that strategy the company acquired ILANS, a Cette stratégie d’acquisition de patients centrée sur la fidélisation à neuropathic clinic based in Bogota with about 120,000, patients la marque par le biais de consultations dans des cliniques, d’alliances and 60 doctors. This patient acquisition strategy that centers on avec des associations de médecins, de pharmacies et d’Assurance building brand loyalty through in-person clinic consultations, Maladie et fournissant aux médecins une variété de plateformes medical association alliances, alliances with pharmacies, health d’éducation au cannabis sera appliquée dans toute l’Amérique latine. insurance and providing physicians with a variety of cannabis Dans le même temps, Kuida, la marque de soins de la peau CBD education platforms will be applied across Latin America. développée par la société («cuida» signifiant en espagnol «prendre Meanwhile, the company’s own developed CBD skin care brand soin de soi») focalise ses efforts dans la catégorie santé & bien-être. Kuida (in Spanish ‘cuida’ means ‘taking care off’) is leading the Déjà présent sur le marché colombien Kuida sera progressivement commercialisé en Amérique latine, aux États-Unis et en Europe. efforts in the health & wellness category. Kuida is already Khiron a également formé une JV avec Dixie qui permettra à ce selling in the Colombian market and will gradually be dernier de vendre Kuida au travers de son réseau de distribution aux commercialized across Latin America, the US and Europe. Khiron États-Unis. Khiron commercialisera les différentes marques de Dixie has also formed a JV with Dixie that will allow Dixie to plug Brands (Dixie, Aceso, Therabis et Synergy) dans la catégorie aliments Kuida in its network for distribution throughout the US and et boissons, suppléments et animaux domestiques en Amérique Khiron will sell Dixie Brands’ various brands (Dixie, Aceso, latine. Therabis and Synergy) in the food & beverages, supplement and En plus de consolider sa position en Colombie, Khiron s’intéresse pet category across Latin America. également à d’autres juridictions latino-américaines où des Next to solidifying its position in Colombia, Khiron is also réglementations gouvernementales sont déjà en vigueur, telles que penetrating other Latin American jurisdictions where Mexique, Chili et Uruguay, ou prévues pour permettre les opérations government regulation of cannabis are in place, such as Mexico, relatives au cannabis, telles que Pérou, Brésil et le Panama. La Chile and Uruguay, or anticipated to enable cannabis operations, stratégie déployée est très similaire à celle utilisée pour le marché colombien: d’une part, préparer le marché pour ses produits à base such as Peru, Brazil and Panama. The strategy that it deploys is de cannabis médicinal par le biais d’alliances avec des associations very similar to how it has been approaching the Colombian médicales, de JV avec des cliniques, d’accords de distribution avec market: on the one hand preparing the market for its medicinal des grossistes et des chaînes de pharmacies et d’autre part, cannabis products through alliances with medical associations, rechercher des opportunités d’entrer sur le marché avant la JVs with clinics, distribution agreements with wholesalers and concurrence sur la base de règles d'usage compassionnel du cannabis pharmacy chains; on the other hand looking for opportunities to ou avec sa gamme de produits de soin de la peau et pour animaux de enter the market ahead of competition based on compassionate compagnie à base de CBD. use rules for medicinal cannabis, or with its CBD-based skin and pet care product range.
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Contents
EXECUTIVE SUMMARY 3
PART 1: INVESTMENT CASE 5 Legal cannabis shoots up in Latin American 6 Patient acquisition model with a particular focus on clinics 7 CBD branded consumer packaged goods 9 Accelerating momentum as market initiatives are executed 10 Attractive valuation 10
PART 2: LATIN AMERICAN CANNABIS MARKET OVERVIEW 15 – Medicinal cannabis is legal in ten Latin American countries 15 – CBD skin and pet care market potential 18 PART 3: BUSINESS OUTLINE AND STRATEGY 20
PART 4: COLOMBIA 24 Regulations and competition 24 Operations 26
PART 5: MARKET ACCESS AND CLINIC STRATEGY 29 – Patient acquisition strategy focused on associations and clinics 29 – Insurance strategy to increase access to medical cannabis 31 PART 6: BRANDED CONSUMER GOODS 33 Kuida 33 Dixie JV 36
PART 7: EXPANSION STRATEGY 38 Mexico 39 Uruguay and Brazil 40 Chile 42 Peru 43 Europe and the United States 45
PART 8: FINANCIAL MODELLING 46 Medicinal cannabis estimates 46 CBD-based branded consumer packaged goods 48 EBITDA margin of circa 25% 50 Key financial items 51
PART 9: APPENDIX - THE KHIRON TEAM 53
BRYAN GARNIER STOCK RATING SYSTEM 56
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Part 1: Investment case
Khiron is a Canadian integrated cannabis company with its core operations in Latin America. From its base in Colombia it is spreading out into Mexico, Peru, Chile, Uruguay and Brazil. Khiron is led by co‐founder and Chief Executive Officer, Alvaro Torres, together with an experienced hands-on executive team, and a knowledgeable Board that includes former President of Mexico, Vicente Fox. The company’s mission is to improving the quality of life of people by developing high-quality cannabis-based branded products in the medical and health & wellness categories across Latin America.
Fig. 1: Operations & partnerships spanning 9 countries with multiple product lines across categories
Source: Khiron
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Legal cannabis shoots up in Latin American
Ten Latin Home to 637m, Latin America’s legalisation of medicinal cannabis is spreading. Since Uruguay American countries have legalized cannabis in December 2013, another nine Latin American countries (Argentina, Brazil, legalized the use Cayman Islands, Chile, Colombia, Jamaica, Mexico, Paraguay, Peru) have legalized medical of medicinal cannabis, Colombia has legalized recreational cannabis (if self-cultivated) and another 3 have cannabis. decriminalized the recreational use of personal amounts (Chile, Jamaica and Mexico). Medicinal cannabis Over the next twelve months the laws will be translated into rules and regulations which will sales in the region could surge to open the commercial opportunities. We are expecting medicinal cannabis sales in the region to USD6.5bn by 2025 surge from USD125m in 2018 to USD6.5bn by 2025. This estimate is conservatively based on a from USD125m in prospective market of 12.6m medicinal cannabis users, assuming that over time 2% of the 2018. population would use cannabis for medicinal purposes. It also assumes the patients will need to pay out of pocket their expenses and hence that there will be a limit in spend at about five to six percent of their income (we completely ignored the current prices for medicinal cannabis that has been running up to USD250 – and even USD700 per gram in Brazil). Assuming that insurance companies intervene and that medicinal cannabis is covered then spend towards medicinal cannabis could indeed grow towards the 9% of income of those patients or USD9.7bn for the Latin American region. Recreational cannabis is currently only being discussed in Mexico and Chile. Those two recreational markets could add respectively USD1.9bn and USD3.3bn in sales assuming current prevalence rates of respectively 2.1% and 15.1%. Legalisation of recreational cannabis across the region could drive total legal recreational cannabis sales up to USD16.2bn (with an average prevalence rate of barely 2.4%).
Khiron is fully Within Latin America, Khiron is well positioned with a strong base in Colombia where its position licensed in Colombia… in medically-validated cannabis products is well advanced. The company is fully licensed in the country for the cultivation, production, domestic distribution, and international export of both THC and CBD medical cannabis. Khiron is also licensed to sell CBD-based cosmeceutical products in Colombia.
… and is expanding Next to solidifying its position in Colombia, Khiron is also penetrating other Latin American into Mexico, Brazil, Peru, Chili, jurisdictions where government regulation of cannabis is in place, such as Mexico, Chile and Panama and Uruguay, or anticipated to enable cannabis operations, such as Peru, Brazil and Panama. The Uruguay. strategy that it deploys is very similar to how it has been approaching the Colombian market: on the one hand preparing the market for its medicinal cannabis products (Mexico, Chile, Peru, Brazil) through alliances with medical associations, JVs with clinics, distribution agreements with wholesalers and pharmacy chains; on the other hand looking for opportunities to enter the market ahead of competition based on compassionate use rules for medicinal cannabis (Mexico, Brazil), or with its CBD-based skin and pet care product range (Chile, Peru). Of particular importance is Khiron’s entry in Uruguay where it is gearing the business mostly to the import/export of medicinal cannabis products and has based the company in one of the free trade zones near the airport which can facilitate imports from Colombia to be re-exported to Brazil (all within the Mercosur Free Trade Bloc) or to the North American and European markets (unlike Colombia, Uruguay is less strict in applying the export quota system of the International Narcotics Control Board). The advantage of the free trade zones is that the entry and exit of goods are exempt from all taxes (no corporation tax, no VAT, no excise tax, etc.). Potentially
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Khiron will be able to use that set-up to participate in the global medicinal cannabis trade where Latin America could play an important role as it is one of the most attractive regions to grow low costs cannabis because of the twelve hours of sunlight year-round, low cost greenhouses, electricity and labor, and cheap available farmland.
Fig. 2: Latam medicinal cannabis potential Fig. 3: Latam recreational cannabis potential USD6.5bn USD9.7bn
Others Others Chile 15% 11% Brazil Peru 5% Brazil 25% 4% 37% Chile 20% Venezuela 2% Argentina Mexico 11% 11% Peru Mexico 1% Argentina 26% 19% Venezuela Colombia Colombia 1% 5% 7%
Source: Bryan, Garnie & Cie ests Source: Bryan, Garnie & Cie ests
Patient acquisition model with a particular focus on clinics
Preparing demand In order to reach potential patients and offer them medicinal cannabis, Khiron is developing for its products through alliances relationships with prescribing doctors mainly through forming alliances with associations, who with associations, lead ideas for their members, liaison and sales staff who visit opinion leaders and doctors, joint insurance ventures or ownership of clinics. By doing so Khiron creates a leadership image and also demand companies, clinics and education for its products ahead of when it will be able to sell them. As doctors become more comfortable platforms. and knowledgeable about cannabis, Khiron expects doctors to refer their patients to Khiron, either by way of prescription or through a referral to Khiron’s medical clinics. Next, it has also been approaching the insurance companies in order to get medical cannabis paid for by medical insurance (which could run up to CAD2,000 p.a.) instead as an out-of-pocket expense from the patient (which, according to Khiron, limits the annual spend to about CAD550 per patient). And in parallel the company is in discussions with the insurance companies to take over a group of pain/epilepsy patients that it will then treat, including with medical cannabis.
For its international expansion, the strategy is very similar: preparing the market for its medicinal cannabis products (Mexico, Chile, Peru, Brazil) through alliances with medical associations, JVs with clinics, distribution agreements with wholesalers and pharmacy chains.
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JV’s with clinics or Particularly the forming of JV’s with clinics or outright owning them could accelerate patient outright owning them could conversion from other treatments to medicinal cannabis. According to QuintilesIMS, about 10% accelerate patient of the population in Latin America suffers from diseases that can be treated with cannabis transition from including chronic pain, anxiety, epilepsy, depression, insomnia, PTSD, Parkinson’s, MS and other treatments to medicinal Tourette’s. Khiron is especially interested in chronic pain clinics as there are 22.7m individuals cannabis. in the 5 countries in which Khiron is active (Colombia, Brazil, Mexico, Peru and Chili). Once Khiron owns a clinic or has formed a JV, there is much more opportunity and willingness to switch patients from existing treatments to (partially) treatment with medicinal cannabis. We calculate that if Khiron could transition 30% of the patients of a clinic, it could double revenues of those clinics (with the same number of patients) and nearly triple EBITDA, given the higher gross margin from the medicinal cannabis business (fully owns the supply chain) and the operating leverage of the fixed costs. In the case of the ILANS acquisition which happened at only 0.7x sales and 3.9x EBITDA, would after revenue synergies become 0.3x sales and 1.4x EBITDA!
In terms of speed, we believe that a 30% conversion rate could be achieved after two to three years, whereas we assume that a conversion rate of 20% in the general patient population could take six to ten years.
Fig. 4: Potential 43.5m patients in Colombia, Fig. 5: ILANS revenue and EBITDA after Brazil, Mexico, Peru and Chile by conversion of 30% of its patients to conditions medicinal clinics
Epilepsy Tourette's 11% 0% Revenue 21.9 Depression 8% EBITDA Parkinson's MS 2% 0% Insomnia Chronic 10.4 6% pain 54% 5.1 Anxiety 13% 1.8 PTSD 5% Naussea cancer Clinic Old Clinic New 1% Source: QuintilesIMS Source: Bryan, Garnie & Cie ests
Khiron intends to Given the high profitability, the ease of conversion towards medicinal cannabis, and the further develop joint ventures and potential for attraction and retention of both doctors and patients, Khiron intends to further acquisitions of develop joint ventures and acquisitions of clinics across not only Colombia but also Brazil, clinics across not Mexico, Peru and Chile. These clinics would not only serve as a point of sales but also as and only Colombia but also Brazil, education center for patients, and infrastructure to welcome any patient groups that it will be Mexico, Peru and able to negotiate with the insurance companies. Chile.
