Research update, DanCann Pharma Q2 2021: Transformative acquisition adds great value

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Update DanCann Pharma October 12, 2021

DanCann continues to execute on its laid-out growth strategy. An important milestone is the significant progress in the clinical development of its partner Tetra Biopharma for the company’s product candidate QIXLEEF™. A strengthened cash position also sets the stage for continued strong business activity. A strategic acquisition that moves the company’s growth strategy forward 6-12 months is, in our view, transformative for the company. We raise our view on the fair value per share to DKK 8.5 (7.0) for the next 6-12 months. This is in light of the value-adding acquisition of CannGros.

A Nordic player in medical cannabis

DanCann was founded in 2018 by the current CEO. Jeppe Krog Rasmussen. The company’s strategy is to provide medical cannabis to the European market. It intends to do this by (i) importing and distributing medical cannabis products, (ii) cultivating and exporting cannabis raw material, and (iii) identifying and developing cannabis products as part of combination medicines. The outlined strategy allows for several potential revenue streams.

Strengthened cash position gives breathing space

DanCann is an early-stage company with no reported revenues. In line with our forecasts. No revenues were announced in the second quarter. The EBITDA result amounted to DKK -3.6 million. Cash flow totalled at DKK -6.9 million and is, as in the first quarter, to a large extent attributed to investments in BIOTECH PHARM1.

At the end of the second quarter, the company had cash of DKK 5.8 million. As we mentioned in the previous updates, future capital needs are imminent and could be seen as a proximate risk. We are therefore pleased that DanCann has strengthened its cash position through directed issues combined with loans. Together, these activities give yielded new cash of DKK 16.3 million. The improved cash position provides the company with room to execute its growth strategy, at least in the short term.

Acquisition of CannGros, a market-leading distributor

As in previous analyses, our sales forecast is risk-adjusted with probabilities. In light of progress in manufacturing, we choose to revise the risk adjustment for sales of raw material to a probability of 48 per cent (from earlier 40 per cent). We have consolidated the expected revenues and costs from CannGros. Likewise, we revise the risk-adjusted revenue from the distribution business to a probability of 48 per cent (40). That results in higher expected revenues over the forecast period. We also model with slightly lower investments in H2 compared to H1. That increase the fair value of DanCann. However, weak performance in the sector results in a fall of the peer valuation by close to 40 per cent. Net, we calculate a fair value of DKK 8.5 (7.0) per share for the next 6-12 months.

Significant potential upside to fair value

As in previous analyses, our sales forecast is risk-adjusted with probabilities. In light of progress in manufacturing, we choose to revise the risk adjustment for sales of raw material to a probability of 48 per cent (from earlier 40 per cent). We have consolidated the expected revenues and costs from CannGros. Likewise, we revise the risk-adjusted revenue from the distribution business to a probability of 48 per cent (40). That results in higher expected revenues over the forecast period. We also model with slightly lower investments in H2 compared to H1. That increase the fair value of DanCann. However, weak performance in the sector results in a fall of the peer valuation by close to 40 per cent. Net, we calculate a fair value of DKK 8.5 (7.0) per share for the next 6-12 months.

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