Cann Group Limited (CAN.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Cann Group FY '20 Results Investor Webinar. [Operator Instructions] Presenting on behalf of Cann Group today, we have the CEO, Peter Crock; and COO, Shane Duncan. Presentation today will last for approximately 15 minutes with ample time after for Q&A. I'll now hand over to Peter for the presentation. Please go ahead.

Thanks, Matt, and welcome, everybody, to our year-end results conference call. Prior to market open this morning, the company released its financial results for the 12 months to the end of June this year. We also included a slide pack, which Shane and I will step you through on today's call. This is also on the ASX site. You'll find the disclaimer there you can read. A summary of our financial results for FY '20 can be seen on Slide 5. As we continue to scale up and establish commercial offtake agreements, the focus has been developing the business so it can deliver meaningful revenues and sustainable profits in the coming years. Cann Group recorded revenues of $647,000 and a loss of $16.9 million during the period. Subsequent to the end of the period, we undertook capital raising activities that provides the company with a strong cash position of over $40 million. As we have focused efforts on development of our commercial strategy during the period, taking product through the GMP process has seen us incur manufacturing costs that we expect to benefit the company in the coming year. And this production, which will satisfy sales to customers, both in Australia and overseas. This year, we also successfully focused on reducing corporate and administrative costs significantly during the period. We're moving to the next growth stage for Cann with strong momentum and confidence. We have a more diversified customer base, we have secured access to important overseas markets, we are executing strongly on our strategy to be a leading B2B supplier of medicinal cannabis and we are projecting meaningful revenues for the current financial year. Those revenues will put us on a secure financial footing to grow the business as planned. Our 4 main pillars of growth are centered around supply agreements, product development, the Mildura expansion, and strategic M&A. Our recent success in securing new contracts and attracting more industry attention is a clear reflection of the strength and value of Cann's integrated business model. As other industry players try to select those parts of the value chain where they can effectively compete, our strategy has been to establish strong capabilities across the full value chain. From this, we are seeing more opportunities present, and it's a clear differentiator between Cann and our competitors. We believe there is a strong competitive advantage in owning our own cultivation assets and leveraging that asset base to secure business-to-business contracts that can contribute to a stable and growing revenue stream. Our integrated model ensures we can participate in and control the key activities that drive quality, innovation and value in the medicinal cannabis sector. Our existing Southern and Northern facilities in Melbourne continue to operate at capacity, and our cultivation team has now completed more than 70 harvests since we began growing in 2017. An important focus has been intellectual property and the ability for us to work with and analyze potential strains for cultivation at large scale. We continue to work with several research partners to further this experience and know-how. Our Mildura expansion facility will enable us to boost our cultivation capability significantly and capitalize on a combination of technology and efficiencies, which will drive down our cost of goods. Moving to large-scale production remains a key part of Cann's strategy. In Australia, acceptance of and desire for medicinal cannabis continues to grow. Current demand requires an estimated 7,300 kilograms of dry flower, and that demand is forecast to grow to 40,000 kilograms within the next 4 to 5 years. In terms of industry structure, we have seen more Australian industry players move to a manufacturing light model, which continues to open up opportunities for Cann and supports our B2B strategy. Globally, the demand profile is also strong. With new markets opening and established markets continuing to grow, we see very strong export potential for our GMP-certified products, particularly in Europe where local production is not meeting that growth in demand. An oversupply of recreational cannabis continues to impact the North American market, and this may take some time to work through and put demand and supply dynamics back into balance. We will continue to monitor that situation closely. And of course, we have our offtake arrangements in place with Aurora Cannabis. But opportunities elsewhere continue to develop, and this is reflected in the recent supply contracts that we have secured and the set up -- and the step-up in incoming inquiries for our products from other overseas markets. Our product pipeline continues to strengthen. A world-class genetics program is helping to yield specific strains of cannabis that can be developed into highly targeted treatments for different indications. And we are expanding the range of product formulations we can offer. We are also looking forward to the program we have undertaken with the Monash Medicines Innovation Center producing its first product development candidates later this year. I'll now hand over to our COO, Shane Duncan, to talk through commercial and manufacturing updates from the period. Thanks. Shane?