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CBD branded consumer packaged goods
Kuida Awaiting the developments in medicinal cannabis, Khiron understands that the regulatory cosmeceuticals were launched in environment in Latin America could allow for the early launch of cannabis based consumer Colombia and is packaged goods. From that analysis it developed Kuida, a cosmeceutical, with a comprehensive looking to enter portfolio of skin and body care products for woman. Kuida was launched in Colombia in Mexico, Peru and Chili. November 2018. Plans to launch Kuida in Mexico, Peru and Chili are being executed. In Peru already four of the Kuida products received regulatory approval.
And with the Dixie To further accelerate its cannabis CPG portfolio, the company formed a joint venture with Dixie Brands portfolio it accesses brands in Brands (March 2019) that allows it to distribute the Dixie Brands various products (Dixie, Aceso, the food & Therabis and Synergy) in the food & beverages, supplement and pet category across Latin beverages, America. Furthermore, Dixie Brands will also manufacture and distribute Khiron's Kuida in the supplement and pet category. US. Skin care is a Together, Khiron and Dixie Brands could be reaching 900m consumers in the US and Latin USD8.6bn industry in Latam and America in large and strong growing segments. GlobalData sized the US skin care market at USD19.8bn in the USD19.8bn in 2017 and we estimate the US CBD consumer packaged goods market at around US. Latam pet USD0.4bn in 2018. The total Latam skin care market is estimated at USD8.6bn. Furthermore, care is a USD7.0bn business. the deal will allow Khiron to access the 200m pets in Latin America with a pet care market estimated at USD7.0bn .
Fig. 6: Latam skin care market -USD8.6bn Fig. 7: Latam pet care market – USD7.0bn
Others Argentina Chile Others Peru 6% 4% 3% 3% 4% Peru Colombia 4% 5% Chile Colombia 7% 7%
Brazil Argentina 49% 11% Brazil Mexico 56% 23% Mexico 18%
Source: GlobalData, Bryan, Garnie & Cie ests Source: GlobalData, Bryan, Garnie & Cie ests
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Accelerating momentum as market initiatives are executed
Kuida is already Although in the long term the company will want to be in all five of its verticals: edicinal selling in Colombia but this year Khiron cannabis, Clinics, Skin care, Pet care and THC consumer brands for recreational use in each should have of the countries, in 2019 we expect the company to make all effort to have some products products in Peru, on the shelves. That would indicate that all regulatory hurdles have been cleared and that Chili, Mexico, Uruguay and Brazil. its’ supply chain is up and running. In particular we are looking for the company in 2019: 1. To start selling in Colombia CBD medicinal cannabis in Q3 and THC medicinal cannabis in Q4. 2. Launching Kuida in the US 3. Start selling medicinal cannabis for compassionate use in Mexico before medicinal cannabis regulation come in place. 4. Selling Therabis in Mexico (through veterinaries), 5. Import Kuida and Aceso supplements in Peru from Colombia, 6. Launch skin and pet care products in Chile 7. Launch Kuida in Europe 8. Launch Aceso balms for muscle pain relief in Colombia (2019) 9. Develop additional lines for the Kuida brand. The target is to have 12 lines by the end of 2019 compared to 7 currently adding products like hair balsam, dry oil, body cream
That should be followed in 2020 with important launches of medicinal cannabis in Brazil, Chile and Peru.
Meanwhile we would expect more JVs/acquisitions in the clinics business line but also more joint ventures in CBD consumer packaged goods and further entry in Europe (currently only in Italy).
All that adds up to significant activity for a team of currently only 250. The secret is the quality and entrepreneurship if Khiron’s employees who tend to be local and have had long lasting careers in a whole range of consumer goods and pharmaceutical companies (see appendix). Attractive valuation
Fair value of We calculate a DCF based fair value for Khiron at CAD4.0 per share. In drawing up our DCF CAD4.0 per share. valuation for Khiron, we start with the Bryan Garnier assumptions of a risk-free rate of 1.6% and a risk premium of 7%. We add to that an unleveraged beta of 1.4x (which becomes a leveraged beta of 1.6.8x given that, over the longer term, it is likely that about 25% of the company’s market value of invested capital is going to be financed with debt – assuming a net debt/EBITDA ratio of around 2.0x) which ends up in a leverage required return of equity of 13.4%.
In terms of growth rate, we use a long-term growth rate of 4.0%. In computing our DCF-based fair valuation of Khiron, we use for our long-term assumption a necessary net capex figure which is equal to depreciations as we assume that the company will shift towards external sourcing of its raw materials rather than further building out its cultivation facilities. The last assumption is what we believe would be the required working capital level at Khiron. There is some need for inventories in finished products and payment terms for their distribution partners could well end up in the 60 to 90 days range, partially offset by its own supplier credits.
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Fig. 8: Khiron DCF valuation
USD m Dec-18 Dec-19e Dec-20e Dec-21e Dec-22e Dec-23e Sales 1 11 44 128 256 363 EBIT before fair value changes (20) (37) (28) 12 45 75 EBIT margin -2231% -343% -63% 9% 17% 20.6% Tax rate 0.4% 17.4% 25.0% 25.0% 25.0% 25.0% Taxes 0 6 7 (3) (11) (19) Operating profit after taxes (20) (31) (21) 9 33 56 + Depreciations 0 1 2 4 8 8 -Investments in fixed assets (4) (8) (10) (12) (12) (11) Total net investments in fixed assets (4) (8) (8) (8) (4) (3) -Investments in working capital 1 (2) (7) (30) (40) (19) =Operating cash flow (22) (40) (36) (29) (10) 34 Discount factor 0.97 0.87 0.77 0.69 0.62 Present value of free cash flow (39) (31) (22) (7) 21 Cumulative present value of free cash flow 64 +Present value of terminal value 405 =Enterprise value 470 Adjusted net debt 16 =Fair value 486 Fair value fully diluted per share 4.0
Long term assumptions Risk free 1.6% Equity premium 7.0% Unleveraged Beta 1.40 Leveraged Beta 1.68 Company debt spread 4.0% RRE 13.4% MT Growth 10.0% LT Growth 4.0% Target Debt/IC 25% LT WACC 11.4% Source: Bryan, Garnier & Cie At a 30% discount to a group of close Khiron’s valuation at 4.0x FY20 revenues is at a 50% discount to where the Canadian LP’s are comparable trading (8.4x 2020 revenues) but in line with the smaller ones. Khiron is also trading with a 30% companies. discount compared to a group of closer comparable companies (5.5x 2020 revenues) which include Aleafia, the Canadian medicinal cannabis LP and owner of clinics; Charlotte’s Web a CBD oriented US consumer packaged goods company and PharmaCielo the Colombian CBD cannabis company.
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Fig. 9: Peer group valuation – priced at 5/7/2019
Market Price EV EV/Sales EV/EBITDA Company Ticker Cap (lc) (CADm) (CADm) CY18 CY19 CY20 CY18 CY19 CY20 Canopy Growth WEED.TO 53.36 19316 14301 93.3 31.4 13.1 -99.6 -55.2 80.3 Tilray TLRY.O 46.35 4589 4412 102.6 24.9 12.3 -81.7 -90.0 1470.6 - Aurora Cannabis ACB.TO 10.24 10568 10409 113.7 26.9 12.0 -6.0 46.6 105.1 - Cronos CRON.TO 20.97 4550 4422 276.4 83.4 26.8 -221.1 142.7 276.4 1554. Aphria APHA.TO 9.28 2394 2116 29.7 5.9 2.5 7.5 25.7 0 - Hexo HEXO.TO 7.08 1699 1211 151.6 13.3 3.2 -12.6 16.7 156.6 TGOD TGOD.TO 3.18 1023 668 37.9 13.9 2.3 -22.0 -17.1 7.9 CannTrust TRST.TO 9.79 1077 951 17.3 7.0 3.5 317.0 475.5 15.6 - Organigram OGI.V 8.36 1170 1069 52.7 7.6 4.2 16.7 11.0 148.6 Supreme Cannabis FIRE.V 1.56 569 557 39.2 9.8 3.8 -79.2 -24.8 13.7 Average Canadian LP's 8.4 183.1
Aleafia ALEF.TO 1.38 375 352 117.4 16.8 2.1 -19.6 -17.6 9.5 PharmaCielo PCLO.V 6.83 659 706 na 141.3 10.5 na -58.9 25.2 Charlotte's Web CWEB.TO 18.79 1755 1686 18.2 9.3 4.0 60.8 27.8 10.5 Average close 5.5 15.1 comperables
Khiron KHRN.V 2.3 261 242 242.3 24.2 4.0 -12.1 -8.4 40.4 Source: Thomson Reuters ; Bryan, Garnier & Cie ests.
It is also interesting to set Khiron’s CAD260m market cap against the transactions that Canopy Growth, Aurora and Aphria have been making in the region. Mainly because of its unrivalled team that focuses mainly on end markets (clinics, pharmacies) and being as fast to the market as possible, Khiron looks for us a somewhat better asset.
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Fig. 10: Recent Latin American transactions
Acquirer Target Date Price Countries Activity (CADm) of operations
Licence for 4.5m sq ft for THC and CBD production. Canopy Spectrum Cannabis 05/07/ Spectrum Cannabis Colombia will serve as a 198 Colombia Growth Colombia 2018 regional production and processing hub for Canopy LATAM.
10/09/ Colombia & Colombian license for production 210,000 sq. ft Aurora ICC Labs 290 2018 Uruguay and over 1m sq. ft of hemp growing in Uruguay
Colombia, Licence for production and extraction of CBD Scythian Biosciences' 27/09/ Argentina, cannabis in Colombia, license to import into Aphria 246 LATAM Holdings 2018 Brazil, Argentina for CBD research, Brazil cultivation Jamaica application and Jamaican cultivation license
Source: Bryan, Garnier & Cie ests. Blue sky scenario value of over CAD10 per share. We believe that our forecasts and valuation of Khiron are conservative. In a blue sky scenario we arrive at a fair value well above CAD10 per share. Upside to our figures includes:
• Our model is based on patients paying out-of-the pocket for their medicinal cannabis needs whereas competing products are covered by insurance. Assuming that insurance cover would extend to medicinal cannabis, spending on medicinal cannabis is likely to be a multiple of the current USD320 per annum that we assumed per patient (and with that comes also higher margin potential). Doubling spend to USD640 per annum would add CAD3.7 value per share. • We have not taken into account any success from Khiron’s negotiation with insurance companies to take over a groups of pain patients that they then manage at a fixed annual costs. It would not only improve medicinal cannabis penetration but also increase Khiron’s market share. We calculate that any additional 5% market share would add CAD0.5 per share. • We have not given any thought on the potential launch in Mexico of the THC Dixie Brands products, but with a Mexican recreational market that could be valued at USD1.9bn, the potential is significant even if we would exclude Khiron entering the dried flower or simple extract markets. A 5% market share from a USD500m THC branded consumer goods would still add USD25m (CAD33m) of revenues and drive an additional CAD0.4 per share. • Although we do expect Khiron to actively acquire clinics not only in Colombia but in the rest of Latam, we believe that acquisitions – even at fair value – would create USD100 value per patient. For every 100,000 acquired patients, Khiron’s fair value could increase by CAD0.1. Adding 500,000 patients would add CAD0.5 per share. • We have modelled that Khiron’s Brazilian business remains in the Rio de Janeiro–São Paulo Megapolis. However, the company has clear intention to venture further into Brazil and reach out to the 209m inhabitants rather than the 51m in the Rio de Janeiro– São Paulo Megapolis. That could add CAD2.5 per share.
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• Another lever is the possibility of Khiron getting into the export market for highly refined products, which is something the company wants to do in partnership with a larger company that has expertise in that business.
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Part 2: Latin American cannabis market overview
• Latin America could become a leading cultivation center for global cannabis supply • Colombia alone is already supplying 44% of total authorized world use and production in the country continues to increase. • Legalisation of medicinal cannabis is spreading in the region and medicinal cannabis sales in the region are likely to surge from USD125m in 2018 to USD6.5bn by 2025. • Recreational cannabis is currently only being discussed in Mexico and Chile. Those two recreational markets could add respectively USD1.9bn and USD3.3bn in sales assuming current prevalence rates of respectively 2.1% and 15.1%. Legalisation of recreational cannabis across the region could drive total recreational cannabis sales up to USD16.2bn (with an average prevalence rate of barely 2.4%). • We estimate the Latam CBD skin care market potential at USD500m and the Latam CBD pet care market at USD350m.
MEDICINAL CANNABIS IS LEGAL IN TEN LATIN AMERICAN COUNTRIES Cost of growing Latin America is gradually becoming a leading market for medical cannabis and as an agricultural cannabis in Colombia is less center. It is one of the most attractive regions to grow low costs cannabis and export globally than US10c per because of the twelve hours of sunlight year-round, low cost greenhouses, electricity and labor, gram compared to and cheap available farmland. Industry sources estimate that the cost of growing cannabis in US70c to US150c in North America. Colombia is less than US10c per gram compare to a targeted growing costs of US70c to US150c per gram in North America.
