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CANN Group (ASX: CAN) Set To Be Biggest Australian Medicinal Cannabis Supplier

This article was originally published at MF & Co. Asset Management.

Today, we’ll show you why we like Cann Group (ASX CAN), a medicinal cannabis supplier in Australia.

Even though Cann Group has not performed well in the past due to high fixed costs in its early growth stage, we think the stock has strong potential.

FY18 was the first year Cann started generating revenue and they recently announced plans to expand production by 50,000kg per annum.

This will be the largest facility in Australia.

Since the announcement, Cann Group rallied more than 50% off its lows.

Cann Group (ASX CAN) - CAN Share Price

We think that Cann Group has a lot of upside potential in the long term.

This is why.

About Cann Group (ASX CAN)

Cann Group (ASX CAN) is a growing medicinal cannabis company with great potential. Cann Group is 22.9% owned by Aurora Cannabis, one of Canada’s biggest Cannabis stocks with a market cap of $13.19B.

With a fully-integrated business model, CAN is able to do research, development, cultivation, manufacturing, packaging and finally provide their products in Australia and globally.

Cann Group (ASX CAN) - business model

Source: CANN GROUP LIMITED

The main objective of CAN is to be the leading supplier of medicinal cannabis products.

Their goal is to provide high-quality, trusted and innovative medicinal cannabis products to Australia and global patients.

CAN started harvesting medicinal cannabis at its Southern facility in Melbourne in August 2017.

However, in Australia, cannabis still has negative connotations and strong regulation. Countries such as Canada and the US that are already on the edge of full legalisation of recreational cannabis.

Having said that, Australia did make prescription of medicinal cannabis legal in 2017. Even though the legal acceptance of cannabis has been slow in Australia, there is at least progress.

Cann Group To Increase Capacity By 50,000kg Per Annum

Cann Group will be constructing a new $130 million, state-of-the-art facility in the Mildura region.

The company has signed a non-binding agreement to purchase a new site for $10.75 million. This site is expected to produce 50,000kg of dry flower per annum.

Cann Group is expected to fund this expansion through a mix of debt and equity.

In addition to this facility, Cann Group currently has two facilities which have already produced more than 25 harvests.

The new proposed site will replace previous plans to expand at a site at Melbourne’s Tullamarine airport.

Cann Group plans to have this facility completed by 2020 and will be Australia’s largest purpose-built medical cannabis facility.

This facility will mean that Cann Group will be one of the largest producers in Australia.

Business strategy

Cann Group is a fast-growing stock and has a strong business strategy:

  1. The first Australian company that obtained the key license for medicinal cannabis.
  2. The company growth is coaligned to its vertical-integrated business model.
  3. CAN cooperates with organizations which have expertise and experience.

First Company To Obtain Medical Cannabis Research and Cultivation Licenses

In February 2017, Cann Group was issued with a cannabis research license by the Australian Government’s Office of Drug Control (ODC).

CAN is the first Australian company to obtain the necessary research license to research cannabis and to cultivate cannabis for research purposes.

In March of the same year, CAN obtained Australia’s first Medical Cannabis Cultivation Licence.

This allows Cann Group to produce Australian grown cannabis for medical purposes and an edge over its competitors.

Fully-Integrated Business Model

The vertically-integrated business model enables Cann Group to establish a leading position and to facilitate the supply of medicinal cannabis for a range of medical conditions.

In addition, the board and management have wide experiences and skills in agriculture, agronomic and health research for commercialising agricultural technology.

This allows CAN to grow high-quality cannabis by itself and produce cannabis medicines that meet government requirements.

Cooperation With Scientific Organisations

Cann Group has cooperated with key scientific organisations which provide access to experts in specialist fields.

For example, Cann Group cooperates with Aurora Cannabis Inc., Agriculture Victoria Research, CSIRO and Oliva Newton-John Cancer Research Institute.

This allows Cann and these scientific groups to share information and studies, making quicker progress than many of its competitors.

In addition, Cann Group has contracts in place which allows it to keep and protect its intellectual property. This allows Cann to develop strong intellectual property assets backed by scientific research.

Medicinal Cannabis is a Fast Growing Industry

The medicinal cannabis industry has experienced strong growth in recent years, mainly due to a few reasons:

  1. The legalisation of medicinal cannabis in a number of countries increases the demand for medicinal cannabis products.
  2. The rising prevalence of chronic pain increasing demand for medicinal cannabis products as an alternative treatment.
  3. More patients are being approved for medicinal cannabis.

