September 18, 2019

Khiron Life Sciences (CVE:KHRN) on Meeting UN Quotas to Supply Colombian Clinics

Midas Letter
Midas Letter
Khiron Life Sciences (CVE:KHRN) on Meeting UN Quotas to Supply Colombian Clinics

Khiron Life Sciences Corp (TSX-V:KHRN) (OTCQB:KHRNF) CEO Alvaro Torres joins Midas Letter to discuss completing the construction of their sophisticated medical cannabis processing facility and its capacity to produce commercial products. The GMP certified lab has microbiology and physical chemical analysis labs and also extraction capacity. Through scalable and flexible operations, Khiron has designed its cultivation capabilities to work within the most up-to-date country quota to meet Colombian demand, including serving more than 120,000 patients at the Company’s IILANS clinics. The CEO also comments on construction of its Uruguay facility, which will act as an entryway to the Brazilian market.

Addressing the underwhelming financial performance of cannabis companies this quarter, the Khiron CEO comments:

“we all have to understand that this is a difficult market to begin. But we’ve been doing this for only a year and a half; we’re already generating $5 million in sales for the first half of the year, with the clinics and with Kuida.”

Midas Letter
Midas Letter
Khiron Life Sciences (CVE:KHRN) on Meeting UN Quotas to Supply Colombian Clinics

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James West: Alvaro Torres, CEO of Khiron Life Sciences, joins me again. Alvaro, welcome back.

Alvaro Torres: Hi, Jim, how are you?

James West: Great, thanks. Alvaro, let’s start with an overview: what’s happening in Doima, where you’re growing, and what’s happening with your laboratory operations? 

Alvaro Torres: Well, we finished everything already. We finished the project, the construction of the lab, we already are growing commercially. I am just waiting for the government to give us the authorization to start selling. But you know, it’s been a year and a half of building and the construction of a very high-quality lab. So we’re very happy that it’s finally over, but now we’re looking to second phase to build new greenhouses – 

James West: Right.

Alvaro Torres: – and to expand our capacity for energies. We’re building solar projects in our plants so that we can reduce the cost of energy, and we’re just expanding that. But we’re very happy that the lab is finally finished. We are, you know, right now, extracting and analyzing and just getting ready to start selling in Colombia.

James West: Sure. I noticed that the lab is extremely large; it looks more like a commercial formulation facility of a cosmetic plant than it does a laboratory. And is that sort of what it’s been built to do, is to create commercial capacity of products?

Alvaro Torres: Well, the lab is very big, because it’s GMP designed, so it’s got, we have microbiology analysis labs, we have physical chemical analysis labs, and also extraction capacity. But what we’re going to be producing there is just raw extract. We take that to a third-party lab in Bogota on our own, and we produce the final products in Bogota.

But what we get out of Doima is just, let’s say, our basic raw extract. It’s so big because we have also analysis labs, which are very important here because you need to analyze everything from the soil all the way to the final product, and that’s a daily, day-to-day type of activity. It’s a beautiful lab; you have to go and see it.

James West: Yeah, I will be there soon to see it again. I’ll be there again to see it again soon, I should say.

Alvaro Torres: Yes.

James West: Okay, so now, the Colombian government has instituted a quota system for THC production. Tell me about that, and how that’s going to affect Khiron’s business going forward.

Alvaro Torres: Well, the quota system is not just Colombia; it’s the United Nations. It’s an authority called the HIFE. HIFE gives every country a quota for THC production. So Colombia has, this year, 1.5 tonnes of quota, which has not yet been asked by any company so far. What we’re doing, everybody is applying to a quota so that you can be allowed to grow THC.

So all those authorizations are going to start happening at the end of this quarter, and the reason the government wants to do this, because I guess they don’t want to really be growing more cannabis than what we are already known for, and make it very legal. So the quota system makes it a little bit more complex for companies who don’t really have a demand, because to be able to get the quota, you need to show the government that you have demand for it.

So if you’re exporting THC, you need to show the government that you have not only a contract with a third party outside Colombia, but you also have to show that the other country allows for the import of THC. Which you can imagine right now how many countries have those type of permits; very limited.

James West: Sure.

Alvaro Torres: And for domestic production, you need to show the government that you have the demand in-country, which is one of the reasons why we acquired ILANS, so that we have 120,000 patients in our clinic. So we can talk about at least 10,000 patients that we can start with next year. And then you prove to the government that these patients have the conditions, and how much cannabis will they use, and that’s how you apply for a quota system in Colombia. And you do that every three months, every six months, every time you can update your demand. And that’s, you know, whether it’s becoming now the most challenging part for our companies.

Before, you know, a year ago, it was all about licenses: who could get a license. And everybody was excited about getting licenses, and there’s, I think, 500 licenses in Colombia. And then that became very easy to do. Now, it’s all about cultivars, and your registration of strains. So the number of companies that have that is decreasing. I would say there’s probably 10 or 12. And from then on, if you want to do THC, you have to ask for quotas.

James West: Sure. So is the quota system that’s imparted by the United Nations, is that legally binding on Colombian companies?

