Description

Investment Thesis – We believe Khiron is one of 2 or 3 leading companies in Latin America with at LatAm founders, management and ownership that is poised to become one of the dominant companies throughout the region. Khiron is only one of a limited number of licensed producers in Colombia. The company plans to not only serve the domestic medical marijuana market, but also acquire licenses and expand into neighboring countries as part of a greater LatAm rollup strategy. It is trading at a steep discount to peers despite significant white space in LatAm and an impressive politically connected Mgmt team. Khiron could easily continue to grow organically or be acquired by either a global consolidator (such as Aurora or Canopy). The potential for a partnership with a pharma company could provide another avenue for growth.

In terms of valuation, given Khiron has a market cap of ~USD$62m and will be serving a population of ~50m people in Colombia and potentially ~620m in the region, this compares favorably vs. the Canada market of ~37m people where Canadian LPs currently have a combined market cap of ~$35-40b. We see potential for Khiron to grow into a multi-billion dollar company over the long term, with a valuation of a few hundred million in medium term, and in the short term we don’t see how this stock isn’t a double or a triple from current levels.

Situation – So far Uruguay is the only country that has fully legalized recreational marijuana in South America, but 5 other large LatAm countries neighboring Colombia have early stage medical marijuana programs (Brazil, Mexico, Argentina, Peru and Chile). Khiron received the first THC license issued by the Colombian Government, and should be well positioned to capitalize on the growth in both Colombia’s domestic medical marijuana market as well as the growth in neighboring countries.

• Colombia has a population of 50m people while greater LatAm has 620m, representing a much larger opportunity relative to Canada’s population of ~37m
  • On a fully diluted basis, Khiron has ~68m shares OS equating to a FD market cap of ~USD$62m vs. ~USD$160m for peer ICC Labs and the other Canadian LPs which have a median market cap of ~USD$300m and an average market cap of nearly USD$1b
    • We estimated the combined market caps of all the Public Canadian LPs at ~USD$30b, with the largest two, Canopy and Aurora at ~$7b and ~$4b respectively, along with a lot of private companies including a very large private company called Tilray, taking the combined total to ~$35-40b.
• Khiron has ~C$11.7m in cash and spent ~C$2m in Q1, meanwhile its planned Ph2 facility and Bogota Clinic should cost below C$1m combined, leaving Khiron with sufficient capital to fund its both its ph2 expansion and domestic operations for another year
  • Currently Mgmt envisions a total capex requirement for its Ph3 expansion of ~C$25m to build out ~2m sqft of cultivation space.
    • Therefore, the company will only need to raise ~C$30m of capital over the next 12-18 months, which is quite modest relative to the raises taking place in Canada currently.
    • Khiron can also raise another ~C$13-14m via its callable options once the stock price hits C$1.40
• Strategy includes serving the domestic market with high quality GMP tested products, and expanding across greater LatAm by acquiring licenses and forming local partnerships to serve the region’s massive population
  • Mgmt sees Mexico followed by Peru, Chile and Brazil as their next target markets
• Khiron is an attractive acquisition candidate to Canadian LPs looking to continue to expand globally.
  • We have already seen numerous acquisitions and partnerships between Canadian LPs and various European companies to supply Europe and other countries.
    • One of Khiron’s advisors is a co-founder of Aurora Cannabis, a company which has already demonstrated a very strong interest in international expansion via acquisitions and partnerships.
  • Khiron could also team up with a pharma company, in a similar way that CannTrust (TRST CN) has a global pharma partnership with Apotex, Tilray with Novartis’ Sandoz, or ICC with EuroFarma.

Company Overview– Khiron Life Sciences Corp, founded in Feb 2017, is a Canadian integrated medical cannabis company with its core operations in Colombia. The company operates in a similar fashion to a pharmaceutical company, by developing and commercializing medical cannabis products for trauma treatment facilities. Khiron combines leading international scientific expertise with branded product market entrance experience with the longer-term goal of addressing the unmet medical needs of ~620m people in the LatAm market (where Mgmt estimates there are an ~68m potential patients)