As Latin America joins the global cannabis rush, cannabis prices are likely to drop as cannabis oil becomes an agricultural commodity. The more supply that enters the global market, the lower the prices will fall. In the global market, first mover advantage is held by Colombia, after they introduced export licenses before other countries in the region. As a result Colombia is the only country in the region that is exporting and in 2018 received, from The International Narcotics Control Board, a production quota 44.6 tons of dried flower for conversion into derivatives, 44% of total authorized world use.
The great The great agricultural condition is also why there is a vibrant illicit cannabis market in Latin agricultural conditions is also America, (for local consumption and export), significant home growth and as a result low why there is a lot cannabis prices. Retail cannabis prices in the region are around USD2.0per gram (and can be as of cheap illicit low as US50 cents per gram for low quality), which is well below the USD5 and USD8 on average cannabis around. in North America and Europe.
Since Uruguay Latin America also is home to the first country that legalized both medical and recreational legalized cannabis in December cannabis – Uruguay. Since Uruguay legalized cannabis in December 2013, another nine Latin 2013, Argentina, American countries (Argentina, Brazil, Cayman Islands, Chile, Colombia, Jamaica, Mexico, Brazil, Cayman Paraguay, Peru) have legalized medical cannabis, Colombia has legalized recreational cannabis Islands, Chile, Colombia, (if self-cultivated) and another three have decriminalized the recreational use of personal Jamaica, Mexico, amounts (Chile, Jamaica and Mexico). Paraguay, Peru have legalized medical cannabis Page - 15
Fig. 11: Overview of the legal status of cannabis in Latin America
Medical cannabis Recreational cannabis Industrial cannabis Argentina Legal Illlegal Illlegal Brazil Legal Illlegal Legal Cayman Islands Legal Illlegal Illlegal Chile Legal Decriminalised Legal Colombia Legal Legal (self-cultivation) Legal Jamaica Legal Decriminalised Legal Mexico Legal Decriminalised Legal Panama Illlegal Illlegal Illlegal Paraguay Legal Illlegal Legal Peru Legal Illlegal Legal Uruguay Legal Illlegal Legal Source: Bryan, Garnier & Cie Latin American cannabis market potential
Latam medicinal The Latin American region boasts a population of 637 million with a total GDP of USD5.5trillion. cannabis market potential However, total healthcare spend stands at USD370billion which, compared to the US’s estimated at USD3.5trillion and Europe’s USD2.6trillion, means that the Latin American market value is USD6.5bn and significantly smaller than North America or Europe, despite its large population. Nevertheless recreational cannabis market we believe that the Latin American medicinal cannabis market could, over time be worth at USD16.2bn. USD5.4bn to USD6.5bn. With only a clear path to recreational legalisation in Mexico and Chile, those two markets could add respectively USD1.9bn and USD3.3bn in sales assuming current prevalence rates of respectively 2.1% and 15.1%. Legalisation of recreational cannabis across the region could drive total recreational cannabis sales up to USD16.2bn (with an average prevalence rate of barely 2.4%).
Indeed both medical cannabis and recreational cannabis could become universally legal in the region when cannabis is rescheduled by the United Nations or when cannabis becomes legal at the federal level in the US. The economies of Latin America and the Caribbean remain dependent on the US systems. There is sufficient local support to make cannabis fully legal but, currently, no political will to do so. Medicinal cannabis market will be the first to develop
Increasingly Latin American countries are legalizing medicinal cannabis. The majority of Latin American countries abide by the UN Controlled Substances Act in an effort to align themselves with international treaties. However, the convention does allow governments to use controlled substances for medicinal and scientific research. It’s because of this provision that most Latin American countries have been able to legalize medicinal cannabis. Mexico, Colombia, Peru, Chile, Argentina, Uruguay, and Brazil already boast legal medicinal markets (some under the compassionate care provision). Panama will be debating the legalization of medicinal cannabis in the next few months and will have a vote before the end of the year, with regulations expected to be finished in 2019. Although the medical cannabis industry is in its infancy, the
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drug is increasingly incorporated into the healthcare systems of several Latin American countries. In the Latin American countries where medicinal cannabis is legalized, mostly a prescription is needed. However, the application process is markedly different across the region. In certain countries, cannabis patients must apply for government licensing and medical cannabis cards, while other countries grant patients access directly via their GP.
Since currently most countries do not allow the cultivation or distribution of medical cannabis, they do allow the importation of cannabis with permits from their respective health departments. CBD oil is commonly treated as a controlled substance but a medicinal product. Medical cannabis in flower form is still relatively uncommon. According to QuintilesIMS, about 10% of the population in Latin America suffers from diseases that can be treated with cannabis including chronic pain, anxiety, epilepsy, insomnia, depression, etc. which is similar to figures on North America and Western Europe. And in North America, where permitted, 10% - 20% of the sufferers are using medicinal cannabis for these indications (equal to 1 to 2% of the total population). We believe that in Latin America that evolution could go as fast as it has been in North America.
Estimating the Statistics from North America, show that the average medical marijuana user spends USD136 per Latin American medicinal transaction and makes a purchase every 10 days, which adds up to USD4,896 per annum or 9% of cannabis market the average GDP per user head (Recreational users, on the other hand, purchase every 14 days at USD6.5bn and and only spend USD49 per transaction.). In our modeling for the potential market, we assume potentially at USD9.7bn if that the 9% of GDP per head spend on an annual treatment with medicinal cannabis is not insurance possible given the much lower GDP per capita figures. Instead we expect the medical cannabis companies would market to be probably 5% to 6% of annual GDP per head per patient. Five per cent spend on include in their cover medicinal cannabis for 1% of the population equals a total Latin American spend of USD2.7bn evolving over time to USD6.5bn (assuming 2% of the population uses medical cannabis at 6% of their GDP per head per patient by 2028). Assuming that insurance companies intervene and that medicinal cannabis is covered then spend towards medicinal cannabis could indeed grow towards the 9% of GDP/capita of those patients or USD9.7bn for the Latin American region. Recreational/adult-use opportunities could become significant over time
Although recreational cannabis is currently illegal in the majority of Latin American countries, the discussion on the medical benefits are driving change in attitudes and there is an increased probability that legalisation of recreational cannabis will be spreading across the region. However, today consumption levels are relatively low as illegal growers have never seen much financial potential in selling cheaply cannabis in the local market but instead preferred to sell it at multiples in North America and Europe. Retail cannabis prices in the region are around USD2.2per gram (but can be as low as USD50 cents per gram for low quality), which is well below the USD5 and USD8 on average in respectively North America and Europe but in relative terms are more expensive. With very low affordability, the average prevalence rate in Latin America is only at 2.4% compared to 17.0% in the US, 14.7% in Canada, 11.1% in France and 6.6% in the UK. Nevertheless, cannabis clubs are
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popular and advocates are pushing for the right to access but also the right to self-cultivate (which is particularly popular relative to North America and Europe). In Uruguay recreational use is legal and it is also legal in Colombia if it is from the use of own grown plants. It is decriminalized in Chile, Jamaica and Mexico. And Mexico seems to be likely to legalize recreational use of cannabis in the very near future driven by favorable judgements from the Supreme Court granting defendants the right to grow and self-cultivate cannabis for personal use. Chile, Colombia, and Uruguay currently allow self-cultivation and possibly Chile could become a legal recreational cannabis market in the near term. Over time there will be commercial opportunities in recreational cannabis. In Mexico prevalence rate is extremely low at 2.1% and recreational cannabis sells for USD2.9 per gram in the illicit market. In Chile prevalence rate is the highest in Latin America at 15.1% and prices are also the highest in the region (USD 7.1 per gram). As such Mexico and Chile would add to a potential market of respectively USD1.9bn and USD3.3bn assuming that recreational users spend up to 10% of their GDP per head on cannabis . And if by 2028, the entire Latin American region has legalised recreational cannabis then that would add up to a market of USD16.2bn, compared to USD92.7bn for the North American market. During the next 12 months Mexico, Colombia, Ecuador, and Peru are set to finish regulating the use and commercialization of medicinal cannabis, but none of them have released any official statements on recreational legalisation.
CBD SKIN AND PET CARE MARKET POTENTIAL Potential Latin According to GlobalData, the global skin care market is worth USD127.8bn of which USD8.6bn for American CBD skin care market Latin America (China is the largest market at USD32.2bn and the US is USD18.2bn). In order to estimated at estimate how much the CBD skin care market could be worth we assume that two/three middle USD500m. size brands will emerge in this category who together could take 5 to 7%, which would mean about USD500m for the entire region. By way of reference the biggest Colombian skin care brand is Avon with an 11% share, followed by Natura 10%. A more upmarket brand like L’Oreal account for 1.6% of the market.
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Fig. 12: Latin American skin care market – Fig. 13: Colombian skin care market – USD432m USD8.6bn
Others Peru 6% 4% Avon Colombia 11% 5% Natura Chile 10% 7% Other Nivea 47% Brazil 7% Argentina 49% 11% Pond`s 6%
Mexico Lubriderm 18% 5% Johnson & Oriflame St. Ives Yanbal Cyzone Johnson 2% 2% 3% 3% 4%
Source: GlobalData, Bryan, Garnier & Co ests Source: GlobalData, Bryan, Garnier & Co ests
Estimating the Similarly the global pet care market is estimated to be worth USD93.5bn of which USD7.0bn for potential for CBD pet care at Latin America (US pet care market is USD43.0bn and the second largest market Germany is USD350m USD4.9bn). Again with Colombia as an example, the market, like skin care, is extremely fragmented which would indicate that over time CBD pet care brands could emerge that take each 1% of the market (like the flea and worm treatment brands), so a total CBD pet care market could be 5%. Purina and Pedigree are the two largest brands in Colombia with respectively 24% and 18% share of the market. But after that there are plenty of smallish brands with flea care brand Advantage taking 2% of the market and another flea care brand Advantix 1% of the market. For Latin America as a whole we estimate the CBD pet care market potential at USD350m.
Fig. 14: Latin American pet care market – Fig. 15: Colombian pet care market – USD479m USD7.0bn
Argentina Chile Others 4% 3% 3% Overall Peru 0% 4% Others Advantix 41% Colombia 1% 7% Agro Dog Care 1% Purina Advantage 24% Brazil 2% Mexico 56% 23% Whiskas 2% Frontline Pedigree Supercan 2% 18% 2% Private Label 7% Source: GlobalData, Bryan, Garnier & Co ests Source: GlobalData, Bryan, Garnier & Co ests
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Part 3: Business outline and strategy
Core of Khiron’s Khiron is a Canadian integrated cannabis company with its core operations in Latin America. operations is in Latin America. From its base in Colombia it is spreading out into Mexico, Peru, Chile, Uruguay and Brazil. Khiron is led by co‐founder and Chief Executive Officer, Alvaro Torres, together with an experienced hands-on executive team, and a knowledgeable Board that includes former President of Mexico, Vicente Fox. The company’s mission is to improving the quality of life of people by developing high-quality cannabis-based branded products in the medical and health & wellness categories across Latin America. The company is Its position in medically-validated cannabis products is most advanced in Colombia where the fully licensed in Latin America. company is fully licensed for the cultivation, production, domestic distribution, and international export of both THC and CBD medical cannabis. Khiron is also licensed to sell CBD-based cosmeceutical products in Colombia.
Core in the A robust marketing plan to develop strong brand loyalty and patients preference is already company’s strategy is to forge developed and implemented and will allow it to demonstrate demand for its products, which is alliances with needed to receive a quota. Through strategic alliances with and endorsements of patient medicinal organizations such as ACMI and ACN the company has already access to a network of 500,000 associations, patient patients. Next the company is also developing a retail presence through JVs with clinics that organizations and would allow it access to doctors and patients. Consistent with that strategy the company clinics but also to acquired ILANS, a neurological clinic based in Bogota with about 120,000, patients and 60 own pain clinics outright. doctors. This patient acquisition strategy that centers on building brand loyalty through in- person clinic consultations, medical association alliances, alliances with pharmacies, health insurance and providing physicians with a variety of cannabis education platforms will be applied across Latin America.
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Fig. 16: Operations & partnerships spanning 9 countries with multiple product lines across categories
Source: Khiron
CBD skin care brand Kuida has Meanwhile, the company’s own developed CBD skin care brand Kuida (in Spanish ‘cuida’ means already been ‘taking care off’) is leading the efforts in the health & wellness category. Kuida is already launched in selling in the Colombian market and will gradually be commercialized across Latin America, the Colombia and will gradually become US and Europe. Khiron has also formed a JV with Dixie that will allow Dixie to plug Kuida in its available across network for distribution throughout the US and Khiron will sell Dixie’s various brands (Dixie, Latin America, US Aceso, Therabis and Synergy) in the food & beverages, supplement and pet category across Latin and Europe. America.
Expanding in Latin While Khiron is solidifying its position in Colombia it is also penetrating other Latin American America with the same patient jurisdictions where government regulation of cannabis is in place, such as Mexico, Chile and acquisition Uruguay, or anticipated to enable cannabis operations, such as Peru, Brazil and Panama. The strategy as in strategy that it deploys is very similar to how it has been approaching the Colombian market: on Colombia and looking for early the one hand preparing the market for its medicinal cannabis products through alliances with entries in skin and medical associations, JVs with clinics, distribution agreements with wholesalers and pharmacy pet care. chains; on the other hand looking for opportunities to enter the market ahead of competition based on compassionate use rules for medicinal cannabis, or with its CBD-based skin and pet care product range.