Alvaro Torres: It’s more of a guideline, you know. But for countries like Colombia, who actually take money away from the United Nations, it matters a lot.

James West: Okay.

Alvaro Torres: Countries like Canada, Germany, who actually give money to United Nations, it’s really not that important. For example, Canada, today, has no quotas for THC. But you know, Canada doesn’t care. Or Germany doesn’t care.

James West: Sure, sure. Okay, so tell me: at this point, how many registered patients are there for medical cannabis in Colombia? 

Alvaro Torres:   Well, we have our own system, because you know, we have a clinic that has 120,000 patients with neurological conditions. So we know how many patients we can start…

James West: So, you have 120,000 patients?

Alvaro Torres: No, we have 120,000 patients with conditions like chronic pain, neurological…

James West: So there’s a process to convert them into clients directly for the product? 

Alvaro Torres: Right. We have to do a lot of education, which is what we’re doing, for the doctors in our clinics, the doctors outside the clinics, and you have to start looking at, which are the patients that would be more suitable to begin the process. You have to start these things slow, right? Because it sounds amazing to have 120,000 patients, but remember that we’re taking care of quality of life; so we need to be very careful about who’s going to start the program. 

There’s a lot of excitement, not only in the clinics, but outside, because basically, let’s say the top five, six companies, we’ve already gone through a lot of the process of cultivation, building; all of that is gone. So we’re just waiting now for the government to give the go-ahead to start selling, and then we’ll start selling. And in our case, we’ve been preparing our patients and our doctors for a year and a half. And you know, we acquired ILANS in December of last year, so we’re already working nine months to get all these programs going.

Once it gets going, it’s just a matter of making sure you can ethically decide which patients can be part of the program. And once that happens, we’ll start. That’s just in Colombia, right? We’re trying to figure this out in Mexico and Peru and the rest of the Latin American countries.

James West: Sure. The financial performance of cannabis companies as reported in their quarterly and annual financials in the last, call it, three weeks, four weeks, has been characterized uniformly by absolutely disappointment. And everybody seems to be having a hard time making money. Even the government of Ontario generated $68 million in sales, did so with $106 million in expenses, thereby losing $42 million – and they don’t even have to grow cannabis! So, is the outlook for Khiron going to be different from what’s happening in North America?

Alvaro Torres: Well, we’ve always been very conservative in the way that we approach the market, and we all have to understand that this is a difficult market to begin. But we’ve been doing this for only a year and a half; we’re already generating $5 million in sales for the first half of the year, with the clinics and with Kuida.

It’s an education process. But I’m really not that concerned, because the way we look at and approach our business, we’re very conscious of our SG&A. We have a great team, but it’s also based out of Colombia, which, you know, makes also very much cheaper than if we were setting up the company here in Canada. 

James West: Sure. 

Alvaro Torres: We’re ready to start looking at the product to see how we can export Kuida to the United States; hopefully all of that will be done this year. Start patient prescriptions, and so on. But so far, if you look at our overall results, they’ve been in line with what the analysts expect us to be doing, and we have three analysts’ coverage.

What’s going to happen of the second half of the year? Well, everybody is expecting results, and nobody is more interested in that than me. But I’m very optimistic about what we’re doing because of the clinics and the programs that we’re having, and the fact that we’re looking to Kuida, into expanding Kuida worldwide, into Europe and the United States, which would be fantastic. But also, you know, we have a very good financial position. We have, you know, $55 million in cash since June 30th; that gives us a lot of time and patience to be able to build our business correctly. And we’re doing a lot of investments that is going to attract the value.

James West: Sure. And how is the expansion going into other Latin American countries? For example, I noticed that you have, you’re licensed to sell products in Peru, for example. Do you have products on the shelves in Peru, and is Peru a market that you expect to develop quickly?

Alvaro Torres: Well, Peru just launched regulations and they approved, by law, medical cannabis. So what we’re doing right now at the moment is looking at the same model in Colombia: Where do we find clinics, how do we build demand? And just be ready for when the government of Peru says, I’m open.

One thing that we don’t have to worry so much right now is that we already have our product. We are already doing, having the extract, we’re doing cultivation. So it’s just a matter of time until the government opens it up, hopefully by the fourth quarter of this year – that’s what they’ve said.

In the meantime, you know, we’ve started the construction of our Uruguay facility, which I don’t know if you’ve seen some photos of it? It’s a very nice facility. Very different from Colombia, because of the weather conditions, but I’m very excited about that, because it’s going to be our entryway to Brazil, which is not yet fully regulated, but there’s a market there right now for compassionate basis. And you know, when you have products coming from the United States, 30 ml bottles selling for $350, and you can produce that for $150 with 80 percent gross margins, that gets very exciting. So we’re looking forward in Uruguay a lot.

James West: Sure. Right. Okay, so it sounds like you’re just, you know, executing on the business plan, paso a paso, as they say, step by step, and it sounds like it’s really coming together, Alvaro. So we’ll keep watching. We’re going to have our crew down there in September.

Alvaro Torres: That will be nice.

James West: And we’ll keep the story going. Thanks for joining me again today.

Alvaro Torres: Thank you, Jim, I appreciate it. Thank you for your time.


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