Company Overview: Cann Group Limited is an Australia-based company, which is engaged in the cultivation of cannabis for human medicinal and research purposes. The Company has facilities to cultivate medicinal cannabis. It also focuses on manufacturing medicinal cannabis products. It focuses on developing and supplying cannabis, cannabis resin and medicinal cannabis products into the Australian market. It also focuses on supplying to overseas markets. The Company has a cannabis research license and cannabis cultivation license. The cannabis cultivation license allows the Company to produce Australian grown material that can be prescribed for patient use. It has research and development, and cultivation facilities in Australia. It focuses on plant genetics; breeding; cultivation; extraction; analysis and production techniques to facilitate the supply of medicinal cannabis for a range of diseases and medical conditions.


CAN Details

Pursuing a fully integrated business model for growth: Cann Group Ltd (ASX: CAN), a healthcare business,  focuses on breeding, cultivating, manufacturing, and selling medicinal cannabis for a range of diseases and medical conditions in Australia. This is the first company that got the necessary licences for undertaking research required for human medicinal and research purposes.The company is set to take advantage of the opportunities from emerging medicinal cannabis industry and is pursuing a fully integrated business model. As part of research and development, the company accesses and stores elite genetics and tissue culture program. CAN is developing ‘next generation’ cannabis strains. Further, the company has internal R&D capabilities, along with key partnerships & collaborations. For cultivation and production, there are ongoing programs to establish optimized growing conditions. There is an expansion program underway, which includes a new approximately $100m facility. During FY18, CAN had completed expansion works at the Southern facility and had commissioned the new, larger Northern facility, which will provide expanded cultivation space. The company is focusing on the activities at Northern on a genetics and tissue culture program, which is expected to yield valuable new cannabis strains for future product development. Moreover, for manufacturing, the company uses leading extraction & analysis technology and has strong GMP manufacturing standards. CAN also works on value-added and higher margin treatments, which is in development for manufacturing. For Packaging and Distribution, the company has an Active Medicinal Cannabis Medicines Portal, license to Wisp Vaporiser and high volume export capability. CAN is also creating various clinical trial programs. Overall, in FY18, CAN has developed the full value chain, through investments and required collaborations.

Stage 3 expansion: CAN has announced stage 3 expansion, comprising a state-of-the-art green field development including glasshouse cultivation space, research and development laboratories and full GMP manufacturing facilities. For this, the company has signed a Heads of agreement with Australia Pacific Airports Melbourne (APAM) in the month of June 2018. Under the lease arrangement, APAM has proposed to fund and conduct primary build and this is a multi-million dollar contribution to the project. CAN plans to complete fit-out & technology deployment of 37,000m facility, state-of-the-art green field development including glasshouse cultivation, laboratories and GMP manufacturing. The total business case is projected to be approximately $100m. Under the heads of agreement, the company is permitted to operate cultivation, manufacturing, warehousing and distribution of medicinal cannabis, and the company is responsible for getting all necessary government approvals. The details given in the agreement for lease are subject to the approval of the APAM board, that is required to be obtained before the execution of the formal lease documents. Moreover, the company has signed Design and Consulting Services Agreement with Aurora Larssen Projects Ltd., which is a specialist greenhouse engineering consultancy to be retained to provide engineering & technical consulting advice on arm’s length terms. The completion of first glasshouse is expected by July 2019.  Additionally, CAN has started initial discussions with several parties, for the future offtake. Overall, the Stage 3 expansion will allow the company’s additional involvement in, and support for, clinical trial activity, and further development of product manufacturing capabilities.


Upcoming Milestones (Source: Company Reports)

First Australian patients prescribed with Aurora medical cannabis: CAN has prescribed the first Australian patients with Aurora medical cannabis through the Therapeutic Good Administration’s (TGA) Special Access Scheme. The patients can access the medicinal cannabis oils after being approved for treatment through the TGA’s Special Access Scheme or Authorised Prescriber Scheme. CAN has imported the first products from its strategic partner and major shareholder Aurora as sponsor and the product supplied being ‘Aurora 1:1 Drops’ comprised of an equal ratio of THC and CBD. The company will be importing additional supplies of cannabis oil from Aurora in several different formulations. Meanwhile, CAN is executing their plans to develop the own local product manufacture. Moreover, IDT Australia Limited has signed a manufacturing agreement with CAN to provide manufacturing support related to medicinal cannabis?based product formulations planned for supply to patients in Australia and overseas.

