Khiron Life Sciences (TSXV: KHRN) vs Pharmacielo (TSXV: PCLO)

I continue to receive a number of letters basically asking whether Khiron (TSXV: KHRN) (OTCQB: KHRNF) is a more or less attractive investment than Pharmacielo (TSXV: PCLO). I must be doing a poor job of explaining why I think KHRN has a far superior investment outlook but readers keep asking so I will keep answering.

QUESTION: “I am writing to see if you can provide some insights on PCLO. I am in Australia and an Australian Stock Exchange (ASX) investor who has never invested on the Toronto Stock Exchange (TSX) or Venture Exchange (TSXV). In June, PCLO announced a share exchange plan to take over Creso Pharma (ASX: CPH). I am thinking of continuing my holding in CPH over to PCLO. I am a regular reader and I know one of your favourites is KHRN. But CPH has a 224,000 sq. ft. greenhouse where initial sales were made in June and 14 licenses for commercial sales of therapeutics, nutraceuticals, animal health, lifestyle and topicals. Do you think this acquisition makes PCLO a more complete and attractive cannabis company?”

BN from Australia

ANSWER: Let me start with a few disclosures. I know Khiron quite well from an investment perspective. I have visited their facilities and I am in regular contact with management. I don’t know much about Pharmacielo but when the company first started to plan going public a little over a year ago, I was contacted unofficially by a shareholder who exchanged information on the company. I was left with a very negative opinion on PCLO. Since then I have noted publications on PCLO on the Internet but I have not spoken to management. I did not know about Creso Pharma until I received your email.

For your information, the Toronto Stock Exchange (TSX), Toronto Venture Exchange (TSXV) and the Canadian Stock Exchange (CSE) are national stock exchanges in Canada that, in general terms, are on a par with the Australian Stock Exchange.

Recently, TMX Money that is part of the same group that owns the TSX and TSXV, reported the market cap of Pharmacielo as $527 million compared with $254 million for Khiron. Market cap or market capitalization is calculated by multiplying a company’s total number of shares outstanding by market price. Market cap is one way to measure a company’s valuation on the stock exchange and it is often used when companies do not have positive EBITDA or earnings on which to base a price-earnings ratio or dividends on which to calculate yields. So if one company’s, in this case PCLO’s, market cap is about double the other’s, in this case KHRN, it means for one unit of PCLO, you have to pay double the price for KHRN.

If, for example, you felt what PCLO and KHRN are doing is of equal value, you would be paying twice as much to buy a share of PCLO. Because I know KHRN as well as I do, I cannot imagine, PCLO’s value is even equal to KHRN. Not even close. In fact, my sense is that KHRN is worth more. That is why reader’s know I cannot conceive of a circumstance in which I would evaluate the stock market opportunity in PCLO as anywhere near as attractive as the prospects for KHRN.

KHRN recently provided an update of their operations and this will give you an excellent sense of where I am coming from. Here is their summary of where KHRN stands today (see complete release here):

• Colombia commercial production anticipated to be commercialized in Q3 (see below). All cultivation, extraction and testing facilities operating and in optimal condition

• Potential addressable patient network of over 1 million individuals, represented by over 5,000 doctors through six medical association endorsements

• Core medical cannabis distribution channels secured with arrangement for over 900 retail locations

• Wellness line secured distribution agreements with largest retails of product category throughout Colombia, across 176 points of sale. Commenced jurisdictional and product portfolio expansion

• Current cultivation capacity of 25,000 kilograms and total potential modular capacity on licensed lands of 158,000 kilograms. Cultivation capacity in Colombia, Uruguay and Chile provides for variety of extractions and flower product mix targeted at domestic and international markets

Subsequently, KHRN announced the following: (see complete release here):

• Secured all approvals required to commercialize current CBD cultivation and production for medical purposes. Commercial sales expected for third quarter of 2019.

• Initial harvest expected to produce CBD extract in 2019 to supply KHRN´s established medical cannabis distribution channel of over 1.0 million potential patients

• KHRN has now registered a total of 22 strains with Colombian Agricultural Institute ("ICA"). Production includes full profile of CBD and THC strains specifically selected for key target indications

• The next step is to seek commercial quota for the commercialization of THC strains based on the breadth and depth of its potential addressable patient network

Conclusion: Assuming PCLO’s acquisition of Creso Pharma is completed, you will end up as a shareholder of PCLO. The option you mention is one obvious choice. You can remain a shareholder of PCLO. It is probably also the easiest approach as it requires little action on your part. But sometimes what is easiest isn’t what is best. As you can see, I believe KHRN is offering much greater value than PCLO at half the price. I would rather own Khiron (TSXV: KHRN).