Top Picks: Khiron Life Sciences (TSXV: KHRN)
It seems the question on many reader’s minds after a strong advance in Khiron Life Sciences (TSXV: KHRN) is “What is your next winner?”
It was a breakout week for KHRN, one of my favorite recommendations. I first picked KHRN when it began trading on the TSX Venture Exchange in the $0.90 - $1.20 range. The stock closed last week at $1.80 and this week at $2.51 per share. So after several days of reviewing questions from readers, here is my next pick to click.
I believe one of the top picks on my list today is Khiron Life Sciences (TSXV: KHRN). That’s right – KHRN! This is the thought process I went through to reach this conclusion:
To someone like me, the companies I bring to the attention of readers are like my children. Can I really love one child more than the others? No I can’t. But there are reasons why one child may be in the spotlight at a particular time. That is certainly the case with Khiron right now as I will explain below. Furthermore, not every stock appeals to everyone in the same way. Some people might like a 1933 Industries (CSE: TGIF) because it is a direct U.S. play or Sunniva (CSE: SNN) because they are a major factor in California. But don’t overlook KHRN at this point.
When I think back on similar issues I have experienced in the past, Lexaria (CSE: LXX) comes to mind. LXX was a stock I first recommended in the $.20 - $25 per share range. After several months, the stock jumped to around $.60 per share. It was then I published an article “If You Missed Some of LXRP’s Gains, Don’t Miss Them All.” The point was that if you don’t own LXX, it wasn’t too late and if you did own it, you would be better off buying more than selling some. In the case of LXX, the stock subsequently rose from the $.60 per share level to almost $3.00 per share and is still at $2.00, at which price I still think the stock is attractive. Similarly with Khiron. (see below). With KHRN, this is not the end of our journey together. It is closer to the beginning. I said it before and I’ll say it again, “If You Missed Some of KHRN’s Gains, Don’t Miss Them All.”
Last week, KHRN announced it was entering Uruguay that would enable it to enter Southern Brazil and, possibly, the European Union. This week, KHRN announced a Joint Venture with Dixie Brands (CSX: DIXI) that will see KHRN marketing Dixie CBD infused products in Latin American and DIXI marketing KHRN’s CBD infused wellness products in the U.S. DIXI leads the global industry in the development, packaging design, product innovation and quality control for the commercial production of cannabis infused products. Dixie now has over 100 products across more than 15 different product categories representing the industry's finest edibles, tinctures, topicals and connoisseur grade extractions, as well as world-class CBD-infused wellness products and pet dietary supplements. This is a mutually beneficial arrangement: DIXI is an excellent representative for KHRN’s Kuida® line of CBD infused wellness products in the U.S. and KHRN is a fine choice as a representative for DIXI’s line in Latin America.
As I consider the popularity of multi-state operators in the U.S., I conclude KHRN is a multi-country operator. They are now growing and about to harvest their first crop in Colombia, they are authorized to market their CBD infused wellness products in Peru, they have signed a binding letter of agreement to acquire NettaGrowth International that will bring 100% ownership of Dormul, the holder of the first license to produce medical cannabis with THC for commercialization in Uruguay giving KHRN access to 75 million people in Southern Brazil through Mercosur, a Regional Free Trade Bloc and Dormul has applied for an extraction license. By the way, Mercosur is negotiating a trading arrangement with the European Community. So KHRN could possibly find a path into the European market as a consequence of this agreement. Finally, Mexico’s new government is in the process of becoming the third nation after Uruguay and Canada to totally legalize cannabis. The expected time frame for Mexico is in the order of weeks.
I believe Khiron is in the process of becoming recognized as the leader in the cannabis industry in South and Latin America. At this time, there are other companies that are involved in the region that trade for substantially higher market caps than Khiron. As the company gains investor confidence as the leader in the South and Latin American region, KHRN’s market cap should rise to reflect that realization. Canadian giants have interests in South and Latin America. Canopy Growth (NYSE: CGC) holds its interests through Spectrum Cannabis Colombia, Aurora Cannabis acquired ICC Labs in September 2018 for $290 million and Aphria (NYSE: APHA) has interests in Colombia through agreements with Colcanna. This lends credibility to Colombia being a hub for South and Latin American operations. But these multi-billion dollar market cap companies are not fair comparables for Khiron.
