Research Update DanCann Pharma, Q3 2022: New agreement boosts prospects

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Research Update DanCann Pharma, Q3 2022

Analysis DanCann Pharma

DanCann has generated revenues of DKK 3.6 million in the first three quarters of 2022. The reported EBITDA result was minus DKK 10.5 million during the same period. However, the outlook remains good and is strengthened by new agreements. The company is carrying out a share issue at DKK 0.6 per new share. In a base case, a fair value of DKK 1.5 per share is calculated.

Increased revenues but also losses

In the first three quarters of 2022, DanCann generated net sales of DKK 3.6 million. That can be compared to our full-year forecast in the previous research update of DKK 6.8 million. The gross margin (calculated on net sales) for the same period was 32.5 per cent. We have earlier anticipated a normalised gross margin of around 40 per cent. Reported EBITDA for the first three quarters of the year was minus DKK 10.5 million. That compares with our previous full-year forecast of minus approximately DKK 10 million. Based on the outcome so far this year, we assess that the previous revenue and gross margin estimates were somewhat high. We have also been low in our assumptions regarding other operating costs.

New distribution agreements worth 40 MDKK or more

However, prospects remain good. At the end of the summer, DanCann announced the signing of a supply agreement with German WEECO. The agreement is for cannabis bulk to be produced at the company’s production facility. The contract has a binding value of DKK 40 million or more over the period 2023-2025. The company expects the first delivery to take place in May 2023.

On November 3, the company announced the signing of another supply agreement, this time with Polish Storkpharm. This agreement also has a binding value of DKK 40 million or more, but over two years, 2024-2025. The first delivery is expected to take place in the first quarter of 2023, and negotiations are ongoing to include another year, 2026, in the agreement as well. At the same time, it is well worth noting that discussions are continuing with several other international players. New contracts are a clear value driver as it reduces uncertainty about future potential.

At the same time, DanCann stands by its expectation that the production plant will receive its EU-GMP approval in the current quarter. Such an announcement is a value driver as it reduces uncertainty about costs and the ability to deliver cannabis bulk.

Fair value well above subscription price in the current share issue

The company has communicated a revenue target of DKK 60-100 million annually for 2025-2027 from the two business models; (i) supply of cannabis bulk and API and (ii) import and distribution of medical cannabis products. The company’s target is below our previous assumptions, and we have thus adjusted our revenue curve downwards accordingly. We have also revised the cost base in light of the results for the year’s first three quarters. By combining a DCF model with a multiple valuation, a fair value per share is calculated at DKK 1.5 (2.5).

The company is carrying out a new share issue to realise on existing contracts and continue to grow in a market that is developing in a favourable direction. If fully subscribed, the share issue (77 per cent guaranteed) will raise approximately DKK 16 million after related costs and loan repayments. The issue’s subscription price is DKK 0.6 per new share, which is well below our fair value per share of DKK 1.5.

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