Legalisation of Cannabis

The cannabis market is expected to quickly grow from $10.3 billion in 2018 to $39.4 billion by 2023, at a compound annual growth rate of 30.7%.

This dramatic growth is due to the medicinal application of cannabis and growing legalisation of cannabis. This also means that medicinal cannabis suppliers such as Cann Group are leveraged to one of the strongest growing markets in the world.

Cann Group (ASX CAN) - cannabis market

Source: Cannabis Market by Product Type, Compound, Application, and Region – Global Forecast to 2023

Moreover, an increasing number of states and countries have started to approve the use of medicinal cannabis. This is one of the main factors driving increased demand over the coming years.

Currently, 45% of countries across North and South America, Europe and Australia legalised or decriminalised medicinal cannabis.

New laws introduced in Australia legalised the use and supply of medicinal cannabis. In 2017, The Therapeutic Goods Administration rescheduled certain medicinal cannabis products, which made medicinal cannabis prescriptions legal in Australia.

The Growing Prevalence of Chronic Pain

growing prevalence of chronic pain increases the demand for medicinal cannabis, which is expected to drive the medicinal cannabis market for chronic pain management.

This is a huge market, as chronic pain is a huge problem across the world. Medical Cannabis is proving to be a good alternative to addictive pain killers, which in itself is also a huge market.

Rising Number of Patient Authorisations

The number of patients who are being approved for medicinal cannabis is increasing in Australia.

The figure increases from 97 between January and February in 2018 to 469 between August and September in the same year.

Around seven applications can be approved for medicinal cannabis per day. Even though this is still a relatively small number, the growth is exponential and represents a huge opportunity for Cann Group.

Business risks

Due to the strong growth of the industry, competition in this space is fierce.

  1. Cann is less competitive than industry giants.
  2. legalization of medicinal cannabis and government regulations increase competition.

Lack of Competitiveness

Cann Group has to compete against major medicinal cannabis companies such as Aurora Cannabis Inc, Medical Marijuana Inc and Cannabis Science Inc.

These medical cannabis giants continuously invest and collaborate in the development of new cannabis medicines to satisfy consumer demand.

Although cultivation and harvesting operations continued successfully during 2018,CAN currently does not have any commercial products yet.

This means that Cann Group will need to move fast and get products to market if they are to secure market share before larger companies lock down product lines with medical institutions.

However, with the expansion of their new facility, Cann will become one of the largest producers in Australia and still have first-mover advantage in Australia.

Increasing Competition

Even though legalisation of cannabis is essential to the long term growth of Cann Group, this also brings along competition.

Victoria was the first state in Australia to legalise medicinal cannabis, but other states have quickly followed.

This is likely to reduce the barriers of entry, leading more companies to enter this industry and increasing competition.

In addition, the regulation of medicinal cannabis usage is relatively strict.

Although medicinal cannabis products are legal for use by different diseases in different states, the list of diseases that are legal to use medicinal cannabis for is not long.

This intensifies competition for Australian medicinal cannabis companies as application still limited.

Financial Performance

Cann Group (ASX CAN) - Financial Performance

Source: Cann Group Limited 2018 annual report

During 2018, Cann started to import cannabis oil from Aurora Cannabis in Canada to TGA granted patients and the company began to earn revenue.

However, as Cann built more facilities for cultivation and research, their fixed cost has also risen sharply.

Costs will rise further as they plan to build the new facility at Mildura.

Another thing to note is that Cann Group has issued quite a number of shares since FY17. Their number of shares on issue has risen from 52 million to 125 million in just a years time.

We expect the number of shares on issue to rise dramatically as they look to partially fund the new facility with equity.

In addition, Cann has seen a rise in their loss in FY18 versus FY17. However, this is due to further investments in growing their business which we view as positive.

On the bright side, Cann Group is starting to show revenue and provided that this continues to uptrend, we could see Cann Group break even in a number of years.

However, this will depend on a number of factors – not least of which, further legalisation of cannabis.

Cann Group (ASX CAN) a High-Risk High-Growth Play

Cann Group Limited is a fully-integrated Australian medicinal cannabis company with great development and upside potential.

Even though Cann Group is still burning through cash, this is mainly due to the large capital investment in R&D laboratories and full GMP manufacturing facilities.

Their new Mildura facility will also see them become one of the largest medicinal cannabis producers in Australia.

With further legalisation and growing demand for medicinal cannabis products in Australia and overseas, Cann Group is well positioned for strong growth.

However, Cann Group is still in its infancy and it will be a while yet before they become cash flow positive. A smaller than usual risk allocation with a longer-term view would be prudent.

Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.



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