Ramping Sales of Medical Cannabis Critical for Long-Term Growth of Khiron, Says ATB Capital

ATB Capital said in its latest report that Khiron’s strategy of vertical integration supports sales growth at attractive margins and as medical cannabis revenue increases, they expect Khiron’s sales growth and gross margin expansion to be meaningful over the long term, supporting a constructive outlook.

Last week, the vertically integrated cannabis leader with core operations in Latin America and Europe recorded revenues of $2.8 million in Q1 2021, a 49% increase from the prior year and 13% increase from Q4 2020. The company said its medical cannabis sales reach 20% of revenues, contributing over 45% of gross profits.

“We reduce our revenue estimates due to depreciating domestic currency and impact of COVID-19 on CPG sales. However, we increased our gross margin estimates to factor the increasing medical cannabis sales. Our target price remains unchanged as lower revenue estimates are offset by higher margin estimates,” noted David M. Kideckel, PhD Analyst, Managing Director at ATB Capital.

“Maintain Speculative Buy with an Unchanged Price Target of $1.00: Our price target is based on our DCF projected through 2030e using a 17% discount rate and a 3% terminal growth rate, both unchanged. The terminal value accounts for 39% of our fair value estimate. Our rating reflects the regulatory uncertainty for cannabis use across LATAM.”

The U.S.-listed Khiron Life Sciences shares rose over 24% so far this year.

ATB Capital has performed a scenario analysis and gave revenue estimates for end-2021 of $11.8 million in the bear case scenario, $15.2 million under a base case scenario and $28.2 million in a bull case scenario.

Bear Case: We assume lower sales throughout 2021e due to the impact of the COVID-19 pandemic on Khiron’s medical cannabis and health services sales.

Base Case: We expect sales to ramp up in 2021e as Khiron increases sales from medical cannabis products in Colombia, with moderate impact from COVID-19. We assume Khiron starts generating meaningful medical cannabis sales from international markets (e.g. UK, Peru, Brazil) from H2/21e onwards. We also assume that Khiron’s revenue from the CPG segment may restart once COVID-19 eases in 2022e.

Bull Case: We assume COVID-19 will not materially impact Khiron’s sales, and that the Company will be able to rapidly ramp up medical cannabis sales in Colombia, export to European markets, and expand its clinic model across LATAM.

Cannabis is an emerging industry and is subject to regulatory headwinds. Although the industry is still emerging, legal cannabis has gone through multiple iterations. The business started as a flower-based market aimed at catering to the needs of stoners and thereafter, blossomed to a more retail-centric market that experimented with multiple edibles, beverages and concentrates.

Most recently, the cannabis industry has further widened its reach to target a broad base of the audience whose main aim is not to get intoxicated but rather to be cured of some form of the disease.

While over half of the population is in favor of new legalization, only a few states have thus far legalized cannabis for recreational use and the product remains illegal at the federal level. Much work and changes are still required to occur for this industry to realize its full potential.