Why Khiron (TSXV: KHRN) should not be trading at a discount
I had the chance this week to spend time with senior management of Khiron Life Sciences (TSXV: KHRN). The company continues to consistently meet its milestones.
Here is a summary:
Management: regular readers understand that management is one of the key determinants in my “invest –don’t invest” decision making. In the past I have commented on key personnel I have met including Alvaro Torres (CEO), Juan Diego Alvarez (VP Regulations), Andres Galofre (VP Commercial), Darren Collins (CFO) and Mark Monaghan (Director). This group has been very busy with the about to close acquisition of ILANS, the addition of Vicente Fox (former President of Mexico and CEO of Coca Cola, Latin America, the Memorandum of Understanding with Fundacion Daya, the holder of Chile’s only medical cannabis license, a bought deal equity financing, among others. I had the opportunity to see these people again and meet for the first time: Chris Naprawa, newly appointed President who I interviewed recently (see Let’s Toke Business July 27, 2018), Matt Murphy, Vice President of Compliance who has extensive experience including 25 years as a Career Special Agent with the U.S. Drug Enforcement Agency and Dr. Jairo Espinoza Martinez, CEO of ILANS. I also received some exceptional feedback but have yet to meet Dr. Maria Fernanda Arboleda, Medical Director. This is a partial list of the management team but I cannot imagine a stronger managerial group in any of the common comparable companies.
Current operations: due to a change in government policy over the summer, all cannabis growers in Colombia are required to “register seeds” with the Department of Agriculture by year end. Although this has delayed the first crop by some three to four months, it has become a positive for Khiron because in addition to themselves, there will probably be only a half dozen growers that can meet this deadline. As a result, the focus should shift away from the one hundred or so licenses/licensees to the much smaller number that have seeds registered. In the meantime, KHRN is growing their mother plants and expect the first crop will be ready around March 2019.
Well under construction is a laboratory built to GMP standards as well as the extraction facilities. It is being built to at least double their initial requirements as there is ample land available to expand their growing capabilities. The cannabis oil will be extracted on site and taken out by helicopter. This is more efficient than transporting the flower out to an external facility. Since the oil represents only around 10% of the amount of cannabis, moving it by truck amounts to paying for the transportation of 90% waste material.
Cosmeceuticals: last week, the Kuida® line of CBD infused cosmetics was launched at one of the largest cosmetics trade fairs in Latin America held in Bogota, Colombia. When Khiron was able to secure regulatory approval from the Colombian Food and Drug Surveillance Institute to make, sell and export CBD this past summer, competitors were caught by surprise. At the heart of successfully working through the regulatory red tape was Juan Diego Alvarez, Vice President – Regulations. Khiron has developed a proprietary technology called CBDerm which allows the cosmetic to deliver three times more anti-oxidant than Vitamin E. The product launch came after careful investigation and research into the Latin American marketplace. The product design and marketing has been handled by a team headed by Andres Galofre, cofounder of Khiron and Chief Commercial Officer. Khiron announced channel partnerships or distribution agreements with Farmatodo (56 stores and 1.2 million monthly transactions) likened to Shoppers Drug Mart in Canada or Walgreens in the U.S. Online distribution will be handled by Farmalisto, Colombia’s leading digital drugstore with over 800,000 monthly visits in Colombia and Mexico and a wholesale agreement with Distribuciones AXA S.A., one of Colombia's largest national distributors in the pharmaceutical sector, with 14.000 product SKU's and more than 8,000 retail clients. For complete details see (here) The entire program, of course, is overseen by Alvaro Torres, Chief Executive Officer. Clearly we are in the early days but this is a start on the revenue track that is so important to management. Torres, Alvarez and Galofre were included as key members of the management team in my initial report on the company in Seeking Alpha. (see here)
Latin American Institute of Neurology and the Nervous System (ILANS): In June, Khiron reported an eight year, exclusive strategic alliance with ILANS, one of the most respected, fastest growing, and largest health service provider networks in Colombia and Latin America. ILANS represents an estimated 100,000 patients (120,000 this year), with the majority of these patients being located in Colombia. I met and listened to Dr. Jairo Espinoza Martinez, the head of ILANS and a neurosurgeon specializing in functional neurosurgery and pain management. Dr. Espinoza was president of the Latin American Society of Functional Neurology and Stereotaxis (SLANFE); President of Stereotaxis and Functional Surgery of FLANC; and is a board member of the World Society of Stereotactic and Functional Neurosurgery (WSSFN). Through ILANS, Khiron will be able to introduce CBD-based medicine into the Colombian system immediately. Read full press release (here) The agreement should close very shortly.
Conclusion: this was a very important management visit from my point of view. It strongly supported my conclusion that KHRN should not be trading at a discount to any of the independent public companies operating in the Colombia/Latin America space. It should be trading at a premium to all of them. However, there is a golden opportunity right now. At the present time, the warrants from an earlier pre-public financing are subject to forced exercise although management has not made the decision as yet. However, some warrant holders are obviously concerned because they may not have the financial resources to exercise unless they sell their shares. Certain key members of management that participated in the financing are in the process of exercising their warrants without selling shares. As a result, I see the current market price which is down 10.3% last week as one of those rare opportunities to buy the shares at a discount to a discount. These warrants should be cleaned up shortly and when they are KHRN’s treasury will be topped up further and I believe the stock price will move quickly toward Canaccord’s target price of $3.00 - $3.40 per share.