Alpha Investments
Is AusCann The Australian Canopy Growth Corp.?
May. 5, 2017 11:53 AM • ACNNF
Summary
AusCann is one of the leading lights in a crowded Australian medicinal cannabis market.
We believe its significant ties with Canopy Growth Corp. have positioned it perfectly to capitalise on the deregulation of medicinal cannabis.
AusCann was granted a licence to cultivate its own cannabis today, making it just one of a handful of companies able to do so.
As many investors will be aware, one of the latest countries to be swept up in pot stock mania is down under in Australia. A great number of Australian pot stocks have hit the bourse in recent months aiming to become the next Canopy Growth Corp. (OTCPK:TWMJF). While there are many pretenders, there are a few with a genuine chance of making it big. The one that we think is the pick of the lot is AusCann (OTCPK:ACNNF).
Why AusCann?
First and foremost, it is worth pointing out that AusCann has significant ties to Canopy Growth Corp. Not only is Canopy one of its largest shareholders but it has also granted the fledgling medicinal cannabis company with royalty-free access to its expertise and intellectual property in the cultivation, manufacture, and the supply of high-quality medicinal cannabis products. We see this as a huge win for the company. Canopy has been there and done that. And, done so in a very successful manner, we might add. Together with AusCann's strong management team, we think this is a recipe for success.
But what is success?
Success for AusCann will be formulating medicinal cannabis products that treat chemotherapy-induced nausea, treatment-resistant childhood epilepsy, palliative care symptoms, and last but by no means least, chronic pain.
Source: Company presentation
Its use in chronic pain is something which we have a keen eye on. Although a smaller market than in Canada, A$5.8 billion is still not to be sniffed at. Especially with the current number one treatment option, opioids, increasingly leading to abuse and more expensive. If medicinal cannabis can become the dominant treatment option for chronic pain in Australia, then AusCann stands to benefit greatly.
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It won't be easy
But there's still a long road ahead for the company and a number of hurdles to clear. One such hurdle, which will undoubtedly take a lot of hard work to overcome, is the middle man - doctors. Convincing doctors to prescribe medicinal cannabis will not necessarily be easy. A lot of general practitioners are cautious on medicinal cannabis and will need to be educated on the benefits. Without them on side, the company will face an uphill struggle to get its product in the hands of patients.
Once again, this is where the Canopy Growth Corp. relationship becomes invaluable. Canopy wasn't overly successful at doing this for a long time, hence why the company acquired Mettrum Health for $430 million. In our opinion, Mettrum was head and shoulders above Canopy at connecting with doctors. By acquiring the company, it not only gained access to its vast network of doctors but also the technical know-how to successfully connect with doctors and effectively promote the use of medicinal cannabis. This knowledge has now been passed on to AusCann. As a result, later this month, AusCann will embark on its own medical education program. It plans to bring in leading doctors in the field from Canada to present seminars to groups of Australian doctors. We believe that this and the growing interest in the drug from patients will increase its overall appeal.
Don't forget DayaCann
While Australia is the key market, in our opinion, it's not the only place where the company is active. A joint venture, named DayaCann, in Chile, with not-for-profit Fundacion Daya, has been encouraging thus far. DayaCann recently harvested its first crop with some promising results. Approximately 400 plants will be harvested, yielding over 300kgs of dried cannabis buds. These will be processed into medicinal cannabis formulations to be used for clinical trials in Chile and sale to third parties. The Chile market, along with neighboring Argentina, is seen by AusCann as significant opportunities, and we agree.
Pleasingly, though, the company can now concentrate on harvesting crops in Australia in the near future. Today, the company announced that it has been granted a license to cultivate medicinal cannabis in Australia by the Office of Drug Control. This gives the company a huge advantage, in our opinion. Whilst it is not the first (Cann Group was the first), it is one of just a handful that have been granted a license. If the company can successfully leverage its relationship with Canopy Growth Corp. and the knowledge gained from its harvest with DayaCann, then we see it gaining an invaluable first-mover advantage in the Australian market.
Is this a long-term investment?
Australian pharmaceutical stocks have a tendency to trade at 4 times sales. With the local chronic pain market alone worth A$5.8 billion, we believe there is significant room for its share price to grow in the future. If AusCann could command just 5% of the chronic pain treatment market, it would generate sales of A$290 million. This would justify a market cap in excess of A$1.1 billion, based on a price-to-sales ratio of 4.
But it will be some time before the company generates revenue. Our best-case scenario sees revenue generation commence in 2018, but we feel investors should be prepared to wait as far ahead as 2019 for significant revenue generation. With a cash position of A$4.488 million and cash outflows of A$925,000 expected during the next quarter, there is a fair chance that a further capital raising will need to be undertaken. This is something that investors should consider before making an investment.
Overall, this is a reasonably speculative and high-risk investment, but in a balanced portfolio, we feel it is worth considering today.
