Khiron Life Sciences A De Facto Beneficiary of Aurora Cannabis – ICC Labs Deal

Benjamin A. Smith

Khiron Life Sciences Corp (CVE:KHRN | OTCMKTS:KHRNF) had a great day yesterday, even if it wasn’t of its own doing. The Latin American cannabis operator not only added almost $10 million in market cap (up ↑19.63%), but became a more attractive acquisition target by default. We explain further.

The basis of this reasoning centers around yesterday’s Aurora Cannabis Inc. acquisition of ICC Labs Inc. The acquirer intends to purchase all of the issued and outstanding common shares of ICC Labs for $1.95/share—payable in ACB common shares—reflecting an aggregate purchase price of approximately C$290 million. By purchasing the Uruguayan medical and recreational operator, Aurora Cannabis now segues itself into the Latin American cannabis market, in which it held little presence. 

Now that ICC Labs if off the marketplace, there are very few—if any—publicly listed Latin American value operators to acquire; let alone ones with established medical patients enrollment, CBD extraction/export licenses, and a Rolodex which includes Matt Murphy (former DEA supervisor) and Vincente Fox (the former president of Mexico) as evangelists.

The situation is akin to a coveted urban neighborhood, where mansions have replaced most of the existing pre-World War II builds on the street. Each time a remaining tear-down sells, the value of the others rises by ‘X’ percent, as existing low-cost supply contracts ever further. Although nothing was added, value-wise, to the inflated cost of the junker, skewed supply & demand dynamics push prices higher regardless.

Khiron Life Sciences Medical Director Dr. Maria Arboleda shares the company’s three-pronged approach to the medical cannabis space in Colombia specifically and, more broadly, Latin America

Khiron Life Sciences is one of the last-standing ‘tear-downs’ on that Latin American street, in which bigger operators can gain fast entry for an affordable price. Thus, I wholly expect someone with deep pockets will come building at some point.

Potential Suitors

Speaking of possible suitors, I expect the laundry list is quite extensive.

Hexo Corp. is on record stating that international expansion remains a high priority. Just last Friday, the company stated, “Future plans include making a move into the international market, as well as listing on a major US stock exchange, with announcements coming in the near future” while commenting on their recent share price activity. To date, HEXO is mainly a Quebec-based cannabis operator, and Khiron Life Sciences could provide an ideal, value-based segue into Latin America which has lower cost barriers than E.U. residency.

Tilray Inc. is another company undoubtedly looking for Latin American entry at some point. As I wrote on September 4th, Tilray currently has no discernible Latin American (LATAM) strategy, as far as we can tell. For a company that operates on five continents and is now considered a leader in the space—perhaps playing second admiral behind Canopy Growth—Tilray’s LATAM entry is all but a formality. The question is when.

This is especially true when you consider that Tilray is a primary medical operator, with pharmaceutical ties to Sandoz Canada Inc.—a Canadian unit of global health care giant Novartis AG. The potential ultra-low cost benefits of growing high yielding CBD strains in ideal ’12/12′ lighting and climatic growing conditions will be too lucrative to ignore. The companies plans to develop and sell cannabis products that are non-smokable and co-branded. Novartis AG is also a direct shareholder in Tilray.

CannTrust Holdings Inc. is another company with scant presence in South America—or internationally for that matter. It’s not hard to envision the company taking a closer look at Khiron’s 100,000 patient medical enrollment list—currently EBITDA positive—and not be intrigued.

Essentially, the company could hold appeal for any mid-major outside of Aurora, Canopy, Cronos and Aphria not currently immersed in the region. That is, assuming those aforementioned players aren’t interested in expanding their presence even further.

Final Thoughts

At this time, I don’t have any specific information that Khiron Life Sciences is necessarily a takeover target. If I did, I wouldn’t be able to divulge that information anyway. But the company’s value proposition is plainly clear for all to see: They have terrific management, export & production licensing all ready to go, and 6-figure medical patient enrollment in a major urban center (Bogota). Khiron is fast spreading its tentacles throughout the region, including preliminary action in Brazil, which is Latin America’s biggest prize. Its association with Vincente Fox bodes well for future Mexican market integration, where cannabis get legalization draws ever closer.

Perhaps most importantly, Khiron is among the last pure-play Latin American cannabis LP standing in this elite neighborhood. Of course, Canadian LPs could elect to build organically through private amalgamation, as we’ve seen from Canopy and Cronos recently. But with a very affordable market capitalization and tantalizing asset base, Khiron makes sense. The opportunity costs associated with a ground floor startup may not be desirable at this juncture, where the major operators already have a big head start.

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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