Funds Raised: CAN had raised approximately $78 million at a price of $2.50 per share through a fully underwritten $60 million institutional share placement and fully underwritten $10 million Share Purchase Plan (SPP). The funds are used for the company’s accelerated growth plans, that comprise the construction of its Stage 3, large-scale cultivation facility and full GMP manufacturing capabilities. The company’s further expansion plans will continue as the demand for medicinal cannabis continues to increase. Meanwhile, CAN’s major shareholder Aurora Cannabis Inc (Aurora) had participated fully in the placement and the company had issued new placement shares to Aurora, which has risen its shareholding from 19.9% to 22.9%. Overall, the company is in a sound financial position to continue with the expansion plans.

Regulatory Approvals: CAN has secured important regulatory approvals, and made CAN the first Australian recipient of research & medicinal cannabis cultivation licences. The company has been granted permits for two cultivation & R&D facilities, that are currently operational in Victoria. CAN is one of the few companies in Australia that can operate with the required permits. The company is working closely with Government authorities involved and is committed to helping build a high quality regulatory framework in Australia.


Partnerships (Source: Company Reports)

Partnerships & Collaborations: During FY 18, CAN has made important relationships and partnerships, in order to build the business. The company has collaborated with a range of organisations, which provide the company to access varied critical skills, technology and experience.These comprised of La Trobe University for expansion of R&D operations, Agriculture Victoria for further medicinal cannabis research, CSIRO, and various medically focused organisations expected to help facilitate further clinical evaluation of treatments. The company has partnered with Medicinal Cannabis Medicines Portal to boost streamlined medicinal cannabis prescribing & access in Australia. The company has signed licencing & distribution agreement with CannaKorp Inc. to import & sell its proprietary ‘Wisp’ vaporising system & to produce the accompanying medicinal cannabis pods in Australia & NZ. The company has secured manufacturing agreement with IDT Australia. Moreover, the company strengthened the relationship with the strategic shareholder, Aurora Cannabis Inc (Canada). This has been formalised through an important Technical Services Agreement. Additionally, the company is evaluating various clinical trial opportunities.

FY 18 Financial Performance: In FY 18, the company’s topline grew 18,692% while the bottom line fell 82.61%. The company had proposed not to pay any dividend in FY 18.


FY 18 Financial Performance (Source: Company Reports)

Outlook for FY 19: CAN expects to continue the positive movements; and by the end of the FY 19, the construction on the Phase 3 expansion facility is expected to be well underway. The company also expects to have progressed the development of a range of new dosage forms, which will be suitable for patients in Australia and in overseas markets. CAN has already secured the export licence, and the company is working with the authorities to get the approval for the permits which will allow the company to start export sales. Further, the company will step up the engagement with the medical community as the company wants to streamline the requirements for patient access and to ensure medical professionals have the resources they require to make decisions on the suitability of medicinal cannabis treatment for their patients. 2019 is expected to be another challenging and busy year for the company, and CAN is expected to make substantial progress towards its business objectives.

Stock Recommendation: During the March quarter, CAN was added to the S&P ASX All Ordinaries Index, which was effective from 19 March 2018. Meanwhile, CAN stock has fallen 18.6% in three months as on August 27, 2018 and was up 2.89% in last five days. CAN has well progressed in their aggressive expansion plans and the company expects growth of demand of innovative medicinal cannabis treatments locally in Australia & overseas. Further, the patients’ access to treatments is expected to improve in the future.

The free cash flow scenario needs to be improved while CAN is investing in clinical trials and other developments. The FY18 loss as the moment indicates administration and corporate costs, research and development costs and finance costs that have increased in the past one year. However, group’s assets and equity have enhanced while total liabilities have reduced. The earnings per share has improved and expected to move up from the current levels by over double to triple digit rate (consensus estimates) based on developments in hand with revenue finding support from the offtake partnerships and other commercial arrangements. This is subject to any changes in prevailing environment. The relative strength indicator under technical analysis sits within the buy zone in view of the resistance witnessed last month and support coming in the last few days, while fundamentals reflect positive earnings and net income scenario to be witnessed in the coming years. The company is well positioned to capitalise on the growing medicinal cannabis market. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 2.810.


CAN Daily Chart (Source: Thomson Reuters)

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