Khiron Life Sciences Positioning Itself As An Ideal Takeover Candidate

Benjamin A. Smith
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Khiron Life Sciences Corp (CVE:KHRN) (OTCMKTS:KHRNF) is unquestionably a darkhorse among giants operating in the emerging South American cannabis scene. At a non-diluted market cap of under $50 million and scant revenues to date, the company’s profile has yet to go mainstream. But from my vantage point, Khiron is positioning itself as the ideal takeover candidate for a senior LP looking for licensing and proximity to the lucrative Latin American market. We look under the hood and examine this thesis further.

Unless you’re a die-hard cannabis aficionado or early stage investor, you may be unaware of what Khiron Life Sciences does. To summarize: the company is a vertically-integrated medical cannabis company with its core operations in Colombia. Its primary focus is set on the 50 million-strong Colombian market, in which Khiron estimates approximately 5.6 million patients may qualify for its services. As an early trailblazer in the local market, Khiron has already established several seed-to-patient pathways which few North American entrants can boast.

In fact, Khiron is only one of two companies currently registered by the Colombian Agricultural Institute (ICA) as an agronomical unit—a mandatory requirement for commercializing medical cannabis products in Colombia for distribution. This milestone positions Khiron to receive the first allocation of quota to commence commercial cultivation of high THC strains and CBD strains which don’t require quota. In conjunction with additional licences procured from the Ministry of Justice in Colombia in October 2017, Khiron Colombia is now fully approved to cultivate, produce, distribute domestically and export internationally both tetrahydrocannabinol and cannabidiol medicinal cannabis.

Aside from the company’s ready-to-go licensing capabilities, its growing patient portfolio should be an attractive asset to acquirer companies.

Just today, the company announced a Letter of Intent to acquire Colombia’s leading health network, otherwise known as the Latin American Institute of Neurology and the Nervous System (ILANS). ILANS represents an estimated 100,000 patients and has two established neurological clinics located in Bogota. Included in the package are 46 physicians from various disciplines, and direct distribution channel to ILANS existing client base. The deal provide an accretive source of revenue, and is EBITDA positive as per end-of-year (2017) audited financial results.

https://www.youtube.com/watch?v=NNyR2ABLENQ

CEO Alvaro Torres discusses securing multiple medical cannabis endorsements from the two largest medical associations in Colombia

For acquiring companies where networking is a key consideration, Khiron has those bases covered too.

On July 17th, the company announced that former Mexican president Vicente Fox Quesada had been added to its board of directors, effective immediately. Obviously, the high-profile appointment puts Khiron in a strong position to expedite expansion plans in other key Latin American markets—particularly Mexico. No other Canadian LP, to my knowledge, has that kind of ultra-heavyweight Rolodex at their disposal.

Presumably, it’s one that carries an incalculable and implicit value-add other LPs would love to secure.

Big Cannabis Is Already Expanding in Latin America—Who’s Next?

Another attractive Khiron feature is its very affordable price tag. Its market capitalization is such that even if acquired at a hefty premium, it’s purchase price would be little more than a rounding error on some major LP’s balance sheet.

The company has a non-diluted market cap of about $48 million at the present time. Including the acquisition of ILANS—which includes a share-based payment totaling $2.1 million based on its 20-day exchange VWAP—Khiron’s fully-diluted market cap is only around $70 million. That kind of expenditure is something even mid-major Canadian LPs could afford, should landing a Latin American beachhead fit within the operating model.

And why wouldn’t it? With a total population of around 620 million people and 68 million patients, Latin America provides huge early-stage growth potential for LP looking to expand internationally. Big cannabis is already beginning to make its move.

In July, Canopy Growth Corp. unveiled a new subsidiary called Canopy LATAM Corp. to exploit cannabis liberalization in the region. Included in the newly-minted Canopy LATAM unit are the assets of Spectrum Cannabis Colombia S.A.S., which was formerly known as Colombian Cannabis S.A.S. The deal could be worth $96 million in Canopy Growth stock if all acquirer milestones are met.

Aphria Inc. recently entered the fray as well. On July 17th, the company inked a $193 million deal with Scythian Biosciences Corp. which netted them significant Caribbean and Latin American assets—including 90% of Colcanna S.A.S., a Colombian medical cannabis producer, currently licensed for cultivation and importation of CBD, extraction, production, research and exportation of medical cannabis products. Also procured was optionality to purchase 50.1% of a Brazilian incorporated entity Scythian is seeking to acquire, giving Aphria a potential segue into the 200-million strong Brazilian cannabis market. The deal will largely depend on whether the said entity procures a applied-for medical cannabis cultivation, processing and distribution license in Brazil.

Notably lagging in Latin American assets among the large Canadian LPs is Aurora Cannabis Inc., which owns the world’s largest medical cannabis portfolio after finalizing the MedReleaf Corp. acquisition in late July. Presumably, staking a considerable Latin America presence will be on the company’s radar at some relatively near point in time—even if that time isn’t necessary now. Aurora already competes heavily with Canopy and Aphria in both the European and Australian markets. It’s hard to envision they neglect Latin America for too much longer.

Given Aurora’s penchant for acquiring assets rather over building them organically, Khiron Life Sciences might provide an affordable segue option in Latin America. One that gives them not just a cultivation presence, but a revenue-generating patient portfolio as well.

Final Thoughts

From my perspective, Khiron is amassing a portfolio of assets which should make it an attractive takeover target for an acquiring company looking to make splash in Latin America. The company has its licensing ducks in a row, requisite cultivation/land package/greenhouses, growing patient networks, and high-level BOD contacts which give the company a material competitive advantage. All these assets come at a very reasonable price tag, based on Khiron’s current market capitalization.

While the company is more of a regional (Colombian) player at the moment, it has the most distinguished presence in Colombia and provides an ideal beachhead into the South American, and potentially, Mexican markets.

Whether Aurora Cannabis or some other major LP will take the bait I cannot say. I’m simply using my spider sense which has served me well as a Midas Letter analyst. Regardless, it should be a possibility worth considering, given Khiron’s top line attractiveness and recent foray by Canopy Growth and Aphria down south.

Benjamin A. Smith

Benjamin A. Smith

Ben is a research analyst and capital markets professional with nearly 20 years of experience. His areas of expertise are broad-based, and include extensive knowledge of macro economics, stock/derivative trading, commodity complexes, cryptocurrencies and technical/quant analysis. He also maintains an particular affinity for U.S. politics and the macro-regulatory environment facing...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

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