Thanks, Peter, and hi, everyone. Our manufacturing agreement with IDT Australia allows us to provide finished products that are manufactured to the global GMP standard. During the period, we've worked closely with IDT to prove our ability to deliver the large-scale production runs, drive the efficiency and the cost effectiveness of that scale brings of our Australian grown and manufactured value-added GMP products that meet the global standard. Cann is already offering a range of product presentations, from finished oils to bulk extracted products which go on for further processing, final dose dried flower and also bulk dried flower. Some of these products have already been supplied to Australian patients under the SAS scheme. And we continue to advance our product development and our genetics program, as Peter mentioned earlier, which will allow us to deliver highly targeted strains in the future and also to very specific delivery platforms that make the medicines easier for doctors to prescribe and patients to take. As part of our B2B strategy, as Peter mentioned, we have secured important new supply agreements with customers here in Australia and also in markets overseas. This is the true reflection of the work we've been doing over a number of years now. We established the business. We've got 370 or more harvests. We've grown our reputation, particularly in respect to our ability to produce and supply that global standard GMP product across a range of formulations. It's this GMP capability that places Cann in a great position to offer products that can meet the strict international standards for medicinal cannabis markets, and it's a reflection of the new markets that we've already opened up and the ones that we've got in the pipeline for the future, which is attracting the attention of new customers, both here and overseas. We currently have 7 supply agreements in place, both domestically and overseas, with varying durations from 1 to 5 years and options to extend those arrangements beyond their initial term. Some number of things in the pipeline, and we expect to be announcing additional supply contracts over the coming months. But our revenue forecasts or projections for the current financial year are underpinned by both the existing contracts and a conservative estimate of the part year contributions from new contracts currently under negotiation. But based on those, the contracts already in place and a realistic view of what's under negotiation, we conservatively estimate that we will generate revenues of approximately $15 million from those contracts in this financial year. Importantly, these trials take the form of a diverse range of products, from dried flower to crude extract and completed all products. And importantly, we note that this assumes no sales at this stage to Aurora, although, as Peter mentioned, we have ongoing and regular conversations around our progress here with Aurora. We'll supply these contracts through a combination of our capacity at the existing cultivation facilities in Melbourne, but also we'll be supplementing that with imported biomass to ensure we have the starting raw material to make that demand. I'll pass back to Peter now to discuss the recent developments and outlook for the new financial year. Thanks. Peter?

Thanks, Shane. We've recently completed an institutional placement and share purchase plan for existing shareholders. These were both very strongly supported, allowing us to secure more than $40 million in new funding. This gives us the capital to have us fully funded from a working capital perspective over the next 12 months, in addition to providing capital reserves for a portion of the spend required on the Mildura expansion. The additional funding places came in a strong position to seek external funding options and proceed with Mildura. COVID-19 has certainly hampered our ability to progress the Mildura facility construction, both in terms of travel restrictions on key overseas based specialist contractors, but also financially in terms of progressing negotiations on external funding options. I want to make it clear, though, that the Mildura expansion project is still core to our growth plan. And I think it's also worth noting that the importance of the Mildura project has recently been recognized by the state government with their announcement of a $1.975 million regional development grant to assist with construction. The Mildura expansion will deliver the benefits of world-leading cultivation technology, significant production efficiencies and greater scale to help propel our growth. The company continues to evaluate all funding options for Mildura, and we remain engaged with major bank lenders in relation to a potential debt facility. Non-debt funding alternatives will also remain in consideration. While clarifying the funding position on Mildura is taking longer than we anticipated, we believe the growth we can generate by our existing and potential new supply agreements materially de-risks the expansion plans and strengthens the business case for Mildura. I'm confident fin year '21 is going to be a very positive period of growth for the company. As you can see from this presentation, we've made strong progress towards building a growing and sustainable revenue base and consolidating our industry leadership position here in Australia. As these revenues come through, we will be in an excellent position to fund and finalize the next stage of our growth at Mildura. While we are not in a position to give you clarity on the timing and funding structure for Mildura today, we firmly believe that the business case for proceeding with that project continues to strengthen. And as it does so, appropriate funding options will materialize. We're very pleased with the result of the recent capital raising activities, and we appreciate the support of both new and existing shareholders who participated in the round. I'll now hand back to Matt for any questions. Matt, over to you.