PharmaCielo (TSXV: PCLO) is a more reasonable comparison. PCLO owns PharmaCielo Colombia Holdings that is a cultivator and producer of medicinal grade cannabis oil. PCLO is the Canadian parent of Colombia’s cultivator and producer of medicinal-grade cannabis oil, PharmaCielo Colombia Holdings S.A.S. PCLO’s business plan is to produce quality cannabis oil in large volumes for sale to consumer products companies. It plans to expand its area under cultivation from 5.3 to 20 hectares by the end of 2019 and to complete its 2,300 sq. m. GMP2 certified Research and Technology Centre oil processing & product innovation facility by the second quarter of this year. It expects to receive a receipt of registration from the Colombian Ministry of Agriculture for several cannabis strains that will pave the way for agreements with Colombian and international distributors & manufacturers. It plans to open its first co-located oncology practitioner clinic in conjunction with Centro Oncológico de Antioquia (COA) targeting five million patients.
In many ways, KHRN and PCLO are similar in size and timing.
I recently visited KHRN’s facilities in Bogota. The picture quality isn’t the best as I it is in the early morning light through the helicopter canopy as we approach. What the picture shows quite clearly is:
The open air greenhouse is built and I will show you it is growing further below,
They are in a secure and isolated area with lots of room to expand.
Longer term this location is better suited for THC because of security features.
The property in this region leases for around $10,000 a month per hectare.
KHRN’s cultivation area is currently 17.5 hectares with 5.5 hectares in use.
It has abundant water, power and skilled labour.
Subsequent greenhouses will have a capital cost of around CAD $500,000.
The cost includes all necessary fire and security systems.
The time required to build is in the three month range.
Biomass grown in one greenhouse can produce $25 - $30 million in extracts.
Additional greenhouses dedicated to growing should yield 20% - 25% more.
The lab and extraction facility can handle up to eight greenhouses.
This is from another direction and it shows the two facilities being built.
The larger facility is the greenhouse of some 80,000 square feet.
The rectangular building in front is the laboratory and extraction plant.
This is being built to GMP standards.
This building will be able to process the output from eight greenhouses.
The next seven greenhouses will not need additional water wells.
This should lower the cost of these greenhouses.
As they are dedicated to growing, the yield from each should be higher.
They can produce up to 25% more biomass than the first greenhouse.
The next seven greenhouses should have a capital cost of about $3.5 million.
They should produce $2.1 worth of extracts per annum.
This is inside the greenhouse. The initial planting it is not a full crop.
A greenhouse is made up of 11 naves or sections with 4 beds and 952 plants.
This works out to 41,888 plants per year to yield 800 kilograms of extract.
At present 5.5 hectares are in use of which 1.5 hectares is for growing.
Subsequent greenhouses dedicated to growing will yield more (see above).
The current plan is to commence building additional greenhouses soon.
In the short term, Southern Brazil and Mexico will be supplied from Colombia.
In time, Southern Brazil will be supplied from a new grow facility in Uruguay.
There will be increased demand to manufacture the Kuida® wellness products.
For the foreseeable future, KHRN will be able sell all of its production.
The strategy of using extracts in their own products will mean higher margins.
Here is some information on KHRN’s CBD infused wellness product brand Kuida®.
Farmatodo introduced the concept of the self-service drug store to Bogota with products in health, beauty, infant and personal care.
Farmatodo has an exclusive distribution agreement for the Kuida® product line.
It is likened to Walgreens in the United States or Shoppers Drug in Canada. It is one of the largest chains with 56 stores and over 1.2 million monthly transactions.
In addition to retail distribution, Khiron has signed an agreement with Farmalisto, Colombia’s leading digital drugstore, wholesale distribution with Distribuciones AXA S.A., one of Colombia’s largest national distributors in the pharmaceutical sector and KHRN operates its own e-commerce strategy with direct sales through www.kuidaskincare.com In addition, the Kuida line will be distributed in Peru and the United States.
Although I missed the visit to the ILANS clinic this time, I was there last visit and I estimate this operator generated around $12 million in revenue in 2018. There are plans to expand the clinics outside of Colombia starting this year so we can anticipate rapid growth moving forward.
Conclusion: I am not passing judgement on the market’s valuation of Pharmacielo but in my estimation, KHRN should trade on a par with their market cap of approximately $850 million at a minimum (over a 3-bagger from here) and, realistically, KHRN is worth even more (a grand slam from here). If you have managed to be a follower of mine and reader of Let’s Toke Business and somehow you don’t own KHRN yet, I urge you to get with the program. Although KHRN traded well last week and all shareholders should be more than happy, it did give back over 12% on Friday. So take advantage of those last Friday who said “Bye! Bye!” and “Buy! Buy!”