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Research_Update_DanCann Pharma_Q2_2022

Analysis DanCann Pharma

In the second quarter of 2022, DanCann reported sales just below our estimates. Sales are expected to pick up during the remaining six months. In addition, we adjust our estimates for the agreement with WEECO and a fair value per share of DKK 2.5 (6.7) is calculated. The an-nounced rights issue to fund the com-pany until break-even is reached brings a substantial dilution.

Sales from CannGros are lagging but expected to pick up in Q3-Q4

During the first six months of 2022, DanCann generated net sales of DKK 2.0 million through its wholly owned subsidiary CanGross. Net sales reduced by the cost of sales leaves a gross result of DKK 0.4 mil-lion, corresponding to a gross margin of close to 19 per cent. However, drawing any conclusions from this is considered a bit premature.

In the second quarter of 2022, net sales amounted to DKK 0.8 million. That was below our estimates of DKK 1.7 million. However, according to DanCann, sales are expected to increase in the third and fourth quarters. With the lower sales than expected and a higher cost base, EBITDA landed at minus DKK 5.2 million compared to our estimates of minus DKK 2.3 million. Free cash flow amounted to minus 3.7 million, and the cash balance at the end of the period amounted to DKK 5.8 million.

Rights issue to secure commercialization

DanCann has announced that it will raise funding through a rights issue that, if fully subscribed, will provide liquidity of DKK 28.5 million (before related costs). The rights issue aims to secure the financing of the approval of its GMP production facility and execute its commercialisation strategy. The company expects the funds to last until the company has reached break-even.

The rights issue is to be carried through in October 2022. Seventy-seven per cent of the share issue is guaranteed. The share issue is priced at DKK 0.6 per new share, correspond-ing to a discount of roughly 70 per cent com-pared to the closing price on August 30, 2022. The share issue will increase the number of shares to 47.45 million if fully subscribed. That means a 37 per cent dilution.

Distribution agreement with WEECO Pharma worth DKK 40m

Leading up to the release of the Q2 report, DanCann announced a new supply agree-ment. The agreement allows the German company, WEECO Pharma, to distribute DanCann’s future THC products on the Ger-man market. The agreement with WEECO Pharma adds a fourth partner to the current portfolio of collaborations with Tetra Bio-pharma, Aeurum Pharma, and Cannasure.

The total value of the agreement with WEECO Pharma is estimated at DKK 40 million over three years. The agreement is conditioned an EU-GMP approval for the products, which is expected to be in place in Q4 2022. The in-tended sales start is 2023.

Potential upside to the share price

We have adjusted our estimates, given the deal with WEEKO Pharma. Assuming a fully subscribed share issue (and the accompa-nied dilution), we calculate a fair value per share of DKK 2.5 (6.7). That corresponds to an EV/Sales multiple 2023 of 5.9x. Our refer-ence group is currently trading at EV/Sales 2023 of 2.3x. The premium is motivated by the significantly higher expected growth rate than the peers in the reference group.

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