• Mexico: Medical cannabis is legal but the government is still working on the regulations. Meanwhile Khiron is looking to enter the market earlier through the compassionate care provisions. It is building relationships with medical associations and clinics. The launch of the Kuida skin care line is being prepared and opportunities to launch the Therabis pet
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brand are being explored, but for both, the company is waiting for publication of the regulations. Potentially, it will also be able to launch the THC-line from Dixie Brands. • Chile: Chile has an established medicinal cannabis culture and was the first country in Latin America to adopt legislation to allow the cultivation of cannabis for medical purposes. DayaCann is the only group that has received authorization for growing cannabis and will be doing that also for Khiron. Meanwhile, Khiron pursues its full medical strategy in Chile, including clinic operations (JVs and/or ownership), endorsement of associations, physician education and pharmacy distribution. For its’ skin and pet care business, there are currently no regulations and Khiron is looking with the authorities how it would be allowed to import and distribute these products. • Uruguay: Khiron owns Dormul that has obtained a license to produce medical cannabis with THC for commercialization in Uruguay. Although there is some domestic potential, Khiron is mainly looking to use the Nettagro/Dormul set-up to export medicinal cannabis products internationally and has based the company in one of the free trade zones near the airport which can facilitate imports from Colombia to be re-exported to Brazil (all within the Mercosur Free Trade Bloc). The advantage of the free trade zones is that the entry and exit of goods are exempt from all taxes (no corporation tax, no VAT, no excise tax, etc.). • Peru: Medicinal cannabis got legalised in October 2017, but regulation and guidelines are still being developed. Khiron is not planning to cultivate cannabis in Peru but to import from Colombia. The company is looking for distributors, identifying clinics with whom to partner and delivering education to doctors. Furthermore cannabis with less than 1% THC is an uncontrolled substance, which offer Khiron the possibility to sell its product lines in skin care, pet care and also food and beverages CBD products . Four Kuida products have already received approval for commercialization. Furthermore, CBD supplements are regarded as a as a national product with medical use and could allow a possibility for Khiron to sell the CBD supplements from Dixie Brands. • Brazil: Although medicinal cannabis use is not yet fully legalized, Anvisa has regulated the compassionate use of cannabis for medicinal purpose since 2015. Khiron is looking with a number of clinics to set up a delivery system for groups of their patients. Over time we expect Khiron to acquire a number of clinics to accelerate its medicinal cannabis sales. Pet and skin-care products with CBD are not yet allowed in Brazil.
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Fig. 17: First mover advantage in Latin America
Source: Khiron
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Part 4: Colombia
Regulations and competition
Patients see a GP Colombia legalised medical cannabis in 2015. Potential patients have to see a GP who is familiar who prescribes medicinal with medical cannabis. If prescribed, the patient will be able to purchase medical cannabis at cannabis that is any nearby pharmacy licensed to sell it. However, only select pharmacies with a license from the purchased in National Council on Narcotics (CNE) and the Ministry of Health and Social Protection can pharmacies. distribute medical cannabis. Furthermore recreational cannabis is decriminalized and the possession of up to 20 grams is allowed, in addition to the personal cultivation of up to 20 plants. On top of that Colombia is a major exporter of cannabis but does obey strictly by the international agreements. The United Nations’ Single Convention on Narcotic Drugs of 1961, the Convention on Psychotropic Substances of 1971, and the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances of 1988, have developed a framework for the legal development of cannabis products. These conventions and regulations have established the export quota which each of the signatory countries must abide by and according to the regulations, Colombia has been granted 44% of the total export quota, allowing them to become a major legal cultivator with substantial export potential. But it does mean that Colombia will only allow exports to these countries that have been allowed import quota by the same conventions and regulations. However, as importing countries will adjust demand during the year, Colombia tends to stick to the export quota determined at the start.
Fig. 18: Regulatory permits to access the medical cannabis market in Colombia
Source: Khiron
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Colombia’s cannabis framework allows sales only of cannabis extracts, not flower. For cannabis with In addition to the licensing system for cultivation, the country regulates production and a THC more or equal to 1%, distribution of “psychoactive” products through a quota system. The system allows production of companies need to “psychoactive cannabis” – defined as THC greater than or equal to 1% – only after a specific apply for quotas quota is granted. that are allocated based on proven Quotas apply to “psychoactive cannabis,” not to CBD, and are granted only if companies can demand for their prove legal demand for their products. No company currently has received a commercial quota product. for psychoactive products:
• License holders must finish their genetics characterization process with the ICA. • They must complete an R&D process for oils or extracts to be exported or used domestically, providing technical and quality specifications of potential products. • Before granting any commercialization quota, the government grants an R&D quota for companies to show they can produce a stable and clearly defined product.
Next to Khiron there are over 200 licensed cannabis growers, as of May 2019, only four companies had fully registered cultivars with the Colombian Agricultural Institute (ICA): Medcann, Clever Leaves, FCM Global and Santa Marta Golden Hemp, which is 60% owned by the Canadian biotech company Avicanna. Pharmacielo and also Khiron are still awaiting final resolutions issued by the ICA. It is unclear when Spectrum (Canopy Growth), Colcanna (Aphria), MED Colombia (Aurora), Blueberries Medical (CSE: BBM), Pideka and Foliumed had finished registering genetics with the ICA or when they expect to complete the first ones. However, Canopy Growth (Spectrum) is licensed to produce cannabis on 13.5m sq. ft and will be using Procaps to manufacture oil-based products. Colcanna (Aphria) is going to same way as Khiron in associating with medical associations. It has made an exclusive arrangement with Federación Médica Colombiana, which will offer doctors (nearly 2,000 are affiliated) and medical professionals across Colombia a trusted source of information and training on medical cannabis. Blueberries Medical has approval for the production, sale and export of five CBD-based health and wellness products from the INVIMA. It expects to launch its products in Colombia and Latin America to commence in the second half of 2019 upon the completion of a product branding strategy and distribution arrangements.
Despite the large number of potential competitors only 8 companies are expected to have registered strains/products. Furthermore to grow cannabis (with THC), cultivators need to prove export or domestic demand. For the domestic market it is necessary to show demand from education enters, clinics, pharmacies, etc and it is exactly in that area that Khiron has been working.
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Khiron is the only A few companies currently have registered cannabis cosmetics with INVIMA, Colombia’s National one that has a CBD skin care product Food and Drug Surveillance Institute. One of them, Khiron, started sales after receiving approval on the market in a year ago to sell CBD-infused cosmetics. Blueberries has also received to sell comparable Colombia. products. But while Khiron products are already available in the Colombian market, Blueberries plans to start selling during the second half of this year. Blueberries will be importing the CBD for the production of cosmetic products from the United States. Khiron imports CBD from Europe for its cosmetic products. Operations
Construction costs In Colombia, Khiron has a production facility located near the town of Ibague, 200km west off could fall to USD150 per sq. m. Bogotá. The first stage of the facility on 5.5 ha of leased land, is completed and comprised of a which is only a 8,000 sq.m. open-air greenhouse along with a 1,388 m2 post-harvest, CO2 extraction and QA/QC fraction of the GMP compliant lab, in addition to all the support infrastructure, buildings and utilities works (a USD4,000 to USD6,000 per sq. new water well was drilled). The capacity of the greenhouse is 8,000 kg p.a. (with 4 harvests). m. in North Management believes the 8,000 annual production is sufficient to service up to 100,000 medical America cannabis patients and extending the cultivation will be function of demand. There is another 12 ha of growing space available, which allows the company to increase its capacity to 100,000 kg p.a. at minimal costs. Indeed the 8,000 sq. m. open greenhouse costs only CAD0.5m while the total investment in the facility was CAD12m and included not only the irrigation and infrastructure but also the post-harvest facility and laboratories. We estimate that the additional cost to extend to 100,000 kg of capacity would only be CAD6.25m.
Costs of growing Growing cannabis in Colombia offers a number of advantages which could bring growing costs cannabis in Colombia could be down to below USD10 cent compared to USD70 cents to USD150 cents in North America. These below USD10 cent include: compared to USD70 cents to • Optimal growing conditions of 12 hours sunlight and darkness each day, that comes from USD150 cents in a location on the equator. Additionally, Colombia’s high altitudes provide growers with North America. high UV light which reportedly produces flowers that are especially resinous. • Warm temperatures offer producers year-round outdoor/greenhouse growing without supplemental heat or lighting. This results in up to three additional harvests each year, while significantly reducing facility costs relative to indoor facilities and hybrid greenhouses. At Khiron, the total costs of the 8,000 sq.m. facility was about USD9m. That comes down to a cost per sq.m. of USD1,125 (and potentially coming down to USD150 if the facility is extended to 100,000 kg production) , which is only a fraction of the USD4,000 to USD6,000 per sq. m. that a similar facility in North America would cost. • Colombia has an established agricultural industry, which comes with a well developed infrastructure for domestic sales and export. • Wages are about 20% of the cost in the US. The minimum wage in Colombia is about USD1.25 per hour compared to between USD7.25 and USD11.0 in the US (depending on the State). Skilled labor costs in Colombia around USD4.5/hour which is 20% of the USD19.0/hour for similar work in US.
In tandem with the construction Khiron is focused on satisfying all regulatory requirements for the cultivation of strains and the registration of additional varieties of strains with the Ministry
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of Agriculture. Of a total of 28 permits that the company needs to obtain, it only needs two more: a quota for the commercialization of its THC products in the medical market (it needs to prove domestic or export demand) and a permit for the commercial use of phytotherapeutic products. However, before it gets its final approval for the commercialization of its products in the medical market, the company still needs to run stability tests with its GMP manufacturing facility (outsourced) that shows that the cannabis preparation is effective during the entire treatment period. Those tests should be finished in 1 month time after which it might take another 2 months before the final approval/quota is allocated. In parallel the company is doing trials of growing the material that it will be using in its preparations.
The stability tests are on the five registered strains (with specific THC/CBD combinations) of medicinal cannabis which Khiron believe it is likely to use most for the variety of medical conditions it will treat. Khiron is in the process of registering an additional 20 strains with the ICA. The company is also licensed to fabricate High and Low THC Medicinal Cannabis extracts and to manufacture and sell products under the category of magistral preparations but not yet as mass market phytotherapeutic products, which are the two forms under which Khiron is planning to develop its medical cannabis products.
Magistral 1. Magistral Preparations: A patient that receives a prescription from a doctor can only preparations to be sold through receive formulation through pharmacies. In the case of High THC Medicinal Cannabis pharmacies, direct formulations, such prescriptions must be obtained personally in a controlled-substance delivery and approved pharmacy. For Low THC Medicinal Cannabis, patients have the option of clinics. delivery or pick-up, as these are not considered controlled substances in Colombia. Since magistral preparations are custom-made, the formulation has a 48-hour maximum delivery period to the patient and a regulated short shelf life. Therefore, the distribution of these products must include an efficient supply chain that combines patient service and affordability in the context of regulatory constraints. Khiron plans distribution through 913 pharmacies and ultimately will have 3 labs to which it would send the basic material and from where to serve these pharmacies could be served: one in Bogota, one in Medelin and one in Calli. Next to pharmacies and direct delivery, Khiron will also distribute the magistral preparations through its own clinics. 2. Mass market phytotherapeutic products: Colombian regulations demand that if Khiron would like to sell extracts as a final branded product for mass market distribution that it needs a separate approval of INVIMA. The review process includes the testing of extracts, production of extracts using standardized cultivation and production methods, and a final review by INVIMA of the efficacy of the product. Khiron Colombia is also working on satisfying all regulatory requirements to register its manufacturing third- party lab (Buenas Practicas de Laboratorio) partners with INVIMA, with the objective of it being able to manufacture final magistral products in 2019. It could well be another 12 months before Khiron receives a license to sell phytotherapeutic products (phytotherapeutic license which uses the cannabis plant and its products for medicinal purposes is easier to get than a license for a pharmaceutical product which would involve clinical trails).
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Fig. 19: Khiron magistral preparations Fig. 20: Khiron standardized products
Source: Khiron Source: Khiron
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Part 5: Market access and clinic strategy
Creating market Khiron estimates that from the 49m Colombians, 5.6m are potential patients with 40% of them demand through strategic alliances suffering from chronic pain, 23% from depression, 11% from anxiety, 8% PTSD, 6% insomnia and before it launches 3% epilepsy. In order to reach those patients and offer medicinal cannabis, Khiron has been products. developing relationships with prescribing doctors mainly through forming alliances with associations, who lead ideas for their members; liaison and sales staff who visit opinion leaders and doctors; joint ventures or ownership of clinics. By doing so Khiron creates a leadership image and also demand for its products ahead of when it will be able to sell them. As doctors become more comfortable and knowledgeable about cannabis, Khiron expects doctors to refer their patients to Khiron, either by way of prescription or through a referral to Khiron’s medical clinics. Next, it has also been approaching the insurance companies in order to get medical cannabis paid for by medical insurance instead as an out-of-pocket expense from the patient. According to Khiron the difference could be receiving USD1,500 p.a. per patient instead of USD420. And in parallel the company is in discussions with the insurance companies to take over a group of pain/epilepsy patients that it will than treat, including with medical cannabis.
