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Date : 22/03/2021

Creso Pharma

ASX :

CPH

Market Cap : $215.20 Million

Buy

52 Week Range : $0.025 - $0.470

Share Price : $0.22

Favourable global regulatory policy, the appointment of world-renowned Cannabis expert Bruce Linton as senior advisor, and improved revenues across the group. We issue a "Buy" recommendation for long-term investors.

Company Analysis

Creso Pharma Ltd. (ASX: CPH) is an Australia-based company engaged in developing cannabis and hemp-derived therapeutic-grade Nutraceuticals and Medical Cannabis products with a range of applications in both human and animal health. The Company’s principal activity is to develop, register and commercialise pharmaceutical-grade cannabis and hemp-based nutraceutical products and treatments. The Company’s segments include Hemp-Industries s.r.o. (Hemp-Industries), which includes hemp-growing operations, outsourced cannabidiol (CBD) extraction and CBD product sales activities; Creso Pharma Switzerland GmbH (Switzerland), which includes the development and commercialization of its therapeutic products, and Creso Pharma Limited (Creso), which includes the Company’s corporate administration. The Company primarily offers human health and animal health products, and hemp-derived extracts, oils, and proteins.

Creso brings pharmaceutical expertise and methodological rigour to the cannabis world and strives for the highest quality in its products. It develops cannabis and hemp-derived therapeutic, nutraceutical, and lifestyle products with a wide patient and consumer reach for human and animal health. Creso uses GMP development and manufacturing standards for its products as a reference for quality excellence with initial product registrations in Switzerland. Creso has worldwide rights for a few unique and proprietary innovative delivery technologies which enhance the bioavailability and absorption of cannabinoids. Creso is developing products in four key areas:

Source: Creso Pharma, Company’s Data

Creso acquires Halucenex to expand its market reach and develop its commercialisation opportunities

Creso strives to expand its pharmaceutical business and the company has achieved a major milestone recently. The firm is evolving toward a broader-based pharmaceutical group by the acquisition of Halucenex, which Creso will now sell its trusted cannabis products and progress the commercialisation of a range of psychedelic-assisted psychotherapy treatments. Creso’s entry into this high growth potential niche market opens the door for the company with a diversified and lucrative vertical and an additional near-term revenue stream expected to exponentially grow by the end of FY21. The global metal health market is expected to gain traction at a CAGR of +5% from FY20 to FY27 and to reach a value of around US$ 242 billion by 2027. Mental illness is becoming prevalent in modern society, while global responses to COVID-19 has resulted in increased isolation of already vulnerable people. Mental health and PTSD are becoming detrimental today and this has been particularly the case since the global coronavirus outbreak. The currently available treatments are shown to have limited effectiveness and many side effects. Psychedelic-assisted therapy is a new alternative treatment route, which has considerable promise and Creso is committed to lead the sector.

The acquisition of Halucenex will strengthen the company’s presence in Canada, as well as provide a few opportunities in drug development which will lead Creso to expand new market entries and commercialisation opportunities. The recent acquisition provides Creso with an entry into the emerging global market for psychedelic medicine which is estimated to be worth up to US$ 100 billion. Creso’s acquisition marks the first fully-owned psychedelic medicines company listed on the ASX.

Creso is ready to lead the global medical cannabis market which is on the way to be widely accepted

The global cannabis sector continues to perform strongly looking forward to FY21, largely driven by a global regulatory reform in several key jurisdictions and a general progressive shift in sentiment, opening several key opportunities for Creso. The positive shift in sentiment was palpable in the U.S. after the passing of the Marijuana Opportunity and Expungement (“MORE”) Act in the US House of Representatives recently in FY20. The MORE Act aims to remove cannabis from the US Controlled Substances Act and essentially decriminalise the use of cannabis. Furthermore, in Europe, the Court of Justice for the European Union ruled that member states must not prohibit the marketing of lawfully produced cannabidiol (CBD), that CBD is not a narcotic, and that it can be sold in the European Union. Also, in Australia, the Therapeutic Goods Administration made a ruling to down-schedule low-dose CBD products from Schedule 4 which are for a prescription medicine to Schedule 3 which are “Pharmacist Only Medicine”. The decision will allow low-dose CBD products to be sold over the counter, without the need for a prescription.

The global regulatory shift that happened recently undeniably provides Creso with a huge growth opportunity ahead. While all the regulatory changes have made the operating landscape more favourable for Creso, the company has demonstrated its ability to eliminate operational bottlenecks and develop sustainable business such as the wholly-owned Canadian subsidiary, Mernova Medicinal Inc. Mernova has considerably expanded during FY20 and achieved a few milestones that have created a robust and sustainable recurring revenue model for the group and we believe it is likely to continue looking forward FY21 and beyond.

