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How Khiron Life Sciences is Latin America’s Best Cannabis Value Play

Marc Davis
0 Comments|January 4, 2019

M1.jpg
Khiron medical cannabis facility in Colombia. Photo courtesy of Khiron Life Sciences.
 
A storm of controversy was stirred up recently by a well-publicized short report citing “largely worthless” acquisitions in Latin America by Aphria Inc. This gives good reason to consider what a solid investment in the region might actually be worth.
 
Khiron Life Sciences Corp. (V.KHRN), an integrated medical cannabis company headquartered in Canada with core operations based in Colombia, represents an excellent example of what we consider to be Latin America’s best value play.
 
In contrast, Canopy Growth Corp. has also been splashing money around, just like Aphria, as it scrambles to establish a presence in Latin America via a number of recent subsidiary startups and acquisitions.
 
As the largest cannabis company in the world, Canopy Growth can give us further perspective on costs and opportunities in this area. For instance, it invested US$53.4 million in its Colombia acquisition alone, with milestone payments potentially pushing the total price over $150 million. Also, Aphria purchased its  package of Latin American assets for C$193 million, according to a press release of July 17, 2018.
 
By comparison, Khiron has spent a fraction of these large capital expenditures while enjoying an early-mover advantage in Colombia and Mexico. (Khiron became the first company to receive a license from the Colombian Ministry of Justice to cultivate cannabis.) It already has the capacity to grow 8,400 kgs/yr of cannabis flower per year. That’s before the cannabis is turned into high-margin medicinal extractions at the company’s own extraction facility.
 
Best of all, Khiron expects its Phase One 80,000 square foot greenhouse to be able to produce cannabis for around $0.35/gram — a number that most North American producers could only dream of. But it gets better from there. Over the next few years as it implements phases two and three of development, Khiron expects to be able to push costs as low as $0.10/gram once all two million square feet of cultivation space are operational.
 
By 2020, Khiron is targeting annual production of up to 100,000 kilograms of dried flower.
 
Also, Khiron has shown its ability to attract world-class talent, including former President of Mexico, Vicente Fox, who sits on Khiron’s board of directors. Fox is Latin America’s most visible and passionate advocate for the reform and rehabilitation of illegal cannabis economies. With his backing and influence, Khiron gains an exceptionally high-profile brand ambassador, and a powerful voice in support of legal and social reforms.
 
Notably, Mexico recently introduced legislation that would create a medical cannabis industry and permit private cultivation and recreational use as well. Fox is likely to be a valuable asset in Khiron’s progress in the Mexican market as the legal situation there continues to evolve.
 
It’s also important to note that Khiron’s CEO, Alvaro Torres, is a successful, self-made Colombian business leader who is very well-connected in his native land. Additionally, he has an extensive background in project management where he oversaw the development of over $1 billion in projects.  
 
Khiron Continues to Execute and Expand
Khiron is fully licensed in Colombia for the cultivation, production, domestic distribution, and international export of both tetrahydrocannabinol (THC) and cannabidiol (CBD) medical cannabis. In addition, Khiron has operations and strategic partnerships in Mexico, Chile, Uruguay, and Peru. This represents a combined population of some 221 million inhabitants.
 
Most notably, Khiron appears to be following the same strategy Canopy used in Canada to emerge as the leader in that market. So far, it looks like Khiron is beating Canopy at its own game of starting out by dominating the medical market landscape.
 
Khiron’s recent acquisition of ILANS (Latin American Institute of Neurology and the Nervous System) provides a network of clinics and doctors with 100,000 patients, and a 45% compound annual growth rate. In 2017, ILANS earned gross revenue near $10.5 million and EBITDA of about $1.8 million. Khiron will channel new medical and wellness cannabis production into this expanding market.
 
Also, Khiron has cooperation agreements and endorsements from several national and international medical associations including pain management, palliative care, internal medicine, and neurology. This cross-section of disciplines puts Khiron in the forefront of medical cannabis research, education, and outreach in Latin America.
 
