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

Thank you for standing by, and welcome to the Cann Group shareholder update webinar for November 2022. [Operator Instructions] Presenting on behalf of Cann Group today, we have the CEO, Peter Crock; and COO, Shane Duncan. The presentation today will last for approximately 15 to 20 minutes and will allow for approximately 15 minutes thereafter for questions. To begin, I'll hand it over to Peter. Please go ahead.

Terrific. Thanks, Matt, and welcome. Good morning, and welcome, everyone, to the Cann Group shareholder update. I'd like to start by acknowledging the traditional owners from where we are presenting today, the Wurundjeri people of the Kulin nation and also the Latji Latji people, where our Mildura facility is, their elders, past and present. I'm Peter Crock, CEO of Cann Group; and today, I'm joined by Shane Duncan, our Chief Operating Officer. There's a lot we want to cover today, so I'll get straight into it. We're very pleased today to update you on how we're executing against our strategy, which, to reiterate, is focused on integrating -- integrated capability from novel genetics right through to high-quality finished dose forms across a range of products. There's a recurring theme you'll hear today. We're not here to produce commodity cannabis, but we do need to operate at a scale that's going to ensure cost competitiveness and allow us to drive revenue growth. It's really important that we're able to tick off on each of these strategy items that we're talking to and take you through the next steps that we're working on. We're pleased to say the foundational pieces are all in place for our strategy, and we've got regulatory sign-off, which effectively allows us to cultivate, process, extract, manufacture, pack, test and release product, and we're set to service a market that's looking for reliability and certainty of supply. What's important here is the integrated capability that's a real value driver for Cann Group. Analytical testing in-house gives us a direct feedback loop both into our cultivation and all the way through into our genetics program, but it also allows us to direct and differentiate all of the products we're producing into value maximizing strands. The GMP licenses that we've had are extremely significant as well. It obviously -- or GMP covers -- sorry, GMPs, good manufacturing practice, but it covers manufacturing, but we've also established and have our GMP license for our analytical and micro labs in Mildura. And these really importantly bring time and cost efficiencies in-house. But more importantly or as importantly, from our manufacturing processes, we're able to manufacture and release for patient use out of Mildura. The Satipharm product, which we'll talk through in detail today, is a differentiated IP-protected delivery of cannabinoids. And we'll talk today about the progress we've made with GSK Haleon around, and we see that as a real validation of what we've done with our Satipharm platform. In terms of the Mildura facility, we're definitely proud to have delivered on what we referred to as our flagship Mildura facility. It's a world-class advanced protected cropping system with a fully controlled environment, automation systems that allow us to optimize workforce against cultivation capacity, high level of automation with robots and table systems that are fully integrated into our production processing. As I mentioned, we've established and successfully licensed its facility, both with the Office of Drug Control and with the TGA and it integrates our manufacturing capability that's TGA approved. In standard practice in these sorts of things, we've started and developed a small-scale manufacturing capability, which is an important milestone that we've ticked off, and that is a licensed GMP TGA license capability. We've also got and now have in place the ability to process, pack and release dry flower product ready for patient supply. So where to next for Mildura? In terms of our processes at the moment, we're looking to optimize a cultivation process, and we're expanding our output into high-quality dry flower is in high demand. We're looking and stepping up cultivation capacity in a stepwise fashion as we get established and operational. We're also taking steps to consolidate our commercial activities in Mildura, and that is allowing us to divest our southern facility, capturing key efficiencies and focusing on cost savings that we can now focus on Mildura. And from a manufacturing perspective, the next important step for us is around scaling up both extraction, but more importantly, the Satipharm capsule manufacturing output in preparation for our S3 over-the-counter registration and expanding product range. I'll now hand over to Shane to talk us -- walk us through in more detail around Satipharm and the growth plans in detail. Over to you, Shane.