Company Updates


Source: Tradingview.com

Human Health CBD business segment

During FY20, Creso advanced both its cannaDOL® CBD topical gels, as well as cannaQIX® products. The cannaQIX® hemp oil-derived food supplement is currently available in various European countries, Australia, Brazil, and South Africa. Subject to further regulatory approvals, Creso is exploring opportunities in some emerging markets. These prospective new market entries are expected to provide revenue-generating opportunities, with sales to add to the Company’s growing revenue streams looking forward to FY21 and beyond.

During FY20, Creso successfully developed and tested numerous new products such as its first oil-free hemp plant-based gum arabicum lozenges. The product formulation contains various compounds, which are already approved for use in consumer products, providing the company with a clear path to market as a food supplement product.

Furthering Creso’s international expansion initiatives, the company secured a commercial agreement in Q3-2020 with DHS Business Portugal to introduce its products into the Spanish and Portuguese market. Creso is planning to sell its products through sport-focused retail outlets and pharmacies, which offer many points of sale throughout the two countries. In Australia, the Company entered into a Heads of Agreement with Martin & Pleasance Pty Ltd, a leading natural, sustainable health and lifestyle brand supplier, intending to capitalise on opportunities in the Australian and New Zealand markets. The recent agreement with Martin & Pleasance grants Creso to leverage the extensive network of 4,000+ pharmacies across Australia and New Zealand.

Mernova Medicinal Inc. reinforces Creso’s North American expansion initiatives

During FY20, Creso’s wholly-owned subsidiary Mernova Medicinal Inc. delivered several important milestones and underpinned the company’s North American expansion initiatives. Mernova received its sales licence from Health Canada, which facilitates the sale of Mernova’s products into the high margin and emerging Canadian cannabis retail market. Throughout CY20, Mernova continued to scale up production towards nominal capacity. Scale-up initiatives included the implementation of multiple proprietary processes to enhance product quality, allowing the company to meet the growing demand for small-batch, artisanal cannabis products in Canada. During FY20, Mernova has achieved another major milestone and launched its retail recreational cannabis products under the Ritual Green brand. Mernova secured a few purchase orders for Ritual Green products allowing Creso to broaden its footprint into key expansion regions. Furthermore, Mernova secured purchase orders from the Nova Scotia Liquor Corporation, the Yukon Liquor Corporation, and Cannabis NB, which has allowed for the retail sale of Mernova’s products in Nova Scotia, the Yukon, and New Brunswick. Creso through its subsidiary Mernova made significant progress with the Ontario Cannabis Store. The Company secured a notice to purchase from the Province of Ontario, which marked the company’s imminent entry into Canada’s largest recreational market.

During FY20, Mernova contributed A$ 1,38 million in revenue to the company. Revenue was generated through purchase orders for Mernova’s Ritual Green suite of cannabis strains to the Nova Scotia Liquor Corporation, the Truro Cannabis Company, the Yukon Liquor Corporation, and Cannabis NB. Additional purchase orders from Israeli-based company Univo Pharmaceuticals Ltd also added to the revenue. Creso anticipates ongoing growth to materialise from Mernova’s operations through new purchase orders, province entries, new product roll-out, and regulatory reform that continues across North America.

Creso secured regulatory approval from the Ministry of Agriculture and Animal feed in Uruguay

Creso secured three purchase orders totalling A$ 414,000 for its anibidiol® products, which were shipped to commercial partners in Europe during the second half of CY20. These orders were a significant achievement for the Company and highlighted Creso’s ability to navigate stringent regulatory requirements for marketing hemp products across Europe, as well as the company’s ability to progress growth initiatives in difficult marketing conditions. The purchase orders secured with European commercial partners took the total order value generated through the animal health business segment to approximately A$ 975,000 during CY20, which defines the strong demand the Company is witnessing for its industry-leading products, with additional growth expected to occur during FY21 and beyond. During FY20, Creso secured regulatory approval from the Ministry of Agriculture and Animal feed in Uruguay through a commercial partnership with Adler Laboratories for the product anibidiol® making it the first CBD hemp-based complementary feed approved for pets in Latin America. The development broadens Creso’s international footprint and unlocks a major market opportunity.

FY21 Outlook, Creso Group toward Pharma diversification and vertical integration

Source: Creso Pharma, Company’s Data.

The company has recently announced its intention to transform itself and evolve from a medical cannabis business to an integrated natural medicines provider with the acquisition of Halucenex. We believe this calculated move from Creso will open the door to a high potential growth ahead of FY21 and beyond. The acquisition provides the group with an early mover advantage into the emerging global psychedelic medicines market, estimated to be worth up to US$100 billion. Furthermore, we think the combination of Creso and Halucenex resources would benefit from several significant synergies, which are expected to eventually fast-track the company to early revenues. These include an established global distribution network with partners in the pharmaceutical space and a cannabis cultivation facility that can readily be adapted for the cultivation of natural psychedelic psilocybin mushrooms.