Mature medical markets like California and Canada have proven that this outreach is the essential first-mover pathway to success for cannabis producers and service providers. These alliances pave the way for Khiron to access the full spectrum of medical cannabis treatments and wellness applications going forward.
 
Successfully Building a Continent-Wide Brand
Significantly, Khiron already has products on the market. It has launched the Kuida branded line of CBD-based cosmeceutical products in Colombia with marketing initiatives and distribution channels up-and-running.
 
Also, it has approval from the Mexican health authority (COFEPRIS) to import and commercialize three nutraceutical products, through subsidiary Kuida Life Mexico S.A. Similarly, the government authority in Peru (DIGEMID) has approved four cosmeceutical products for commercialization.
 
M2.jpg
Khiron’s KUIDA brand of CBD-based cannabis cosmeceuticals. Photo courtesy of Khiron Life Sciences.
 
These product launches give Khiron a first-to-market advantage that should help to solidify the company’s position as the dominant integrated medical and wellness cannabis company across the region.
 
Even with all these advantages, Khiron’s current share capitalization amounts to a fraction of the prices paid by Aphria and Canopy for their operations. So we can safely conclude that either Khiron is trading at a sharp discount to its fair market value, or the competition is paying a steep premium.
 
To help settle that question, we can compare the way corporate insiders have responded to the market value of their respective shares.
 
Insider Buying Speaks for Itself
Generally speaking, there’s nothing wrong with corporate insiders selling stock. It’s one of the ways entrepreneurs and executives get rewarded for building and growing a business. But when insiders buy their own company stock, it sends a positive message about their view of future share prices.
 
That’s why Aphria’s senior management announced, in the aftermath of the short report, that insiders had purchased over $3 million in shares at fire-sale prices. There was no mention, however, that insiders had sold over $7.5 million worth of shares through April and May of 2018, at much higher prices.
 
Additionally, Canopy Growth insiders sold $43 million worth of shares in 2018, while buying $122,000 worth.
 
In stark contrast, Khiron insiders, with no outside influence or fanfare, have purchased over $1.2 million in shares during the last six months, while selling less than $25,000 worth.

The Market Always gets the Last Word
One analyst from the capital markets, Canaccord Genuity, covers Khiron. Initially rating it a strong speculative buy with a price target of C$3, Canaccord recently reiterated the rating and increased the price target to $3.40.
 
Also, Horizons ETFs, on Dec. 27, 2018, announced that Khiron is now a component of its flagship marijuana fund HMMJ. This fund includes all the large-cap and mid-cap names in the space, and should increase Khiron’s visibility and liquidity in the market.
 
M3.jpg
Khiron shares (candles) compared to HMMJ ETF (light-blue line), May-Dec 2018. Chart from Yahoo Finance.
 
Finally, as world stock markets erased trillions of dollars from investment assets in the last quarter of 2018, Khiron held up rather well. It is up 27% from the closing price of its first day of trading on May 24, 2018. From that same date, HMMJ is 18% lower. That’s a 45% positive differential for Khiron over its peers.
 
Volatility notwithstanding, Khiron offers investors a highly-leveraged (yet under-valued) opportunity to participate in the exponential growth of a nascent, multi-billon-dollar medical cannabis industry in Latin America.
 
Plus, the company’s modest share prices – when compared to Aphria and Canopy Growth – does not yet factor-in Khiron’s early-mover advantage value catalyst. In time, this should change as Khiron begins to earn meaningful market share in Latin America, beginning with Colombia and Mexico. 
 
Whether viewed on its own merits or in comparison to its major regional competitors, Khiron looks like an increasingly attractive front-runner in the race to dominate the emerging markets of Latin American.
 
 
Senior Staff Writer Daniel Brooks with edits by Marc Davis
 

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