Thank you, Peter. [Operator Instructions] We've had some come in advance on e-mail as well and Peter and Shane will individually answer as many as possible in the time we've got available. The first question came over e-mail, which is with regards to research and development, and what stage the company is currently at in that regard.

Thanks, Matt. So yes, as I pointed to in the agreement, we -- in the presentation, sorry, we've got a number of partners that we're working with in this space. Agriculture Victoria, and our accelerated breeding program is underway with them. And that's a really exciting world-leading genomics capability that we're leveraging there. So La Trobe University and the med ag hub are working actively with us as well and that program is underway. And as an essential service, it's been continuing throughout this COVID period. So we're really pleased with that. As you know, CSIRO, a major shareholder of Cann Group, and that's through the agreement and relationship we have with them, where we have used script as part of the process with paying for research with CSIRO, that's been really positive, too. So we're well advanced on those. And we also have work that's underway with New South Wales DPI and their cooperative research program where we're a lead partner in that. So we're really pleased with both the breadth and extent of research that we've got underway, and it's really making great headway.

Thanks, Peter. Next question is, when do you plan to manufacture your product at a national and international level?

Thanks, Matt. That's a great question, and that's -- we're already doing that. So we're currently providing products to B2B customers in Australia that's been grown in Australia and manufactured here. We are working our way through the last stages of the regulatory process to be able to ship product into the U.K. and Germany, and we look forward to the announcing that, that has happened in the very near future.

Okay. Next question is due to the popularity of CBD oil, has Cann considered moving into this market and joining sellers on platforms such as Amazon, which seems to be popular with overseas companies? It appears legal to sell CBD oil in Australia, if in the right concentrations.

Yes. Thanks, Matt. We -- CBD is an evolving new area for this whole industry. We currently have 2 programs in place to work through the down scheduling of CBD. CBD is currently a prescription-only product in Australia at the moment. There is draft legislation working its way through the TGA around a down scheduling, so taking it from a prescription-only to a pharmacist-only medicine. And we're working actively on that -- working our way through that and preparing ourselves to enter that market. We have high CBD cultivars in our genetic pool. So when that -- the legislation becomes clear and the path forward to supplying products under that pathway, then we'll be ready to go to jump into that.

Thanks, Shane. Next question is, can you provide more detail on how the recreational cannabis market in North America, mostly Canada, is having on the medicinal cannabis market overall? And what impact is it having on Aurora Cannabis given the earlier statements by Cann that Aurora would take full access product from Cann's Australian production after it serviced local demand.

Yes. Thanks, Matt. And as I mentioned, yes, we're keeping a close eye on that. There's no doubt that the supply demand situation in North America is not back in balance as yet. There was clearly a rush of operators looking to get into the recreational space. The other key part for the Canadian market is under their medicinal cannabis product that they produce, they are not required to produce to GMP standards as we are here in Australia. So that really limits what they can do with product into other international markets, not only Australia, but also Europe and elsewhere. So that continues to be worked through at the Canadian end, and I think they're starting to make some headway down that track. What is interesting is that in light of everything that happened over there, the medicinal cannabis demand continued to grow. So there's clearly still demand and interest in medicinal cannabis, not people just changing wholesale to the recreational market. From an Aurora perspective, there's no doubt that their focus has turned inward into getting their house in order in North America and Canada, in particular. We continue to work very closely with Aurora and members of our team are in contact with them on a weekly basis. We still believe that the strategy that we're setting up to supply TGA GMP-grade product that will service key international markets remains a key value that we can add to Aurora when they're ready to move on that. As always, our focus is on supplying Australian customers first and under legislation, we're required to do that. But setting up at scale and being able to service international markets is the other part of that, that we'll be ready to do.