Khiron intends to apply across Latin America its model of alliances with associations, clinics and insurance companies to create doctor/patient and brand loyalty.
Fig. 21: Colombia - 5.6m potential patients Fig. 22: Khiron's cultivation facility out of 49m inhabitants Parkinson's Refractory Anorexia Nausea in disease epilepsy 2% cancer 4% 3% 1% Tourette's Insomnia syndrome 6% 1% PTSD Multiple 8% sclerosis Anxiety 1% 11% Chronic pain 40% Depression 23%
Source: Khiron Source: Khiron
PATIENT ACQUISITION STRATEGY FOCUSED ON ASSOCIATIONS AND CLINICS There are three ways through which Khiron is approaching the approx. 2,000 prescribing doctors in Colombia:
• Forming strategic alliances with medical associations provide access to 500,000 potential patients. Because medical associations do lead ideas for their doctors, Khiron has forged
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strategic alliances with three medical associations: the Colombian Association for the Study of Pain (ACED) with 65 members, the Colombian Association of Internal Medicine (ACMI) with 2,450 members, Colombian Association of Neurology (ACN) with 400 members and the Colombian Association of Palliative Care (ACCP). As part of these agreements, Khiron is the exclusive medical cannabis company marketing to, and participating in, the events organized by these associations. As such it does educate their members on medicinal cannabis allowing them to have a higher degree of confidence that their recommendations are responsible and informed. To date, the company has participated at around 20 events organized by these associations.
Fig. 23: Patient acquisition model
Source: Khiron
• Khiron has also created a specialist team of 4 medical scientific liaison staff who are specifically engaging with opinion leaders in each pathology. A sales team of currently 21 supports the efforts of the scientific liaison staff and the education through the medical associations. • The third way in which Khiron is looking to increase demand for its medical cannabis products is through joint-ventures or ownership of clinics in the field of pain, insomnia, neurology, epilepsy. The clinics serve multiple purposes including: a) research centers for particular conditions, allowing Khiron to obtain data which will then be used to improve upon the formulations; b) education centers for doctors and patients to increase awareness of medical cannabis; c) pharmacy centers for dispensing medical cannabis products to the patients; and d) develop brand awareness and loyalty through continuous brand communication with patients. Khiron intends to increase its clinic network throughout Colombia and implement this model as part of its expansion in Latin America. The clinic strategy will be pursued either through acquisitions or partnerships or through organic growth by building clinics in strategic positions within large metropolitan areas.
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ILANS’ two clinics • One of the cornerstones of the Khiron clinics business unit is the Latin American Institute brings immediate 120,000 potential of Neurology and the Nervous System (ILANS). ILANS is one of the most respected and patients of which largest health service network providers in Colombia. With two well established and potentially 1/3 large neurological clinics located in Bogota and 60 licensed physicians and clinicians, the could switch to medical cannabis ILANS network serviced an estimated 100,000 patients throughout 2017 and in the first five months of 2019 has treated 60,000 patients. In 2017, ILANS generated USD1.8 million in EBITDA on revenues of USD10.5 million (acquisition price of USD7m of which 70% in cash and 30% in shares, makes it a highly accreditive acquisition). ILANS has seen exceptional growth since 2012, with a five-year CAGR of 24% on revenues. As such, we expect the clinic to continue growing its patient base while contributing to Khiron’s bottom line through its regular operations and switching the treatment for a number of its patients to medicinal cannabis. Further, Khiron has the intention to roll out its own branded education centers, known as Zerenia, which should help to establish a strong presence in major metropolitan areas of Colombia to educate and inform patients on medicinal cannabis.
Fig. 24: ILANS Sede Country Fig. 25: ILANS revenue (CADm)
10.2 10.4
8.2
6.0
3.6 3.9 3.0
2012 2013 2014 2015 2016 2017 2018
Source: ILANS Source: Khiron
INSURANCE STRATEGY TO INCREASE ACCESS TO MEDICAL CANNABIS Negotiating with In Colombia, consultations are paid for by patients themselves or by insurance companies if the insurance companies to treatment is included in the care package. Hence Khiron’s efforts to have medical cannabis include medicinal included in the list of care that insurance companies pay for. It would also allow Khiron to cannabis in their increase the price of a treatment to USD1,500 instead of the USD420 it is planning to charge for care package… when the patient has to pay it themselves. In order to convince insurance companies, it is generating evidence on the efficacy of medical cannabis and organizes special events around that.
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… and looking into Next to the CARE model, Khiron is also negotiating with insurance companies to take over a the possibility of managing groups group of pain patients that they then will manage at fixed annual costs. The advantage for of pain patients. Khiron is that it could get a large number of pain patients (eg 100,000) that it manages and can help them with medical cannabis, without the insurance company having to include it in their list of funded treatments. It could offer that service at a lower cost to the insurance companies as managing chronic pain with cannabis (USD2,000 p.a.) is significantly cheaper than the USD36,000 p.a. for morphine. So for the insurance company the advantage is that it not only costs less, but that it also lowers opioid consumption whilst still lowering the pain level for the patients. However, a potential outcome of these discussions is not expected in the next 12 months.
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Part 6: Branded consumer goods
Developed Kuida Awaiting the developments in medicinal cannabis, Khiron understood that the regulatory skin care products and formed a joint environment in Latin America could allow for the early launch of cannabis based consumer venture with Dixie packaged goods. From that analysis it developed Kuida, a cosmeceutical, with a comprehensive Brands portfolio of skin and body care products for woman. Kuida was launched in Colombia in November 2018. To further accelerate its cannabis CPG portfolio, the company formed a joint venture with Dixie Brands (March 2019) that allows it to access the Dixie Brands portfolio. Furthermore, Dixie Brands will also manufacture and distribute Khiron's Kuida in the U.S.
US skin care Together, Khiron and Dixie Brands could be reaching 900m consumers in the USA and Latin market valued at USD19.8bn and America in large and strong growing segments. GlobalData sized the US skin care market at the Latam skin USD19.8bn in 2017 and we estimate the US CBD consumer packaged goods market at around care market at USD0.4bn in 2018. The total Latam skin care market is estimated at USD8.6bn. Furthermore, USD8.6bn. the deal will allow Khiron to access the 200m pets in Latin America with a pet care market estimated at USD7.0bn . Kuida
Kuida is the first As part of its branded cannabis consumer product portfolio, Khiron has established a health & mass market CBDbased brand wellness business unit focused on cosmeceuticals (a cosmetic that has or is claimed to have in Colombia and medicinal properties) and nutraceutical products. The health & wellness unit was introduced Latin America. with the launch of its initial consumer brand Kuida. Kuida is the first mass market CBDbased brand in Colombia and Latin America and was approved by INVIMA, Colombia´s health agency.
CBD has benefits Kuida features a comprehensive portfolio of skin and body care products for women containing for the skin. CBDERM. CBDERM is a proprietary blend of CBD and other active ingredients, which has been proven to have three times more antioxidants than vitamin E and antiaging properties. Kuida products have been developed for quick absorption and a light texture to improve the penetration of CBD. The benefits from CBD for skin and body care include anti-aging properties, more potent anti-oxidants than vitamins C and E, improvements of dry skin (hydration, softness, nourishes, firmness), reduction in the appearance of lines, anti-inflammatory properties useful for the treatment of both allergic contact dermatitis and atopic dermatitis (eczema) and acne.
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Fig. 26: Current Kuida product portfolio
Source: Kuida
Kuida is priced Kuida is priced around USD20 (USD10 to USD30) and sits in the ‘masstige’ (mass prestige) market. around USD20 per product and sits in The brand is targeted to woman between 25 and 45 years old who are more likely to try the masstige something new. Kuida was launched in Colombia in October 2018 through retail, wholesale and market online channels and with an exclusive agreement with Farmatodo (retail stores)and Farmalisto (e-commerce), one of Colombia´s largest pharmacy chains with 56 stores. The number of stores in which Kuida is available has grown to 200 in May after Khiron signed an agreement with Cafam, a leading Colombian drugstore chain (150 stores) and the company is aiming to be on the shelves of 700 stores by the end of 2019 and 2,000 by the end of 2020. Kuida is also available on Fedco, Colombia's Top Specialist Beauty Retailer and Linio, Latin America's Largest Online E- Retailer. Kuida is also distributed by wholesaler Distribuciones AXA one of Colombia's largest national distributors in the pharmaceutical sector, with 14,000 product SKU's and more than 8,000 retail clients. However, we expect sales per store only to build up slowly as regular Colombian customers need to be educated of the benefits of CBD cosmeceuticals. Addressing consumers with social media is difficult but with the help of brand ambassadors (e.g. the race car driver Mapa Martinez) the company is manging to generate some interest. Additionally Kuida is using pop-up stores to let consumers try its products.
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Fig. 27: Kuida is in the Farmatodo stores Fig. 28: Kuida pop-up
The linked image cannot be displayed. The file may have been moved, renamed, or deleted. Verify that the link points to the correct file and location.
Source: Instagram
The product range The initial product line of Kuida consisted of 7 different products: facial and body scrub, body of Kuida will be extended further. mist relax, body lotion, eye contour, moisturizing day cream, regenerative night cream, Step Ø Fluid. But through continued innovation, the company is looking to reach 12 products by the end of the year and start some male grooming product range. Fig. 29: Kuida targets
2018 Q4 2019 Q4 e
Point of sales 56 700 Own pop-ups 0 10 SKUs 7 12 Source: Khiron
Kuida was launched with one of Colombia´s top influencers and recognized personality, Ms. Catalina Aristizabal, as ambassador for the Kuida brand. A model, actress and health advocate, Ms. Aristizabal has starred in hit TV programs, in film, as a judge on the popular Colombia's Next Top Model TV show, and hostess of Colombia´s top rated reality show over the last two years. With a prominent social media presence, including almost 1.5 million Instagram followers, and a well-known passion for healthy living, Mrs. Aristizabal will represent Kuida at beauty and lifestyle events, and feature prominently in Kuida´s marketing plan.
Catalina Aristizabal – actress and Kuida brand ambassador Mapa Martinez – race car driver and Kuida brand ambassador
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Source: Khiron Source: Instagram
Kuida is currently Kuida is currently only available in Colombia but the brand has received approval to sold in Colombia but the brand commercialize and market the brand in Peru and is looking with the Chilean authorities how it should be on the would be allowed to import and distribute Kuida. For launching the brand in Mexico, the shelves in Peru, company is waiting for the final cannabis regulations which should be published in October 2019. Chili, Mexico and the US before the JV partner Dixie Brands (see below) is also expecting to launch Kuida this year in the USA and end of the year. will be presenting Kuida at the FounderMade in June in NYC (but is looking into if it can import from Colombia or needs local US GMP facilities). In 2020 Khiron is expecting to launch Kuida in Europe with Italy probably being the first country to launch following the completion of the Cannapalife acquisition.
Next to mass-marketing the Kuida skin care brand, Khiron has also launched itself in research around the efficacy and therapeutic use of CBD skin care. It has entered into a multi-year agreement with Centro Dermatológico Federico Lleras Acosta (CDFLLA), a leading Latin American institution, to jointly conduct medical cannabis research and host educational activities addressing skin conditions and symptoms. This should be key for the company to develop new dermo cosmetic and dermatological product lines for the Khiron Skin Unit and strengthen the Kuida portfolio. If studies turn out positive, we could expect the company to launch new products at significant higher price points (and hence probably under another brand) than the current USD20 average price. Dixie JV
With the Dixie Using the team’s understanding of compliance and regulations, Khiron had started developing a Brands JV, the company adds portfolio of cannabis consumer goods awaiting the potential sales of medicinal cannabis. Kuida food & beverages, was a first product but with the Dixie Brands joint venture, Khiron saved time and money to pet care products, offer a broader portfolio. With Dixie Brands, the company can add over 100 products, 15 CBD supplements and CBD hemp different delivery systems, combination, THC and CBD-oriented products, both targeted to derived wellness medical as well as recreational use. products.
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For Khiron, the opportunities of the joint venture are:
• Selling the Dixie Brands in Latin America. Dixie owns the cannabis consumer brands leading THC brand Dixie, including the Dixie Elixir drinks, Synergy relief balm, Therabis CBD products for pets and Aceso CBD focussed wellness line (hemp-derived). • Using the Dixie Brands distribution network in the US to sell Kuida in the USA. Dixie Brands has a presence in over 900 stores in six states California, Colorado, Maryland, Nevada, Michigan and Oklahoma. By the end of 2019, the company is expecting to have distribution and manufacturing agreements in in 10 states. • Further development and innovations at Khiron and Dixie will have an additional leverage through the cross selling agreements. Kuida is planning additional lines for hair care, dry oil, body cream and men grooming products. Both Khiron and Dixie Brands are likely to add other brands to their respective portfolios, organic or through acquisitions.
