Company Overview: Khiron Life Sciences

Khiron Life Sciences (TSXV: KHRN) is a vertically integrated global medical and CPG cannabis leader with core operations in Latin America and Europe. They currently have distribution throughout various countries in Latin America, along with activity in North America and Europe. The company is licensed in Colombia for the cultivation, production, domestic distribution, and international export of both low and high THC medical cannabis products from Colombia to UK, Peru and Uruguay/Brazil.

The Investment Thesis

The overall investment thesis from our view can be broken into the following key points:

  1. Khiron is the early leader in Colombia with a fully vertical operation and regulatory ability and permits to export products internationally.
  2. Khiron stands out from their Latin American publicly traded competitors in terms of both revenue and balance sheet strength.
  3. They are the first to market with CBD cosmetic products in Colombia under the KUIDA brand.
  4. Khiron is one of a handful of suppliers producing medical cannabis products for distribution in the United Kingdom through Project Twenty21.
  5. The company has a balance sheet that gives them the strength to be careful and diligent within their growth strategy. More importantly, the balance sheet strength reduces shareholders dilution risk relative to vast majority of other cannabis companies.

Overall we feel Khiron is the leading distribution and service oriented company in a country that can offer the lowest cost cannabis products in the world and a huge base of patients. They have a prudent strategy to grab distribution in countries moving towards legalization and already have a proven suite of products available to plug into each new channel at industry leading costs of production.

The Business Model

Khiron has three operating segments:

  1. Medical Cannabis Products – Khiron produces and sells branded products and services to patients with medical conditions where cannabis can be an acceptable proven option.
  2. Health Services – They operate their own network of medium complexity health centres under the brands ILANS and Zerenia. These clinics offer a suite of health, medical and surgical services in alignment with insurance partners.
  3. Wellbeing Products – The company focuses on delivering the benefits of CBD and hemp across an array of various branded consumer packaged goods, such as its Kuida cosmetics line with sales in Colombia, UK and US.
Source: Khiron Investor Presentation, May 2020

Khiron’s medical cannabis strategy is focused on leveraging the complete value chain from seed to patient. They have a current portfolio of 22 THC and CBD strains registered with the Colombian Agricultural Institute (ICA).

The company lays out their regional strategies for us in the most recent MD&A (2019 annuals):

Colombia

Khiron has all licenses and certifications in Colombia to manufacture both high-THC and low-THC cannabis magistral preparations. Magistral preparations are custom formulations prescribed by physicians according to the individual needs and symptoms of patients and prepared as prescribed by a certified pharmaceutical establishment using cannabis derivatives. As of March 2020, Khiron Colombia is legally permitted to fill prescriptions and sell low-THC medicinal cannabis, making it the first licensed producer authorized to sell medical cannabis in Colombia. They expect to commence filling prescriptions for high-THC medicinal cannabis when their health centre dispensary receives authorization from the Narcotics National Fund (NNF), which is expected during Q2 2020.

The company has transitioned many of its’ clinic’s services to on-line, and launched a large, on-line medical education program with Tecnologico de Monterrey in Mexico.  The opening of one (out of 3) of the Company´s clinics in Bogotá-Colombia last February 2020 has been very positive in this pandemic environment. Zerenia is a fully integrated medical care clinic designed to meet patient health and well-being. Operating in a 15,000 sq. ft facility in Bogota’s prime medical services district, the clinic increases Khiron’s clinical capacity by 75% and forms part of the Company’s patient acquisition strategy as it prepares for the issue of cannabis prescription in Colombia.

Peru

The company’s wholly owned subsidiary, Khiron Peru S.A, was established for the purpose of importation of medicinal cannabis products for commercial sale. In Peru, only licensed pharmaceutical establishments that have received Good Storage Practices (GSP) certification are authorized to participate in wholesale import and commercialization of cannabis products. Khiron Peru holds the necessary pharmaceutical establishment license and is one of the first cannabis companies in the country to have received GSP certification from Peru’s Directorate General of Drug Supplies and Drugs, as well as its import license.

The Company signed a 2-year exclusive agreement with Farmacia Universal to manufacture and distribute Khiron-branded medical cannabis products in Lima, Peru´s largest city with 8.6 million inhabitants.

Brazil

Brazil’s new regulatory framework for medical cannabis has created a new path for entrants into the highly regulated space. The new regulations came into force on March 10, 2020, creating a new class of medical cannabis-based products that may be prescribed by doctors and sold through pharmacies. At the moment, cultivation of cannabis in Brazil continues to be prohibited, however recent new measures allow for personal importation of cannabis-based products. Khiron Colombia has received authorization for their cannabis-based products to be imported by patients into Brazil for personal use under a medical prescription.