Thanks, Peter. Next one is with regards to the Mildura expansion, are there any barriers or challenges because of its location outside of Melbourne?

No. Look, I think in terms of Mildura as a key regional center in Victoria and the benefits that it brings, no, we don't see a barrier to that. And under the current COVID situation, Mildura is able to operate more freely than we can in Melbourne. So we're preparing for remobilization on the site there once we get the funding issues resolved and ready to move, and we're already working actively around how, in this COVID environment, we can look to remobilize on-site with travel exemptions and visas as required. That work is well underway. So we're expecting to move. And it's a really exciting project for the region. The support from the state government was a great signal for that as well and we're looking forward to being a key employer in the region.

And also on Mildura, is solar power part of the plan in terms of being used at the site?

That's a good question. I mean, the facility itself is the ultimate in solar power in that it's a glass roof that is obviously set up to make use of the sunlight hours itself. But the abundance of renewable energy that's coming online in the Northwest of Victoria, which, at the moment, can't find its way to Melbourne because there's still upgrades required to infrastructure to get that power under the Melbourne grid, we're actively working again with state and federal government around what's happening with energy generation in the area. And solar, we believe -- solar and wind will probably be a key part of what we do to be able to operate there, and we're looking forward to literally tapping into that.

Thanks, Peter. This one was touched on, I think, during the presentation, but just if you want to reiterate, does the funding from the capital raise provide enough capital for the completion of the first stage at Mildura?

So we still have a debt component to that, that we're working on. So no, it does not cover the full funding requirement to the completion of Stage 1A. But definitely having been such a successful SPP following on from the placement has put us in a very strong position, and that's where we've earmarked those funds for part of the Mildura process.

Thanks. And Shane, this might be one for you. How many GPs do you think could prescribe CBD in Australia? Or perhaps touch on medicinal cannabis as well, I think part of that answer.

Yes. No worries. Thanks, Matt. So all GPs in Australia, in fact, all doctors in Australia can prescribe medicinal cannabis, given that the product is made available under an SAS program, a Special Access Scheme. And so it's not like a typical prescription that a doctor would write. So there's a few. They need to seek an approval from the TGA, fill out some documents. They're typically getting approvals within hours or within 24 hours. So that process is relatively straightforward, but it's a lot different to a typical PBS prescription. In -- with -- the estimates are, there's probably around 1,000 to 1,500 doctors who are semi-regularly prescribing medicinal cannabis products or prescribing medicinal cannabis regularly at the moment. And that's of a total GP population of around 30,000 GPs. So the number of doctors prescribing regularly is still really low. We think that's due to the nature of it being an unregistered medicine and being provided under a Special Access Scheme. But it has grown like the patient population has grown exponentially over the last 12 months.

I think it's also worth mentioning that, that was one of the key findings from the Senate inquiry. It was around what could be done to assist in the education of doctors around medicinal cannabis. And it's not that doctors need educating, but they do need access to information that's provided efficiently to them and time effective for them. So we're working closely as part of the MCIA, Medicinal Cannabis Industry Australia, and they're engaging with the AMA and others around this topic to see what we can do to facilitate and improve that process, and that's making headway as well.

Thank you. Next question is do Cann Group see any possibility of entering into partnerships with major med -- pharmaceutical companies nationally or overseas?