Priorities are With the joint-venture, Khiron is able to enter a number of different product categories adding selling Kuida in the US and over 100 SKUs saving time and money to develop these themselves. Although there might be Terrabis and some market for the Dixie THC products in Mexico (the only Latam country that might allowed Aceso into Latam. recreational cannabis use in the short term), the main products that Khiron will be adding are Therabis, which is a CBD wellness platform targeted to pets and Aceso Wellness, which is a human dietary supplement which uses hemp-derived CBD as a base
We understand that that the main priorities are:
1. Launching Kuida in the US (2019) 2. Selling Therabis in Mexico (through veterinaries), Colombia (2019), Peru, Chile and Uruguay, 3. Launching Aceso supplements in Peru (powder cooler/sooth/wellness) (2019), 4. Selling Aceso balms for muscle pain relief in Colombia (2019), 5. In 2020 Khiron expects, depending on the market regulations, to launch in Mexico the THC Dixie products (elixirs, gummies, mints, …)
Rather than focussing on volume, for 2019, the main aim is to realise a sale in all the markets as it would indicate that the regulatory and logistics issues have been solved. In parallel the company will have to explain to its consumers the advantages of CBD products and have them experiencing that they work, before that it can look to encourage brand loyalty.
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Part 7: Expansion strategy
In Colombia, Khiron established a systematic approach to enter the market and the company is replicating the same market entrance strategy across Latin America:
1. Master the local regulatory environment: the company has teams on the ground in each country to understand how regulations work and how they can go as fast as possible with products in the market 2. Access market needs and potential: Khiron calculated the potential number of patients across Latin America at 60m and has studied what the potential spend for medicinal cannabis could be. Also Kuida was launched after studying the market needs and understanding the potential customers (e.g. woman between 25 and 45 are more receptive to new skin care products) 3. Establish teams and leverage relationships: the company has managed to assemble a great team of seasoned professionals to lead each country. 4. Educate local institutions/medical associations: the company has now partnerships/endorsements not only from the Colombian Association of Neurology, Colombian Association of Internal Medicine, Colombian Association of Palliative Care, Colombian Association for the Study of Pain, but also from the Mexican College of Internal Medicine and Mexican Academy of Neurology. Educating physicians about medicinal cannabis with sponsored events and conferences organized in partnership with leading medical associations gives an edge in approaching doctors and healthcare professions. 5. Develop distribution channels: in each country, Khiron want to go as fast as possible to the market with products and for that it does need to understand what the best distribution channels could be.
The aim is to get in Although in the long term the company will want to be in all five of its verticals: Medicinal 2019 a product on the shelves in each cannabis, Clinics, Skin-care, Pet-care and THC consumer brands for recreational use in each country. of the countries, in the short term the priorities are to get products on the shelves. That would indicate that all regulatory issues on the in-store products are solved and that the company can start building cannabis consumer brands. In the short term, i.e. for 2019, we understand that the priorities are:
We understand that that the main priorities are:
Priorities are to 1. Launching Kuida in the US start selling medicinal 2. Start selling medicinal cannabis for compassionate use in Mexico before medicinal cannabis in cannabis regulation come in place. Mexico, launch 3. Selling Therabis in Mexico (through veterinaries), Kuida in the US, Peru, Chile, 4. Import Kuida and Aceso supplements in Peru from Colombia, Mexico and 5. Launch skin and pet-care products in Chile Europe; and 6. Launch Kuida in Europe introduce Therabis in Mexico That should be followed in 2020 with important launches of medicinal cannabis in Brazil, Chile and Chile. and Peru.
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Mexico
Awaiting the final Mexico legalised medical cannabis in June 2017, and currently the Mexican government is regulation. refining regulations including what products could be offered and how prescription would work. These regulations and a decision on recreational cannabis are expected by October 2019. Potential market The country could be become a significant cannabis market. Khiron estimates that from the for medicinal cannabis is 129m Mexicans, around 11m have indications that could be treated with medicinal cannabis of USD13.5bn. which chronic pain, epilepsy, depression and anxiety are the largest ones. Those indications could value the potential medicinal market for cannabis at USD13.5bn. Additionally, according to Euromonitor, the Mexican skin care market could be valued at USD2.0bn and the pet care market at USD2.3bn.
Fig. 30: Potential 11m Mexican patients Fig. 31: Market size (USD bn) across different indications
13.5
Others 19% 7.0 Chronic Anxiety pain 15% 49% 2.0 2.3
Depres- sion Epilepsy Medical Cosmetics Skin care Pet care 8% 9% market
Source: Khiron Source: Khiron, Euromonitor
Khiron’s strategy to enter the market is focused on all three areas: medical cannabis, skin care and pet care:
Khiron will try to Medical market: Although the regulations for medicinal market has not been put in place, the enter the medicinal market fact that medical cannabis is legal, would allow import for compassionate use. Khiron is working before regulations with different private clinics to include cannabis for compassionate use even before further are in place. regulation of medicinal cannabis is published. For the period after regulation is published, Khiron is establishing contacts with key interested medicinal associations. In the medium term we would expect Khiron to acquire a number of clinics in Mexico.
Skin care: Khiron has to wait for the final regulation and in the meantime they are preparing documentation to submit for approval. The company is also in advanced talks on the distribution and customers for the Kuida line of products.
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Pet care: Khiron is exploring with the different ministries if they start can importing pet hemp products (Terrabis from the Dixie JV) as it is not part of the cannabis law and regulations. Potential in the Recreational cannabis: Mexico could well be the only Latin American country in which recreational cannabis market recreational use of cannabis will be allowed. Khiron has no intention in being present with basic through selling the cannabis products like flower and extracts. However, it does see potential for cannabis THC drinks and consumer goods like the THC drinks and edibles from its Dixie Brands JV. edibles from Dixie Brands. Former Mexican Amongst its board members, Khiron counts former Mexican president Vincente Fox who was president Vincente Fox is a previously also CEO of Coca Cola Latin America and is the founder of Centro Fox, a non-profit board member at foundation dedicated to serving communities in Mexico and Latin America. Through his various Khiron, which business and community interests, former president Fox has been highly vocal and is a well- should give the company an edge respected advocate for the legalization of medical cannabis throughout the Latin American in this large region. We believe former president Fox gives Khiron and edge to securing an early entry into market. Mexico. If the company were to enter with a broad suite of products in the Mexican market than that could be a critical point in creating shareholder value. Uruguay and Brazil
Through the CAD13.7m acquisition of NettaGro/Dormul, Khiron not only expanded into Uruguay, which is the first country in the world that fully legalised cannabis, but more importantly set up a bridgehead to enter the Brazilian market. Dormul has a license to produce medical cannabis for commercialization, including up to 120 tonnes and 170,000 plants per year. Pending the receipt of an extraction license, Dormul expects to become Uruguay’s first producer of CBD oil for both the medical cannabis domestic and international export markets.
In Uruguay (3m inhabitants), cannabis is sold at selected pharmacies without a prescription, where citizens can purchase up to 40 grams per month (sold for USD1.30 per gram of which USD0.9 goes to the grower). The Uruguayan medicinal cannabis market potential (in which Khiron is interested) can be estimated at USD0.3bn. Residents are permitted to register as "homegrowers" (over 7,000 are registered) or form "grow clubs" (over 3,700 members are registered) to cultivate up to 480 grams per person each year. But these homegrowers can't sell to pharmacies. Pharmacies (17 currently) could for non-medicinal cannabis initially only be supplied by the state-licensed companies, Symbiosis and ICC (owned by Aurora) (each can produce 2,000kg of cannabis). However, supply has been insufficient and the government agency IRCCA invited at the start of 2019 bidders for 5 additional non-medicinal licenses who each will also be able to produce 2,000kg p.a.. In 2018, the IRCCA also issued two licenses for the cultivation of medicinal cannabis (THC and CBD): one to Fotmer (who has already exported to Germany) and one to Nettagro/Dormul (now owned by Khiron). Another international player in Uruguay is Auxly that bought 80% of Inverell a large scale hemp grower for CBD extraction for the domestic and international markets. There are a total of 15 licenses for non-psychoactive cannabis.
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Khiron bought Although there is some domestic potential, Khiron is setting up Nettagro/Dormul mainly to Nettagro/Dormul mainly to establish export medicinal cannabis products internationally and has based the company in one of the free an export route to trade zones near the airport which can facilitate imports from Colombia to be re-exported to Brazil. Brazil (all within the Mercosur Free Trade Bloc). The advantage of the free trade zones is that the entry and exit of goods are exempt from all taxes (no corporation tax, no VAT, no excise tax, etc.).
Medicinal cannabis With 209m inhabitants, the Brazilian medicinal cannabis could potentially be one of the biggest for compassionate use can already be medicinal cannabis markets in the world. Although medicinal cannabis use is not yet fully imported in Brazil. legalised, the National Health Surveillance Agency (Anvisa) has regulated the compassionate use of cannabis for medicinal purpose since 2015. Medical cannabis products can be obtained through a doctor’s prescription and government-approved import documentation. And because cannabis cannot be grown legally in Brazil, it has to be imported. Over the period 2016-2018, just over 4,000 import authorizations have been granted (mostly imported from the US, UK and Canada) and Brazil has granted 10 import licenses for cannabis-based medicines.
Potential Khiron estimated that 19.1m Brazilians suffer from indications that can be helped with medicinal medicinal cannabis market cannabis and assuming that they can spend USD730 per annum on medicinal cannabis, the of USD14.0bn. potential market is USD14.0bn. We understand that Khiron is looking with a number of clinics to set up a delivery system for groups of their patients. Over time we expect Khiron to acquire a number of clinics to accelerate its medicinal cannabis sales. Initially, the San Paolo/Rio de Janeiro region seems to be carrying most interest from the company, given its higher GDP/capita.
Pet and skin-care product with CBD are not yet allowed in Brazil, but once they are the market could be sizeable. Brazil is home to over 58 million dogs and 27 million cats and Euromonitor estimated the Brazilian pet-care market at USD6.1bn in 2018, growing at 10% p.a. Furthermore, the value of the Brazilian skin care market is estimated at USD6.5bn.
Fig. 32: Potential 19.1m Brazilian patients Fig. 33: Market size (USD bn) across different indications
14.0 Others 18% Epilepsy 12% 6.5 6.1
PTSD Anxiety 4% 10% Chronic pain 0.3 55% Medical Medical Skin care Pet care Nausea/ market market Brazil Brazil cancer Brazil Uruguay 1%
Source: Khiron Source: Khiron, Euromonitor
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The two high-profile owners of NettaGro/Dormul will also become part of Khiron: Joe Mimran former Dragon’s Den personality (Canada) and founder of Joe Fresh and Club Monaco, will provide strategic counsel on packaged goods and retail development for Latin America as a member of Khiron's Colombian board and Michael Beck, a high-profile equity investor with extensive experience in venture capital, will be sitting on the parent company board. Chile
Chile has the Chile’s 18 million people are the most prosperous of Latin America with an average GDP per head highest cannabis consumption rate of USD16,277. Chile has the highest cannabis consumption rates per capita in Latin America in Latin America. (prevalence rate of 15.1%) as well as the largest support for cannabis legalization. The potential for With 1.9 million potential patients, Chile has an established medicinal cannabis culture and was the medicinal cannabis market is the first country in Latin America to adopt legislation to allow the cultivation of cannabis for USD2.4bn. medical purposes. Medical cannabis is subscribed by GP’s and distributed through the pharmacies. Health care coverage is provided through state-funded, private or armed forces insurance schemes. Recreational use of cannabis is decriminalized and adults can grow six plants for their personal use. Khiron estimates the medical market potential at USD2.4bn. According to GlobalData, the potential market for skin care is USD560m and for pet care is USD230m.
Fig. 34: Potential 1.9m Chilean patients across Fig. 35: Market size (USD bn) different indications Depres- Others sion 4% 6% 2.4 Epilepsy 7% Insomnia 7% Chronic Anxiety pain 0.6 22% 54% 0.2
Medical market Skin care Pet care
Source: Khiron Source: Khiron, GlobalData
Khiron will source Regulations for cultivation, extraction and manufacturing of cannabis products are in place. its medicinal cannabis from Cultivation is allowed with the authorization of the Agriculture and Livestock Service and the local grower Public Health Service. The Public Health Service is also the organization in charge for DayaCann. authorizing extraction and manufacturing. Daya a non-profit organization focused on research and promotion of alternative therapies, is the only group that has received authorization for growing cannabis and it has a formed DayaCann a 50/50 JV with AusCann (13.28% owned by Canopy Growth). DayaCann who is growing and selling cannabis in the domestic market, will also be growing cannabis for Khiron (minimum of 1,000 kg of dried flower/year to be used to
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formulate two products targeting patients with neuropathic pain and epilepsy) that will use the supply for the domestic medicinal market. DayaCann will also develop GMP extraction facilities. International competitors in Chile include Tilray and Canopy who both has already been shipping product to the country. It aims to start In parallel, Khiron is in discussions with Daya, which has already a 17,000+ patient base, to selling its products in the first quarter develop clinical trials for medicinal cannabis (Chile is the only country where companies can run of 2020. clinical trials whilst commercialize these non-registered products under provisional authorization if there is scarcity or non-availability). A special authorization allows the country’s health department to grant provisional authorizations for the distribution and sale of nonregistered pharmaceutical products in cases of scarcity or non-availability. And on the demand-side, Khiron is in the process of selecting clinics where it could form an alliance with. The target is to start distribution medicinal cannabis in the first quarter of 2020. We expect Khiron to pursue its full medical strategy in Chile, including clinic operations (JVs and/or ownership), endorsement of associations (it has already partnered with Mama Cultiva, one of the most recognised patient organisations in Latin America), physician education (300+ scheduled seminars with physicians and students) and pharmacy distribution. Furthermore the partnership with the Daya Foundation should provide access to regulatory expertise, medical and patient relationships, and early brand recognition.