Thanks, Peter, and good morning, everyone. Thanks for tuning in. It's a really exciting week for us this week in terms of announcing the nonbinding term sheet with Haleon, the former GlaxoSmithKline Consumer Healthcare company. Just incredible validation of not only the program we've put in place to try and get our Satipharm capsules registered, but also the technology and the product looks like a product that fits in a Haleon product range. And that's why they're very excited and keen and done a lot of work themselves on preparing for a launch of this product in the future. In the term sheet, while the details remain confidential at this stage, but shareholders will be pleased to hear that it covers exclusivity payments around hitting milestones around the clinical trial results and getting the product registered and scaling up manufacturing, but also sales-related payments, and probably most importantly is the company continues the exclusive manufacturing of this product at commercial and attractive manufacturing margins. This license is to -- is a sales marketing distribution license to Haleon. It's limited at the moment just to Australia and New Zealand. But given their enthusiasm for the platform and what we're working on in terms of this first registration program, they've also negotiated the position to have a first right of negotiation for other jurisdictions globally. And we work very closely with them on evaluating the data we get out of this registration program to what would be the next most applicable markets to take forward. From here, we continue to negotiate towards a definitive agreement. We'll talk in a second more about the clinical trial, which is one of the key levers that we need or key milestone we need to hit to get closer to having those definitive agreements executed. In terms of the clinical trial, we announced earlier this year that we have actually reached our recruitment target and the study has sufficient patience to power it to achieve a primary outcome. So we're very pleased about that. That means that we -- in terms of the cost of running the study, we keep that within what we have budgeted. The final patient participant visit is scheduled for the next week. So that will mean that all patients will have completed the study and then we move on to the cleaning of the database and the data analysis piece, and we're expecting the retrial results of first cut of the trial results early next year. And obviously, we'll communicate that to shareholders once they become available. In parallel, we continue to work on key components of the registration dossier. If you're familiar with drug registration is that there are a number of pieces that we can do around some of the historical previous clinical trial work that we've done. Some of the data that exists around CBD. And we continue to populate those modules of the dossier in advance of receiving these final pieces, which will be the results from the clinical trial. And again, in parallel, we've been doing the manufacturing of the first batches, the engineering batches, the stability batches to establish the shelf life of the product when we get to that launch phase. So it's an incredible amount of work going on at the moment to ensure that we do get the product, the dossier submitted early in 2023. And then it's a 9- to 12-month process with the TGA to a registration. So again, we anticipate a launch early in 2024. From here, we now move to how do we expand this platform that the Satipharm technology gives to the company. We've always talked about that this business is currently -- it's a CBD product only at the moment only or range of products. And we -- the real excitement in the market is to move into adding THC, so the psychotropic of psychoactive component of the cannabis plant, and we move to early next year, we'll start manufacturing our first batches containing THC. There'll be a number of different formulations. And we see this as a really important step. THC-containing products, the S8 products, Schedule 8 products, have -- they're probably the market leaders, the largest share of what's prescribed in medicinal cannabis at the moment, mostly it's oil and flower products. So there's a limited number of prescribers who are using or prescribing these products to their patients. So we've had a lot of interest both locally and globally around these new formulations containing THC. And we see that this will bring not only new prescribers, but also new patients into the medicinal cannabis sectors, again, growing our sales over the coming years. On that product development side of things, we continue to work on the development of our dried flower product range. Peter mentioned earlier that our breeding program, which is world class, has delivered a number of new product or new cultivars and new plants to our commercial program. We've got 7 strains in commercial production at the moment out of this breeding program. And they're really targeting around the consumer and the prescriber needs out of this product form. It's a very distinct and in some forms, educated prescriber and patient population. So we're very diligent and very focused on ensuring that we create a high-quality product that is in high demand, and that matches the commercial capacity and the capability that we've built in Mildura that we can scale quickly to move product to different customers all around the world. So our attention now, I suppose, in this presentation, moves towards our commercial progress. We talked, I think, at the AGM and earlier this year around our annual results is that we've delivered a project, we're commissioning the project, we're scaling up the project, and it's the shareholders are obviously questions all the time around, how are you going in terms of growing sales and growing your revenues, which we reported at the end of the first quarter of this financial that we've made good progress. We continue to see great demand for high-quality products, and I can't overemphasize that high-quality product is in great demand. There's lots of low-quality product that doesn't sell. So the quality demand equation is one that we're really focused on. Having that GMP capability and licenses now in 2 sites that can manufacture and deliver product means we have greater capacity to meet that demand and move those high-quality products out to our customers. And we haven't -- we continue to grow the number of customers. We've got a lot of work now going on in Europe and the U.K. around new markets and new customers there now that we have this increased capacity, particularly of dried flower products. And probably one of the growth opportunities that we're seeing in the Australian market is this the TGA moving to us tightening the GMP requirements for all products that are in the Australian market, but particularly the imported products, and July '23 is when those changes will come into effect. So we're just seeing a higher demand for local product, local manufactured and growing products that do meet these new GMP requirements. So off the back of all this, more capacity, more licenses and more customers, we've generated significant sales momentum and expecting to continue that. We talk about having an increased number of customers. But what's now happening with these customers with this increased capacity is that we've got repeat orders, we've got them in larger quantities, and we've got them further in advance. So customers are now putting orders in many months in advance of receiving product so they can secure supply and have certainly supply -- of supply for their doctors and their patients. This is coming from a range of existing and also we add new customers in all the time. I mentioned earlier that we -- our focus is on Australia at the moment. It's that our capacity is mostly being absorbed by the Australian demand at the moment. But in the near future, we look to announce new customers in the German market, who again are looking for these high-quality dried flower products that we're producing. And the capacity and the capability in Mildura and this breadth of strains that we've now got really does allow us to scale up production around this demand that is increasing and is being unfulfilled. And that's where we really see this growth in momentum, and you'll see that over the coming months and years as we continue to meet that demand and deliver that high-quality product. I'll hand back to Peter now to talk more about the SPP in some detail -- oh, sorry, one more slide. Sorry, delay in changing the slide. So just to summarize what I've just said, is that we have the capacity and the capability now. We've delivered that Mildura program project. It's a scalable facility that is there to meet the growing demand. It's an industry-leading facility and has all the licenses to ensure we can make meet that demand for the various customers we're talking to, both internationally and also locally. That customer base expands. There are new customers that we're talking to. The ability to travel this year has meant that we've been able to attend conferences that previously haven't been able to do. So that's created some real momentum particularly on the international front. The Haleon agreement, the path to registered products, we've always talked about how do you get -- how do you fill the Mildura greenhouse, how do you get all that capacity utilized, and registered products goes a long way to doing that. So this relationship with Haleon is a really exciting step, this path to a registered product, the differentiated products. All do lead to greater facility utilization and then, obviously, greater revenues over time. And then we don't take our eye off the innovation, the differentiation piece. Peter said earlier that we're not a commodity cannabis company. It's really important in any market to be an innovator, to be differentiated. That's how you maintain pricing and maintain margins, and you increase your market share. So we continue to put resources and effort into delivering that innovative pipeline that will again -- to grow revenues and profitability over time. Now I'll hand back to Peter and talk about the SPP.