United Kingdom

With an eye for global expansion, Khiron  has also entered into an agreement to be the exclusive Latin American provider of cannabis medicines to Project Twenty21 in the UK. This initiative will bolster the company’s credibility (and commercial opportunities) in other European countries. The new program, Project Twenty21, will create Europe’s largest national medical cannabis registry. The project will enroll 20,000 patients into clinical trials by the end of 2021, creating the largest body of evidence for the effectiveness and tolerability of medical cannabis; possibly leading to a path for UK policy makers to legalize medical cannabis as an affordable, approved medicine for appropriate patients.  

Khiron has also fulfilled the regulatory requirements necessary to import and distribute 11 Kuida cosmeceuticals SKU´s into Europe, with sales in UK through Nabino.com  and TJC.

Source: Khiron Investor Presentation, May 2020

Management

Some members of the Khiron management team include:

Alvaro Torres, CEO & Board Director
• Industrial Engineer who built infrastructure projects in Colombia and LatAm.
• Formerly with SNC Lavalin and successfully built an engineering and merchant banking firm.

Chris Naprawa, President
• 20+ years of experience in institutional capital markets.
• Former 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.

Matt Murphy, VP Compliance
• 25 years with the U.S. DEA. Served in variety of positions, including Chief of Pharmaceutical Investigations, prior to founding the Pharma Compliance Group.

Tejinder Virk, President Khiron Europe
• 15 years of executive-level experience in the capital markets and cannabis industry.
• Previously served as a Managing Director in Europe, for Canopy Growth Corp. Formerly Managing Director of Global Equity Products for BMO Capital Markets.

Elsa Navarro, Wellbeing VP
• 10 years of experience in marketing and sales strategies in multiple industries such as dermo cosmetics, agro, bio-fuel, event and food & beverages companies.

Comparables

The other publicly traded companies with core operations in Latin America include PharmaCielo, Blueberries, and Avicanna. We feel that Khiron clearly stands out against their these comparables. They have the strongest balance sheet, more revenue per quarter by a wide margin, and trade at the lowest price to sales multiple of the group.

Potential Catalysts

Some of the near term cataylsts we see that could propel Khiron to a larger opportunity:

  1. A successful program in the United Kingdom. On May 6, Khiron announced their first medical medical cannabis prescriptions for UK patients participating in Project Twenty21. With 20,000 patients in the program, and a potential path to wide scale legalization for medical cannabis following the program, we see the pipeline for sales growth out of the UK to be a potentially large cataylst for Khiron in the near future. For example, by 2024 the UK medical cannabis market is predicted to be worth nearly £1bn, servicing nearly 340,000 active patients (source: Prohibition). The Company complete its first import of EU GMP medical cannabis products to the UK, under an strategic partnership, that will allow Khiron to deliver patient prescriptions to their homes. UK medical cannabis clinics and doctors have received regulatory approval to conduct teleconsultations with patients, a new milestone in opening up patient access.
  2. Traction of sales in Brazil. In April 2020, Khiron announced an exclusive agreement with Medlive in Brazil. Medlive is a leader in the distribution of medical and hospital products in the south of Brazil, serving more than 3,000 hospitals and clinics in the public and private sectors. Brazil represents the largest addressable market in Latin America with a population of approximately 212 million. Khiron’s medical cannabis products will be marketed through Medlive network of doctor offices, clinics, hospitals and governmental institutions
  3. Growth of Distribution for Well Being Products. Khiron offers the first mass-market branded CBD skincare line in Latin America. Kuida is the first brand in Colombia to develop cosmeceutical products based on the benefits of CBD. The products are distributed at retail and online outlets across Colombia. The products are also carried in permissive States in the US and in the UK. Thus the opportunity to grow this product line extends well beyond Latin America.
  4. Expansion Into News Countries. Khiron has a unique opportunity in the sector with a strong balance sheet. They have the ability to acquire distressed assets that create synergies with their current product line, or enter greenfield markets with a prudent strategy. For example, investors are anxiously watching for how the country chooses to enter Germany and Peru.
Source: Khiron Investor Presentation, May 2020

Risks

From our view, some of the potential downside risks in the Khiron investment thesis are as follows:

  • Operational Execution
  • Dependence Upon Management and Key Employees
  • Dependence on Suppliers
  • Demand for Cannabis and Derivative Products
  • Repatriation of Funds from Colombia
  • Growth of Sales in Emerging Cannabis Markets

For a more detailed view of risks, we encourage investors to read the management discussion and analysis from the most recent quarter on Sedar.

Conclusion

Overall we feel Khiron stands out against all the competitors in Latin America. They have a strong balance sheet, a path to profitability, and opportunities to be early in many new markets. The management team has demonstrated a level of restraint and prudence that has put them in a unique position today. Khiron has an opportunity to be a leader in regions like the United Kingdom, where they can offer industry leading low costs along with proven medical and CPG products. The company is in the early stages of their growth cycle and at the bottom of their sales ramp looking upwards. Overall, we feel that for investors looking for an integrated medical cannabis company, Khiron offers a favorable risk/reward profile.


FULL DISCLOSURE: Khiron Life Sciences is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover Khiron Life Sciences on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.

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