For its’ skin and pet care business, there are currently no regulations and Khiron is looking with the authorities how it would be allowed to import and distribute these products, which in both case could be a great opportunity for the company to be a first mover with CBD products in those categories.
Longer term, Chile could become an important bridgehead into the Asian markets given it is one of the founding members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP) and which includes also Australia, New Zealand, Japan, Malaysia, Vietnam, Singapore, Brunei next to Mexico, Peru and Canada. Peru
Peru is the sixth country in Latin America to create a legalised medicinal cannabis environment with laws that allow for the production, import and commercial sale of cannabis for medical use. Potential for medicinal With 32m people, Peru could offer significant opportunities for Khiron. Based on the indications cannabis is USD1.5bn. for which cannabis has efficacy there is a potential patient base if 2.8m, of which the majority (64%) are for chronic pain. Regarding market size Khiron estimates that the medical market in Peru could be USD1.5bn. According to Euromonitor the current skin care market is USD 350m and the pet care market USD280m.
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Fig. 36: Potential 2.8m Peruvian patients across Fig. 37: Market size (USD bn) different indications Others 1.5 10%
Epilepsy 7% Anxiety 7% Chronic 0.4 Depres- pain 0.3 sion 64% 12%
Medical market Skin care Pet care
Source: Khiron Source: Khiron
Medicinal cannabis Medicinal cannabis got legalised in October 2017, but regulations and guidelines are still being regulations and guidelines are still developed. The law is putting in place a system of licenses that will allow will allow cultivation, being developed. import, export, extraction, manufacturing of medicinal cannabis (very similar to the rules in Colombia). Qualifying patients will be able to access medical cannabis from permitted pharmacies, following an evaluation from a registered GP.
Khiron is planning Khiron is not planning to cultivate cannabis in Peru but is working on the registration as a to import produce from Colombia. pharmaceutical entity which would allow it to import. In parallel the company is looking for distributors, identifying clinics with who to partner and delivering education to doctors.
Kuida products Another opportunity is that the law established two types of cannabis: less than 1% THC and have received approval for more than 1% THC. When there is less than 1% THC, the cannabis is an uncontrolled substance, commercialization which could offer Khiron the possibility to sell its product lines in skin care, pet care but also . food and beverages CBD products . As both Colombia and Peru are part of the Andean treaty, Khiron is looking to import Kuida and the Dixie Brands products from Colombia. Four Kuida products have already received approval for commercialization by Peru’s executive director of the Directorate of Medical Devices and Health Products of the General Directorate of Medications, Supplies and Drugs (DIGEMID).
Furthermore, CBD supplements are regarded as a as a national product with medical use and could allow a possibility for Khiron to sell the CBD supplements from Dixie Brands.
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Europe and the United States
Khiron has signed In Europe, Khiron has signed a LOI to acquire the Canapalife group in Italy for CAD15m a LOI to acquire Canapalife in Italy. (CAD10.5m in shares and CAD4.5 earn-out). Canapalife is an Italian based hemp company with licenses for the cultivation, research, production and marketing of hemp-based products. Canapalife operates a cultivation site in Padua, near Venice, conducts research in partnership with prominent universities and has registered three CBD consumer brands, including, Bloom CBD e-liquids, Canvax nutraceutical products and Legal Seeds, a brand designed to market EU approved seeds to the consumer market. These products are already sold through established partnerships with pharmacies and independent retail chains across Italy. Italy represents the fourth largest economy in Europe, and is the second largest cannabis market in Europe, with a projected medical cannabis market value of EUR7.5bn by 2028. (Source: Prohibition Partners – The European Cannabis Report, January 2019). Upon completion of the acquisition of Canapalife, we would expect Khiron to prepare the launch of Kuida in Italy.
Dixie Brands will As part of a joint venture agreement with Dixie Brands, Khiron is also positioned to enter the US manufacture and distribute Kuida in market for consumer cannabis products. Under the agreement, Dixie Brands will also the US. manufacture and distribute Khiron’s Kuida brand of CBD-based cosmeceuticals in the USD18.2bn US cosmetic market. Kuida will be one of the first CBD brands targeting the US Hispanic population, estimated at almost 60 million.
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Part 8: Financial modelling
In developing a model for Khiron, we divided the business in three components:
• The clinic distribution model for medical cannabis • The distribution of medical cannabis through pharmacies • CBD-based branded consumer packaged goods Kuida and Therabis, In our modelling we have ignored Khiron’s production capacity: Khiron is not destined to become a cannabis grower; it is a cannabis-based CPG company. Furthermore, the cost of an open-air cannabis greenhouse is cheap and it is easy to erect once the basic infrastructure (land, water, electricity, security, lab) is in place. Medicinal cannabis estimates
Annual spend on For the clinic distribution model and the distribution of medicinal cannabis through pharmacies medicinal cannabis in Latin we have not used the amount of cannabis that patients in theory should consume for a full America could be treatment, but have used a maximal nominal amount that they can spend annual on a medicinal between five and cannabis treatment. For the US we calculated that an average medicinal cannabis consumer six percent of GDP per patient. would consume about 9% of the average annual GDP on medicinal cannabis. Directed by World Bank data on health expenditure as % of GDP, and taking into account that medicinal cannabis is cheaper than some alternative treatments (eg. opioids for pain management) and that it tend to fulfill basic needs rather than luxury needs, we estimate potential medicinal cannabis consumption at 5% of GDP per patient head for Colombia, Mexico and Peru, and at 6% for Chile and Brazil. In concreto we estimate annual spend on medicinal cannabis by patients in Colombia at USD320, in Mexico at USD446, in Peru at USD329, in Chile at USD921 and in the Rio de Janeiro– São Paulo Megapolis at USD1,428 (Brazil GDP per head is around USD9,800 but in the South East it is around USD23,800).
For estimating the number of patients that are likely to use medicinal cannabis, we refer to the US and Canada where 10% to 20% of the potential patient, are using medicinal cannabis and that equates to about 1% to 2% of the total population, depending on the development rate of the local market. In our model we have the penetration of medicinal cannabis in the total population gradually climbing to 1% after 3 years and 2% after 6 years. In the area that interests Khiron (Colombia, Mexico, the Rio de Janeiro–São Paulo Megapolis, Peru and Chile), we expect the number of medicinal patients to climb from virtual nothing in 2019 to 1m by 2021, 3m by 2023 and 4.5m by 2025.
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Fig. 38: Health expenditure as % of GDP for Fig. 39: Estimated number of medicinal selected countries cannabis patients
3.0 Colombia 17.1% Mexico 2.5 Rio de Janeiro–São Paulo 11.8% 11.5% 11.1% 10.5% Peru 9.8% 2.0 9.1% 8.5% Chile 5.9% 5.5% 5.1% 1.5
1.0
0.5
0.0 2019 2020 2021 2022 2023 2024 2025
Source: The World Bank Source: Bryan, Garnier & Cie ests
Within its current Assuming that Khiron is able to achieve a 15% share of its targeted markets, the number of set-up, we believe Khiron will be able medicinal cannabis patients at Khiron is expect to be 3,000 in 2019 (in the second half of the to reach 750,000 year) climbing to 165,000 in 2021, 495,000 in 2023 and 740,000 in 2025 – Khiron is targeting to patients by the get to 1m patients by the end of 2024. These numbers include also conversion of the patients in end of 2025. With additional steps the ILANS clinics that it has bought. The advantage of these clinics is that education of doctor we believe that and patients can be quicker and we are expecting that the company will be able to convert 30% Khiron’s own of these patients to medicinal cannabis. The other advantage is that, Khiron can get the full target is 1m patients by the price of these medicines while otherwise it needs to leave, according to our estimate about 32% end of 2024 is of the selling price to wholesaler and pharmacy (10% gross margin for wholesaler and 25% for feasible. pharmacy).
We expect Following these assumptions we believe that Khiron will sell for USD13m medicinal cannabis in medicinal cannabis revenues 2020, USD61m in 2021 and USD204m in 2023. On top of that the company will continue to book of USD61m in revenues from its clinics which for 2019 should be around USD6.3m. 2021.
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Fig. 40: Estimated number of medicinal Fig. 41: Revenue estimates from medicinal cannabis patients at Khiron cannabis (USDm) 400 Colombia 140.0 Colombia 350 Mexico 120.0 Mexico Rio de Janeiro–São Paulo Rio de Janeiro–São Paulo 300 Peru 100.0 Peru 250 Chile Chile 80.0 200 60.0 150 100 40.0 50 20.0 0 0.0 2019 2020 2021 2022 2023 2024 2025 2019 2020 2021 2022 2023 2024 2025
Source: Bryan, Garnier & Cie ests Source: Bryan, Garnier & Cie ests
CBD-based branded consumer packaged goods
We assume that For our financial modelling, we have taken only taken into account the Kuida CBD-cosmeceutical Kuida could take a 2% share of the line and the Therabis CBD-chews and CBD-sprinkle. We have analysed the current spend on skin local skin care and pet care in Colombia, Mexico, Peru and Chile. According to GlobalData, the largest skin care market… market is Mexico with revenues of USD1.6bn followed by Brazil (USD1.0bn) and Chile (USD0.6bn).
Colombia skin care market total revenues were USD0.4bn and for Peru USD0.3bn. We have assumed that Kuida will be able to reach a 2% share of those markets except for in Brazil where we have not yet anticipated a launch.
…and that In Pet care, Mexico is the largest market with a USD1.6bn value followed by Brazil (USD0.9bn), Therabis can take a 1% share of the Colombia (USD0.5bn), Peru (USD0.3bn) and Chile (USD0.2bn). With Therabis more in the pet care market. supplement area (hence comparable with treatments against fleas and worms), we look for a 1% share of the market over time.
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Fig. 42: Kuida body spray, body lotion and Fig. 43: Therabis dog products – Calm and day cream Quite
Source: Kuida Source: Therabis
We expect CBD Our forecasts for Kuida and Therabis sales, are taking into account wholesale and retail margins based CPG revenues of of in total 32%. We expect sales to increase from USD1.1m in 2019 to USD28.9m in 2021 and USD28.9m by USD63.9m in 2023. We have not incorporated in our forecasts any sale of supplements in Peru or 2021. sales of THC drinks and edibles from Dixie Brands in Mexico. Recreational cannabis regulations are still being discussed in Mexico and with the current prevalence rate of 2.1% we estimate the potential market at USD3.8bn. Where the prevalence rates to edge towards North American levels, a 15% prevalence rate would indicate a potential market of USD27bn.
Fig. 44: Market size skin and pet care market Fig. 45: Revenue estimates from CBD-based (USD bn) branded consumer goods (USD m)
63.9 1.6
1.6 Chile Skin care Peru Pet care 53.9 Mexico 1.0 0.9 Colombia
28.9 0.6 0.5 0.4 0.3 0.3 0.2 14.1
1.1
2019 2020 2021 2022 2023
Source: Bryan, Garnier & Cie ests Source: Bryan, Garnier & Cie ests
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EBITDA margin of circa 25%
We expect EBITDA For the company as a whole we look for relatively high sales and marketing costs of 65% (2019), margins of about 25%. 35% (2020) and 20% (2021) before normalizing at 15% of revenues. We look for a similar pattern on SG&A that we over the medium term see stabilizing at 25% of revenues. Given our expectation of a group gross margin of 65%, the expected EBITDA margin of the company is about 25%:
• The Ilans clinics’ EBITDA margin was 17% on a standalone base. We understand that Khiron has been shedding the low profitable surgery (still diseconomies of scale) and have improved accounting, HR, administration processes. As a result we expect EBITDA margin at Ilans to stabilize at around 25%. • For medicinal cannabis we also assume EBITDA margins at around 25% which is in line with what generic pharma companies are achieving and is also function of the education, marketing and networking costs. Furthermore, in the first years of a launch we expect even significant EBITDA losses because of that. • Based on our assumptions on sales and marketing costs, for the cosmeceutical and nutraceutical business, we expect EBITDA margins of around 20% after a number of launch years, when profitability is lower.