Its primary focus near term is to build its brand reputation by selling medical cannabis products in the forms of high quality GMP certified extracts to the domestic market. Khiron is focused on addressing the unmet medical needs of Colombians with conditions including: Epilepsy, Chronic pain, Cancer, PTSD, Anxiety, Insomnia, MS, Parkinson’s, Depression, Tourettes, and Anorexia. Khiron received its first license to cultivate medicinal cannabis in Colombia last September, which was the first such license granted in Colombia. Khiron has since secured several other requisite licenses from the Colombian Government that now allow it to cultivate, produce, distribute domestically and export both tetrahydrocannabinol (THC) and cannabidiol (CBD) medicinal cannabis. Khiron also completed a reverse merger with Adent Capital and raised ~C$12m of capital in its second round completed last month. Its shares began trading on the TSX under the ticker KHRN on May 24th.

Currently, the company is in the midst of completing its initial 80k square foot greenhouse, which should house ~8,400 plants per production cycle or ~8,000kg annually, enough cannabis for 50,000 patients. Khiron plans to open its first clinic, located in Bogota (population of 9m) by year end 2018, with initial medicinal cannabis sales occurring in Q1’19. Mgmt expects the three physicians staffing this facility to handle over 1,600 patients/month. Khiron plans to expand to three other major cities in 2019 (two of which are very likely Cali and Medellin, both of which are just over 2m each.) This is only the beginning phases however, beside regulatory approvals and construction, Khiron has focused most of its efforts on educating doctors regarding its products. The company has held large medical conferences earlier this year with over 1,000 physicians attending. It has also gained endorsements from and signed cooperation agreements with The Colombian Association of Internal Medicine (ACMI) and the Colombian Association of Neurology (ACN). Khiron also plans to have its products GMP certified (which should not only help build its brand domestically but also help exports).

Lower Cost Advantage – Despite facing lower margins on domestic sales, Khiron will benefit from having lower costs of production and capex requirements than other producers in more developed countries, which should give it an advantage in terms of expanding into and supplying other markets.

• Khiron currently leases 4.5 hectares (~11 acres) of land, and has the option to lease or acquire an additional 15.5 hectares (~38 acres).
  • The company pays C$10,000/year per hectare (C$4.05k/year per Acre or US$3.0k/yr per Acre).
    • Mgmt notes that the grow location is secured by not only 24hr on site security along with fencing and video cameras, but is also located near two police stations and a military base.
• The current facility has the potential to be expanded to ~5x its current size at an extremely low-cost relative to producers in more developed countries.
  • Initial grow facility capex is ~C$500k, meanwhile the Clinic capex is estimate at C$210k (US$158k)
    • Cost per Sqft for the greenhouse is estimated at C$6.30/sqft
      • By contrast Aphria’s Mgmt estimates that its greenhouse will cost C$55/sqft to build vs a typical indoor facility at C$250-300/sqft.
• In addition to the greenhouse, the company has also prepared to commence outdoor planting (which is not allowed in Canada, but is the most efficient form of cultivation)
  • Similar to Coffee, Colombia’s climate, soil and terrain are very favorable to Cannabis. Thanks to its proximity to the Equator, sunlight patterns allow outdoor production virtually all year long
    • This results in 3 crop cycles, which is far more favorable than Uruguay’s 1 crop cycle.
    • Regulation is also an advantage for Khiron, as Colombia not only allows for much higher CBD and THC concentrations than Canada, but Khiron also has secured a favorable share of production quota from the Colombia Government.
      • This is due in large part to both its first mover advantage as well as its efforts to educate doctors and generate demand, which better enables them to justify their shares of THC quota
• Mgmt projects COGS of C$0.35/gram flower equivalent.
  • By contrast Canada’s lowest cost producer, Aphria (which uses a greenhouse model) had cost to produce of ~C$1/gram and an all-in cost per gram of C$1.56 last Q.
  • In terms of selling price, Khiron should be able to get somewhere around C$1.00-1.50/gram domestically (depending on the quality)
    • The Govt of Uruguay for instance recently increased the price for dried recreational cannabis by 6.5% to C$1.41 per gram, meanwhile medicinal sales through licensed pharmacies are ~C$1.28/gram

Competition – In terms of competition, Khiron claims that their competitors are primarily focused on generating low cost homogenous products for international export as base extractors, as opposed to Khiron’s approach of creating higher quality GMP certified branded product formulations for the domestic market. Most of the competition has English speaking Canadian management teams, who lack the same expertise with regard to both the domestic Colombian market and also the greater LatAm region.