Thanks, Shane. Yes, it's on the back of this progress we've made that we're now taking some really important steps. So having a proven capability and delivering a product that's patient ready, we now need to do those to prepare and scale up to service a registered product demand that is going to require millions of capsules per month, rather than 1,000. So the -- what we're looking to do with the SPP and support from existing shareholders, obviously, will be to contribute to putting in place the requirements we need now around commercial scale, encapsulation and packaging. As Shane mentioned, we're also looking at a broader range of products that we're developing, so we've got a whole suite of products, which include differentiated Satipharm range, but also the GMP dried flower, which demand for high-quality and reliable supplier of flower is a key one. So that's what we're looking to do with the SPP. It opened or opened last Monday, closes next Friday, the 18th of November, and we're expecting and looking to raise in the vicinity of $8 million to $10 million with SPP. So in terms of a summary, and it has been a great way to update shareholders with where we're up to and be able to report on how we've delivered against the key strategic elements that we've been striving for. So having established a state-of-the-art integrated facility in Mildura that allows us to maximize value creation is key. We are streamlining our operations to be really focused and efficient. The GSK Haleon term sheet is a really important validation of our Satipharm strategy. The next major milestone is obviously around the pivotal clinical trial. And that report, we're expecting those trial results through early next year. And then the SPP will support us in scaling up to the Satipharm capsule manufacturing ready for an ARTG registered product launch once that registration comes through. And having delivered on the [ 3 ] strategically important foundational capabilities that we've got, we can now also pivot our focus to a much stronger commercial focus and drive revenue growth in the short term. So a really exciting time for Cann ready to take the next step, really pleased to have shown what we've delivered on to date and now using those foundational pieces to take us forward in the next step. So Matt, I'll hand back to you if we've got any questions. Thank you.

Thank you very much, Peter and Shane. As you mentioned, we'll now jump into the Q&A segment of the webinar. [Operator Instructions]. First of all, some questions that came through via e-mail. So the first is a number of questions were received regarding details on the cost, production yields and margins associated with Cann finished products and in particular, Satipharm capsules. Can you talk to that, please?

Yes, sure, Matt. Thank you. And Yes. As we've pointed out today, the Mildura facility being fully integrated and what we can do around value creation with an asset like this is really exciting. So yes, the capsules are part of that process. But as Shane mentioned, the demand for high-quality flower that's reliable and ready supply is part of what we're doing. So having the integrated capability that we have with our analytical testing and the GMP licenses up there as well, it means that the production through Mildura can be fed into a number of pathways, so everything from GMP released flower that's ready for patient use through to active pharmaceutical intermediates and extracted products that can then go into our own Satipharm product as well. Having value-added and IP-protected delivery of product is a key part of that. So it's that whole mix that allows us to maximize the value-add out of Mildura, and it's going to be a key focus. So there isn't a single sort of margin number we can point to, but in terms of what we've established and have now as a capability is going to be key to maximizing that value.