Fig. 46: Medium term Group EBITDA margin Fig. 47: Revenues and group EBITDA Group margins
65% 450 Revenues 30% 400 EBITDA margin 25% 350 300 20% 250 15% 25% 25% 200 15% 150 10% 100 5% 50 0 0% COGS Sales & SG&A EBITDA
Marketing 2019 2020 2021 2022 2023 2024 2025
Source: Bryan, Garnier & Cie ests Source: Bryan, Garnier & Cie ests
As a result we expect the company to still be EBITDA negative in 2019 and 2020 to the tune of respectively USD33m and USD23m, before returning to EBITDA positive figures of USD18m in 2021 and USD55m in 2022
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Key financial items
P & L highlights (CAD m) Dec-18 Dec-19e Dec-20e Dec-21e Dec-22e Dec-23e Net Revenue 1 11 44 128 256 363 reported growth n.m 1112.4% 309.7% 188.8% 100.2% 41.7% Inventory expense to cost of sales -1 -9 -22 -45 -90 -127 Gross margin before the undernoted 2 22 83 166 236 Fair value changes 0 0 0 0 0 Gross profit 0 2 22 83 166 236 Sales and marketing expenses -2 -7 -13 -26 -38 -54 A&P % revenues 29% 65% 30% 20% 15% 15% General and administration -15 -23 -26 -34 -68 -90 G&A % revenues 211% 60% 27% 26% 25% Consulting and professional fees -5 -5 -6 -6 -6 Share-based compensation -3 -4 -3 -2 -2 -2 EBITDA -20 -37 -26 16 53 83 Adjusted EBITDA -17 -33 -23 18 55 85 Depreciations -1 -2 -4 -8 -8 EBIT -20 -37 -28 12 45 75 reported growth (25.2%) (142%) 280.7% 67.8% EBIT adjusted (non-IFRS) -17 -33 -25 14 47 77 adjusted growth 502.6% 99.4% (25.2%) (155.4%) 239.8% 64.9% Net financial income (expenses) 0 0 0 0 Interest charge 0.0% 0.0% 0.0% 0.0% Tax -0 -6 6 -3 -12 -19 Minorities -0 -0 -0 -0 -0 Net profit -20.2 -43 -21 9 33 56 reported growth nm nm nm nm 289.3% 68.3% Net profit adjusted (non-IFRS) (17) (40) (19) 10 35 57 adjusted growth nm nm nm nm 245.5% 65.3%
Cash flow highlights (CAD m) Dec-18 Dec-19e Dec-20e Dec-21e Dec-22e Dec-23e EBITDA incl affiliates (20) (37) (26) 16 53 83 Other items/restr. /corrections 3 4 3 2 2 2 Change in WCR 1 (2) (7) (30) (40) (19) Operating cash flow (16) (35) (30) (12) 15 66 Capex (4) (8) (10) (12) (12) (11) Free operating cash flow (19) (43) (40) (24) 3 55 Net financial items + tax paid 1 (6) 6 (3) (12) (19) Free cash flow (19) (49) (34) (27) (9) 36 Fin. divestments/(investments) (5) Other (0) Capital increase (decrease) 38 25 5 3 Incr. (decr.) in net financial debt (13) 24 29 24 9 (36)
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Balance sheet highlights (CAD m) Dec-18 Dec-19e Dec-20e Dec-21e Dec-22e Dec-23e Fixed tangible assets 10 17 25 33 37 40 Fix. op. assets (incl gross gdwll) 16 24 32 40 44 47 WCR (7) (5) 2 32 72 91 CE (incl gross goodwill) 9 18 34 72 115 137 Shareholders funds 26 11 (2) 12 46 104 Net fin. debt (16) 8 37 61 70 34
Financial ratios Dec-18 Dec-19e Dec-20e Dec-21e Dec-22e Dec-23e Gross margin 0.0% 20.0% 50.0% 65.0% 65.0% 65.0% EBITDA margin (2231.3%) (338.7%) (58.2%) 12.3% 20.6% 22.8% Adjusted EBITDA margin (1862.4%) (301.7%) (51.4%) 13.9% 21.3% 23.4% Adjusted EBIT margin (1862.4%) (306.3%) (55.9%) 10.7% 18.2% 21.2% Tax rate 0.4% 17.4% 25.0% 25.0% 25.0% 25.0% Net margin (1871.3%) (367.6%) (42.4%) 7.9% 13.6% 15.8% Capex/revenue 429.1% 74.0% 22.6% 9.4% 4.7% 3.0% OpFCF/revenue (2174.1%) (393.4%) (90.8%) (18.8%) 1.1% 15.2% FCF/revenue (2085.9%) (452.7%) (76.9%) (21.5%) (3.4%) 9.9% WCR/revenue (805.1%) (48.7%) 5.0% 25.0% 28.0% 25.0% Core WCR/revenue (252.9%) (18.7%) 15.0% 25.0% 25.0% 20.0% CE/revenue 530.8% 127.6% 59.2% 41.3% 36.6% 34.8% ROE (65 3%) (353 6%) 792 0% 86 8% 75 8% 55 3% Gearing (64.4%) 67.1% (1539.5%) 522.9% 151.8% 32.3%
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Part 9: Appendix - The Khiron team
Fig. 48: Board of Directors ● Sidney Himmel is the Board Chairman. Mr. Himmel has over 30 years of corporate and finance experience in the Canadian markets, having worked as an executive and director of public companies, and corporate finance, institutional sales and research professional for notable Canadian and US financial institutions, including Deloitte, TD Securities and Merrill Lynch Canada. His experience also includes the completion of significant financial transactions and commercial partnerships internationally as well as the oversight and development of management teams and boards. ● Alvaro Torres, CEO, has over 15 years of experience in the Latin American market, including infrastructure projects and project finance, management strategy, team development, and mergers and acquisitions. Mr. Torres was previously head of business development for SNC-Lavalin, Colombia, and was instrumental in growing the company from two people to more than 2,000 people in Colombia over the course of three years. ● Mark Monaghan has over 25 years of experience as an advisor, founder and board member with investment banks, merchant banks and public companies. Mr. Monaghan has served in senior executive roles with British and Canadian investment and advisory firms. Over the course of his career, he has completed billions of dollars of transactions for growth companies internationally. In the last five years, Mr. Monaghan has served as Managing Director of Dalvay Capital Corp., an investment and advisory firm focused on Latin American growth opportunities. ● Alvaro Yañez has over 15 years of commercial and legal experience in Colombia and internationally. In the last five years, Mr. Yañez has served as Legal Manager of Pacific Exploration and Production, the largest independent oil company in Colombia and as Partner of his law firm Yañez & Associates. Upon engagement with the Resulting Issuer, Mr. Yañez will execute standard non-competition and non-disclosure agreements. Mr. Yañez has a law degree from Universidad del Rosario and an LL.M in corporate law from Instituto de Empresa. ● Michael Beck is the founder and Managing Director of Regent Advisors LLC, a corporate finance advisory and investment firm. He has advised on equity and debt financings for private and public companies in the natural resources sector, including Signet Petroleum Limited, West African Minerals Corporation, Polo Resources Limited, Direct Petroleum Exploration Inc., Titanium Resources Group, Copper Development Corporation, UraMin Inc., Diamond Fields International Ltd., Weda Bay Minerals Inc., Regent Pacific Group Limited and CCEC Ltd. Mr. Beck was a Managing Director at N M Rothschild & Sons with responsibility for the firm’s mining, oil and gas advisory and investment activities. Prior thereto, Mr. Beck was the founder and President of Librion Group Inc., a corporate finance boutique. He also was with the International Finance Corporation of the World Bank Group, where he oversaw the structuring and financing of a large number of natural resource projects in Africa. Mr. Beck has also been a founder or co-founder of a number of companies listed on the Canadian, Australian and London stock exchanges. ● Vicente Fox was from December 2000 to November 2006, Mr. Fox was the 55th President of Mexico. Prior to his presidency, he served as the Chief Executive Officer of Coca Cola Latin America. Mr. Fox is the Founder of Centro Fox, a non-profit foundation dedicated to serving communities in Mexico and Latin America. Through his various business and community interests, Mr. Fox has been highly vocal and is a well-respected advocate for the legalization of medical cannabis throughout the Latin American region. He currently serves on the board of directors of a US based cannabis publication advocating for cannabis legalization.
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● Livia M. Maduri is the General Counsel & Corporate Secretary. Ms. Maduri brings a broad range of legal experience gained in private practice and in-house at a multinational life sciences company including Termo Fisher Scientific. In addition, Ms. Maduri brings over ten years’ experience in Regulatory Affairs and Quality Assurance roles at several multinational pharmaceutical companies in Canada.
Source: Khiron
Fig. 49: A great management team ● Alvaro Torres, CEO, has over 15 years of experience in the Latin American market, including infrastructure projects and project finance, management strategy, team development, and mergers and acquisitions. Mr. Torres was previously head of business development for SNC-Lavalin, Colombia, and was instrumental in growing the company from two people to more than 2,000 people in Colombia over the course of three years. ● Chris Naprawa, President, brings extensive institutional capital markets experience to the Company. Prior to joining Khiron, Mr. Naprawa was Partner at Sprott Capital Partners, Head of Equity Sales at Macquarie Canada, Head of Equity Sales and Trading at Dundee Securities, and Managing Director at Primary Capital. He was also previously founder and CEO of Startcast Solutions, a company successfully sold to a large telecommunications company. ● Wendy Kaufman is the Chief Financial Officer of the company. She has significant experience with Latin American operations, gained during her tenure as CFO at Primero Mining Corporation, and previously in her role as Vice President, Finance and Treasury at Inmet Mining Corporation, among other executive management positions. ● Juan Diego Alvarez is Vice President Regulatory. He has 10 years of legal experience in Colombia and is an authority on Colombian medicinal cannabis regulation. He was previously a public policy advisor to the Ministry of Health in Colombia. In the last five years, Mr. Alvarez has been a consultant for Payson Center for International Development and USAID, a Professor of Law at the University of Los Andes. ● Andres Galofre, Vice President of Business Developments, has 15 years of experience in pharmaceutical marketing, brand management and distribution of prescription drugs and consumer products in Latin America. Mr. Galofre was integral in leading the launch of Advil in the Colombian market, which reached a 28% domestic market share. In the last five years, Mr. Galofre has been Marketing Manager for Alpina, Founder of VeggiesBox. ● Matt Murphy, Vice President of Compliance, is an executive leader with broad based domestic and international expertise in both the federal and private sectors. As a Career Special Agent (25 years) with the DEA, he served in a multitude of positions prior to founding the Pharma Compliance Group (PCG). Mr. Murphy is an internationally recognized security expert in the fields of drug law enforcement, risk assessment and system development, regulatory compliance, and training. ● Luis Chavez leads the Mexican unit. He is a senior executive in the pharmaceutical and health care sector with more than two decades of market experience across Latin America, Luis has an extensive track record with global brands that operate in the region, which include Pfizer and Wyeth. Mr. Chavas also served as a Business Unit head for Novartis Mexico. ● Rodrigo Azócar who heads the Chilean effort is also an experienced pharmaceutical industry specialist, who has played an important role in marketing, brand positioning, management, and corporate development for leading pharma organizations in Chile, over a career span of 20+ year.
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Rodrigo is also current member of the board of ASILFSA, the Chile-based industrial association of pharmaceutical laboratories. ● Marco Algorta steers the Uruguayan/Brazilian effort. He has the dual Uruguayan/Brazilian nationality, has been in the cannabis industry since 2013. He is a Co-Founder of the Associação CANNAB in Brazil which main focus is to perform R&D of medical cannabis and also works with SmartHemp, an accelerator for startups. He founded CannaPur in 2016 as a biotechnological project to develop hemp strains that adjust to the Uruguayan regulatory framework. Mr. Algorta has participated in several cannabis-focused scientific investigations in Uruguay and Brazil with medical associations including Institut Pasteur, Hospital Maciel and Fundação de Neurologia e Instituto do Cérebro among others. ● Luis Marquez, country manager Peru is a biologist, marketing specialist and MBA from International University of La Rioja with over 28 years of successful experience in multinational pharmaceutical companies such as Pfizer, Aventis, and Rhône-Poulenc filling in the position of Country Manager and Business Unit leader. Mr. Marquez last experience was at Pfizer as Country Manager for Peru and Bolivia. ● Maria-Fernanda Arboleda, Medical Director, is an Anesthesiologist, Pain and Palliative Care Physician. She also completed a Spine-Regional Anesthesia Fellowship at the McGill University Health Center and most recently, she completed a Post-Doctoral Research Fellow in Supportive Cancer Care and Medical Cannabis, at the Department of Oncology, McGill University, and at Santé Cannabis, a leading specialized cannabis clinic in Canada. She is a co-investigator on several research projects that are being developed in Canada, including the deployment of a phase II study on the use of cannabis oil capsules for chronic pain, as well as the first phase III study for the use of inhaled cannabis to improve health-related quality of life in advanced cancer patients. ● Rodrigo Durán is in charge of the CPG effort. He has over 17 years of experience in the consumer goods and pharma industry. His experience covers directing go-to-market strategies, managing teams, and bringing brands to the consumer market across Latin America. As Consumer Brands Director for Team Foods, Rodrigo was responsible for USD70 Million in US sales through retail and digital channels. ● Elsa Navarro is the manager that looks after the Skin Line. She has 10 years of professional experience developing and executing marketing and sales strategies in multiple industries: dermocosmetics, agro-industry, bio-fuel, events and food & beverages companies.
Source: Khiron
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