MGC Pharmaceuticals | 22 October 2018
Investment summary
Company description: Cannabis-based biopharma
MGC Pharmaceuticals is an Australia-listed company with operations in central and southern
Europe. Its key focus is supplying cannabis-based API and finished medicines in Australia and
Europe. It has already established licensed growing operations in the Czech Republic and
Slovenia, and has built a resin extraction plant in Slovenia, which has received full GMP
certification. The Maltese government recently gave the company approval to establish a full
medical cannabis cultivation and production facility in that country. The company intends to conduct
Phase II studies of is lead products, CannEpil and CogniCann, for the treatment of refractory
epilepsy and dementia, respectively. These trials represent the first step towards seeking approval
as registered pharmaceutical products in Europe and Australia. It has signed a binding term sheet
to sell its MGC Derma cosmetics business to Canadian cannabis investment company,
Cannaglobal, for up to C$15m (A$16m).
Valuation: A$140m or A$0.11 per share
We arrive at an initial valuation of A$140m or A$0.11 per share, based on a risk-adjusted net
present value (rNPV) analysis. The sales of cannabis flowers and resin from the cannabis-growing
operations contribute over 60% of the enterprise value, with the CannEpil and CogniCann
registered pharmaceuticals providing potential upside. Our valuation assumes that the company will
increase its cannabis-growing greenhouse space tenfold to 10,000m2 by 2022. We model A$6m of
additional funds being required in FY20 to support construction in Malta.
Sensitivities: Ongoing regulatory risk
MGC faces the typical risks of a development-stage biopharma company, including the
unpredictable outcome of trials, regulatory decisions, success of competitors, financing and
commercial risks, coupled with unique regulatory risks associated with its medicinal cannabis focus.
The investment case hinges on establishing expanded, GMP-certified, medicinal cannabis growing
and processing facilities in Malta. Obtaining regulatory approval for CannEpil in refractory epilepsy
and CogniCann in dementia will be crucial to its ability to drive additional sales growth in the
competitive medicinal cannabis space. GW Pharmaceuticals (GW) recently gained FDA approval in
two severe epilepsy syndromes for Epidiolex, which is a highly purified formulation of cannabidiol
(CBD), the main ingredient in CannEpil. It has also filed for approval in Europe. If CannEpil’s
efficacy is not comparable to Epidiolex, it may be difficult to capture a significant market share. GW
has an extensive patent estate, which affects the extraction, purification and use of CBD in
refractory epilepsies. While the company’s advice is that the GW patents will not impinge on its
freedom to operate, there is a risk that GW could pursue legal action if it believes that its patents
have been infringed. Finally, the company could potentially face competition from supplies of
synthetic CBD from API manufacturers in South Asia.
Financials: Sufficient cash support ongoing operations
MGC has been loss making since its re-listing in February 2016, reporting losses of A$6.2m in
FY16, A$8.5m in FY17 and A$9.0m in FY18. We forecast smaller PBT losses of A$5.7m and
A$6.6m in FY19 and FY20 respectively, as it commences commercial sales of API in Europe and of
CannEpil as an Investigational Medicine in Australia. We assume that expansion of cannabis-
growing and API extraction capacity to support 10,000m2 of greenhouse space, to be constructed
by 2021 and fully operational in 2022, will require capital expenditure of A$10m. The company
raised net proceeds of A$10.5m from stock issues in FY16, A$9.8m in FY17 and A$4.7m in FY18.
We estimate that additional funds of A$6m will be required in FY20, which we model as long-term