Thank you, Peter. The next question is, a series of capital raises have had a dilutionary impact on shareholders and of constrained share price growth. When will the company be in a position to fund its own operations and growth plans and cash flow -- and positive cash flow and profitability, key focuses for the Board and management?

Yes, they absolutely are a key focus for us, Matt. And that is we're driving and looking to get to that point as soon as possible. In terms of the support we've had from shareholders over the journey and what we've done, we are very proud to be able to show what we've put in place to -- we have put our money where our mouth is in terms of the capability and what we've got now as a real foundation to the business to go forward from the step of going from small scale and proven capability in manufacturing through to commercial scale going from thousands of capsules a month to millions of capsules a month, which is where we're heading with the Haleon project, for example, is why we're looking for further investment and doing it in a stepwise manner though that makes sense to scale up and execute as we require. So that's being done absolutely with a focus on maximizing revenues and getting to a cash flow positive position as soon as possible. But we do have a lot to show for what we've done so far and really pleased with the foundation we've set and absolutely ready for this next exciting chapter.

Thank you. The next question is, what is the risk of oversupply leading to a decrease in the price per kilogram on the world market with all the new cannabis producers coming into production?

Yes. And look, maybe let Shane talk to this one, if you want, Shane, in relation to the comment you made earlier about the flood of low-quality product that hopefully will with the TGA changing their requirements around the imports. But do you want to talk to that one in a bit more detail, Shane?

Yes, sure. Thanks, Peter. Look, I mentioned earlier that there is a lot of cannabis being cultivated around the world. Is there a focus on quality product? Is there a focus on delivering product profiles and developing product that meets the needs of the customers? Probably there are only a few producers who were doing that. So that's a key focus for us. So I think demand for high-quality product that is focused on what consumers and doctors are looking for is still largely unmet. So we continue to focus on that. We think that in all markets, whether it be cannabis or anywhere else that you've been focused on a quality product that is targeting the consumer, what the consumer is looking for, and you continue to do that and you have a disciplined and a program to do that, then we think that leaves us really well placed. And that's why we've continued and we have our breeding program, which is, again, taking feedback from the market and then looking at ways that we can improve the genetics we have or diversify the genetics, we have to, again, meet those customer needs. So I think we've always got an eye on the competition and what's going on in the market dynamics. But it is a [ truism ] of any business that if you continue to focus on high-quality products that are meeting the demands and the needs of the patients, then it will always stand you in really good [ stead ].

Thanks, Shane. [Operator Instructions] The next question, and this does somewhat follow the question previous. How are the international competitors such as Aurora and Canopy growth likely to affect Cann's revenue? Shane, I don't know if you can speak to a bit about those large players in particular?

Yes, sure. I think as I just said is that we've always got our eye to the competition and the activities that they're up to and what the market dynamics are is, I think, that where we play in the market is we are the engine room behind a number of different companies in this B2B model. So -- whereas Aurora and Canopy are operating under their own brand in a lot of the markets they operate in, is that we're supplying various companies within markets with different [ cultivars ] or different products from our range. And so we've got an extensive range of oils and as I said, 7 different flowers in cultivation at the moment. So we've got a breadth of products that we're providing. So we are the engine room to a number of different companies who are looking for building a catalog out of products in different parts of the world and from different producers. So we say that we have -- our model is slightly different to what Aurora and Canopy particularly are doing. And we also have appeal to a larger number of customers because they are looking for a product or a range of products that they can put their own brand on an in-market within their own market. So it's a start-up industry. I think Peter said this very well at the AGM, it's a -- we're a start-up company in the start-up industry, things don't move quickly. We have a really good focus and continued research and observation of the different dynamics that are going in the market. And as I said, we've got a slightly different business model. But at the moment, it's standing, it's in a really good stead to grow our revenues and again grow our distribution globally.

Thanks, Shane. I'll just pause from a moment to see if there's any final questions. Now with that, Peter, I'll hand it back to you to give a closing comment.

Terrific. Thanks, Matt, and thanks, everyone, for tuning in today. We're really pleased to have been able to provide an update to shareholders. The support we've had over the journey has been terrific. Cann pride ourselves as being the first through the gates to be licensed in Australia and a lead player in this space and showing the difference we can make in patients' lives with access to safe and effective medicines that are trusted and available here in Australia and around the world. So we're ready to take the next important step. And as Shane said earlier, the Haleon confirmation of interest in our platform technology we've set up is a really exciting chapter ahead. So thank you for your ongoing support. Exciting times ahead and really pleased to show what we've delivered on to date and where we're going. So thanks for your time today, and we look forward to your ongoing support. Thanks again.

Thanks, everyone for joining. That concludes the session for today, and we'll see you next time.