So the big pharma question comes up quite often. And there's no doubt that there's a very exciting future ahead of us in terms of cannabinoids being a new class of compound in medicine. So I do expect that down the track, there's going to be interest from big pharma and strategic M&A is on our radar as well but it will be really interesting to see how this whole industry develops. And in terms of doing it correctly, which is what the Australian structure allows us to do with TGA, GMP requirements and taking it through that pathway is really setting us up well for this to become mainstream medicine. The ability of using Special Access Scheme and having unregistered products available in the short-term is a great way that we can bring patients online, but down the track with products going through to registration and being treated as a traditional pharmaceutical is a really exciting future for products that will be available and solutions to patients in the future.

I might just jump in there, too, is that, that part of the program that we're doing with the Monash Medicines Innovation Center is really around identifying formulations or delivery platforms, which are more pharm-like. So that would -- as that program gains some momentum and identifies candidates, is that could unlock opportunities to partner with pharmaceutical companies to further validate the utility of those particular projects.

And something Peter touched on in his answer there, there's a question on which is if you can -- maybe you can expand on the prospect of strategic M&A?

Yes. Look, that's definitely something that's on our radar, and we're keeping a close watch on what's happening in the space. And it's around a number of areas that we're seeing companies have pivoted with their business models, as we said in the presentation, going asset-light and focusing on parts of the value chain of medicinal cannabis. So as that occurs and that the industry changes, there's going to be opportunities that come through, and that also relates to international markets as well as Australia. So yes, there's a lot of moving parts, but we're just keeping a close watch on what's happening around and where we might play in that.

And next one is other advances in extraction technologies of specific compounds for GMP that Cann is leading or looking into?

Yes, that is an important part of our research program that we're working on a couple of fronts. So that's been one of the key areas of focus for us. And we've got developments underway. But I want to expand on the detail here. And a big part of that is also potentially around the IP aspect of it, where being able to manage that is a careful part of that process.

Peter, we're getting close to time, but I'll squeeze in a couple more before we finish up. So in future, would Cann consider expanding into the global recreational market? Or does legislation prevent this?

Yes, the legislation prevents it. It's clearly not allowed in the Australian regulatory environment. And it's an important part of the medicinal cannabis industry and sector developing properly, that recreational leap through legalization actually confuses the issue and we're looking to provide solutions to patients and really focus on patient requirements. The recreational or push for recreation doesn't assist in that. And we -- so we're staying entirely focused on the medicinal cannabis solution for patients, and that's -- and it will be there to make a difference in people's lives. So we are focused on that at the moment.

The last one, actually it's in line with the previous one a little bit, but does Cann Group envisage any road blocks from federal government in future regulations being imposed on medicinal cannabis being prescribed by the medical fraternity?

No, I think they are actively looking to help streamline that process. So at the moment, and again, we're using the industry association as a key way to engage with the regulators. So -- and that's a really important part of a new industry, having an industry body that can provide a voice that's not just seen as 1 company trying to push their own barrow. So we're in close contact with Minister Hunt's office and various federal bodies. But yes, that's an important path that we can play as an industry body and ensuring that we've got a sustainable and well supported industry is a key part of that with regulatory support. And that comes back to how we can assist in reshaping the regulatory environment that's there. So we've been part of the Senate inquiry and feeding back into that process. But also dealing directly with the minister to provide feedback on how we can improve access for patients through a well-regulated system.

Thanks, Peter. We'll leave it there. There's still -- even still some questions coming through. So I'll come back to people separately on e-mail with those, but we'll leave it at that. And Peter, I'll hand back to you just for closing comment.

Yes, terrific. Thanks, Matt, and look, thanks, everyone, for joining us today, and thanks, again, for your support and involvement in the placement and SPP. We're making really important headway and have a great momentum into the new year. Stay safe, and we look forward to keeping you informed of progress in the year ahead. Thank you, and good afternoon.

Good bye.