• There are only a few LPs in Colombia currently; however the market is growing rapidly as Colombia offers an open process to apply for the licenses.
  • ICC recently expanded its presence into Colombia, other licensed companies in Colombia include PharmaCielo, Cannavida, and MedCan as well as the subsidiaries of privately held US based Cansortium Holdings LLC, and Canadian Avicanna
    • Avicanna produces low cost cannabis in Colombia in partnership with Grupo Daabon, an international food conglomerate. The company also produces CBD based products for medical markets
    • PharmaCielo (private) is a Canadian-headquartered company with operations in Colombia, that believes it can grow cannabis for ~C$0.05/gram in open-air greenhouses and sell back into Canada
• We believe Khiron is the first and most mature company in terms of obtaining doctor and patient relationships in Columbia, and will have a well-developed pipeline of drug approvals in the process

Market Size – According to Mgmt, which is relying on an analysis from QuantilesIMS, Colombia, with a population of almost 50m, has an estimated ~5.6m people with qualifying conditions. The largest portion of which (~44%) is pain, followed by Depression (16%), Anxiety (10%), Insomia (9%) and PTSD (7.5%).

• Currently, of the chronic pain population of 2.2m people, an estimated ~500K patients use opioids for treatment.
  • Given these can be both expensive (on a relative basis) and can lead to adverse health effects, Khiron is specifically looking to displace this portion of the market.
• The size of Colombia’s Medical market in dollar terms is still unclear, but given its population is 30% larger than Canada alone and that the overall LatAm population is almost ~2x that of the US & Canada combined, this is a significant opportunity
  • A risk here is that a poorer population can’t afford to pay as much as other more developed countries, however the cheaper production and other lower costs should help offset this
• According to Stifel the overall LatAm market is conservatively worth USD$2.2 – 3.1b
  • By comparison, Stifel estimated Canada’s medical market was ~USD$375m last year, with the potential opportunity for ~USD$1b
    • Canada’s wholesale market size is estimated by Stifel to have a potential market opportunity of ~USD$3.75b once recreational marijuana takes effect
• Other sources, such as GrandView Research estimate that the Global Medical Marijuana market will be grow from ~$11b to ~$56b by 2025
  • This includes ~$42.5b from Europe, $12.5b for the US and nearly ~$5b for China

Mgmt – Insiders own ~31% of the company and given both their expertise and political ties this should serve to benefit Khiron’s other shareholders

• Khiron’s CEO was educated in the US and has 15 years of experience working as a leader in Colombian infrastructure, engineering and project finance. He oversaw the construction of Colombia’s largest skyscraper and also proven experience growing a small company into a large operation, as he previously grew the Colombian subsidiary of Canadian engineering firm SNC-Lavalin from 2 employees to over 2,000 people in 3years.
• Khiron’s chief regulatory officer Juan Diego Alvarez previously served as the Colombian Minister of Health’s authority on cannabis regulation. The minister appointed Alvarez to create and draft regulations for legalization of medical cannabis.
• The company’s COO lead Pfizer’s Advil in Colombia and his family owns the land currently being used for cultivation
• The chief compliance officer is a former DEA agent who specialized in pharmaceutical investigations, and has been featured on 60minutes speaking out against the current opioid epidemic. Mgmt claims to have DEA level security protocols implemented across its entire platform (from production, distribution and logistics).
• Other Mgmt, board members and advisors includes the former founder of Aurora Cannabis as well as other individuals with expertise in Agriculture, import-export and pharmaceutical sales

Risks

• Early stage company without revenues that is reliant upon capital markets to grow
  • Given Khiron is fully funded through its phase II expansion and its initial clinic in Bogota, the company could likely push back Phase III plans and grow organically at a slower rate
• Canadian LPs currently overvalued, however Khiron still remains cheap on an absolute basis given its growth prospects.
• Execution risks, this should be mitigated by a strong Mgmt team that is following industry leading standards and has a similar model to other proven operators in the medical marijuana space

Catalyst

• Sale of Company
• International Expansion/Exports
• Strategic Partnership