Equity Research, DanCann Pharma Q1 2021: Good news flow increases fair value
3 Jun 2021
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DanCann presented investments above our expectations during the first quarter of 2021. This also means that the company is better prepared to serve the market. As important, several events occurred after the end of the first quarter. BIOTECH PHARM1 began operations, a distribution agreement was signed with Tetra Pharma and the pilot programme was extended. The positive news flow has reduced uncertainty. We raise our view on fair value per share to DKK 7.0 (6.5) for the upcoming 6-12 months.
DanCann is still in a pre-commercial phase and had no revenues booked in the first quarter of 2021. Costs were slightly higher than expected as the EBITDA-result amounted to DKK -2.5m. The EBIT-result was DKK -2,6m. Cash flow of DKK -8.6m was lower than expected mainly due to higher investments in BIOTECH PHARM1 and in intangible assets. However, much of the full year’s need for investments should have been taken.
Progressing towards commercialization
On the other side, news flow has been good. DanCann opened its production facility BIOTECH PHARM1 in April 2021. Test production has been initiated, which should lead to a GMP certification at the end of this year after which the bulk-products can be sold on an international market. The facility will focus on rare cannabinoids, which should command a higher price than plants with high content of only THC or CBD. Another important event was the conversion of the LOI with Tetra Pharma into an distribution agreement. This agreement has great potential as it gives DanCann the exclusive rights of distribution of Reduvo Adversa® and Qixleef™ on the Nordic market as well as on the large and relatively well-established German market.
In addition, an important decision was taken by the Danish government: to extend the pilot programme by four years and to allow cannabis production permanently. The regulatory risk for DanCann has consequently been drastically reduced, as it will be possible to maintain production in Denmark for the future no matter what the conclusion of the pilot programme will be.
Given the relatively high level of uncertainty, our assumed sales curves (and associated variable costs) from the various business models have been risk adjusted with probabilities. As the distribution agreement with Tetra Pharma is now in place, previous uncertainty related to this has been eliminated. Thus, we have increased the probabilities for the assumed sales curve from the collaboration to 32 percent from previously 26 percent. Given DMA’s decision, we have also marginally reduced the discount rate. However, we have also increased future investments. All in all, we raise the risk adjusted fair value to DKK 7.0 (6.5) for the upcoming 6-12 months, using a multiple valuation combined with a DCF-model.
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