Industry Analysis

Medical cannabis industry sector to reach 30K Million by 2026 at +13% CAGR

The medical cannabis sector is segmented into two segments, Tetrahydrocannabinol (THC) and Cannabidiol (CBD) for the treatment of pain, arthritis, and neurological disease. The actual valuation of the global medical cannabis market is estimated at 12,800 million in 2020 and is expected to triple by the end of 2026 according to Valuates Reports (2020). The main growth driver is the general acceptance and legalisation of medical marijuana and an increase in the demand for cannabis in medical applications. FY20 saw a huge step forward for the sector with cannabis’ shift in sentiment in several jurisdictions, particularly with the passing of the Marijuana Opportunity and Expungement (“MORE”) Act in the US House of Representatives. Medical reports suggest symptomatic benefits for a growing number of patients from the application of medical cannabis-derived from cannabinoids THC and CBD over the last 10-year. Medical cannabis market share in Europe is projected to become the largest with the legalisation of medicinal use in Germany in 2017 that created a domino effect over in the Eurozone which is beneficial for Creso that seeks for a global reach and distribution of its products.

Furthermore, with Creso’s latest move to enter the psychedelic medicine market, the company is now exposed as well to the global behavioural health market which is expected to garner growth at a CAGR of +5% from FY20 to FY27 and to reach a value of around US$ 242 billion by FY27.

Investment Thesis

FY20 Financial Summary

For FY20, Creso revenues decreased by 34% to A$ 2.4 million. Net loss increased from A$ 15.1 million to A$ 30.8 million. Higher net loss reflects FV Adjustments on Biological Assets increase from A$ 803K (income) to A$ 3.1 million (expense), Loan settlement fee increase from A$ 441K to A$ 3.9 million (expense), and interest expense increase from A$ 856K to A$ 3.2 million (expense).

During FY20, Creso laid a strong foundation for growth and actively implemented its strategy to develop and commercialise cannabis and hemp products worldwide. The Company’s product distribution in the five continents continued to grow, allowing Creso to further build its position as an international cannabis company with a nascent global footprint.

COVID-19 has disrupted the operations of businesses around the world, and it has been no exception for Creso. The company’s results for FY20 were unavoidably affected by the global pandemic. Total revenues for the group declined by 33% or A$ 1,18 million compared to the previous period. While the company was able to maintain its operations in Switzerland during CY20, revenues from nutraceutical products fell by A$ 1,5 million due to the deferral of re-orders, although conditions appeared to improve in the latter part of CY20, with some significant orders being received for delivery ahead of FY21.

Mernova, in its first full year of production, increased its revenues by A$ 354,240 as it established itself as an emerging producer of superior artisanal cannabis products, with the FY21 outlook for revenues expected to grow further. Q1-2021 commenced with record sales and purchase orders which a record year in revenue is expected for FY21. However, total expenses increased substantially during FY20, due to non-cash expenses attributable to the settlement in full of all convertible notes, the loss on disposal of the company’s 74% share in the Israeli joint venture, the impairment of its operations in Canada and Switzerland and the issue of equity instruments instead of cash in the settlement of operating expenses.

Throughout FY20, Creso cleaned up its balance sheet with the repayment of all convertible notes and reduction of some debt and is now well-positioned for FY21 to capitalise on solid revenue growth. The strong share price performance in H2FY20 has allowed Creso to raise funds via “in the money” options and has helped with cash flow requirements substantially. Despite the challenging economic conditions induced by COVID-19, FY20 was a constructive year for Creso with favourable global regulatory policy, the appointment of world renowned Cannabis expert Bruce Linton as senior advisor and improved revenues across the group. The Company ended FY20 in a stronger financial position, having more than doubled its cash reserves compared to FY19.

Technical Analysis

Trend

CPH since the last 200-day period has exhibited a very bullish price action with an upside of ~630%. However, the long-term trend remains bearish since CPH attempted to reach the A$ 2 per share by reaching its all-time high at A$ 1.65 in November 2017 before dramatically falling to its all-time-low 3 years later in November 2020. CPH is struggling to remain above the A$ 50 cents per share throughout the last 3-year period and remains mostly consolidated in a range between A$ 47 cents and A$ 12 cents level. However, since the stock found its support in the area of A$ 2.5 cents per share, CPH rallied during Q4-2020 to near its multi-year key level of A$ 50 cents before consolidating lower at 61.8% Fibonacci retracement from the all-time-low – December 2021 peak swing high. Since the beginning of CY21, CPH remains trapped in a tight range between 22 and 25 cents per share.

Key price levels

The key level to watch carefully is the A$ 50 cents per share as this level acts as a multi-year and psychological resistance. A break above this level will trigger an upside potential to the next resistance at A$ 64.5 cents and eventually push the price back to the A$ 1 per share. On a negative note, a break down of the A$ 12.5 cents per share may prompt a sell-off pushing the price lower back toward the base at A$ 2.5 cents per share.

Volume and momentum

Volume decreases since the last 200-day with the 20-day volume average down by -46%. The price action remains neutral in the near-term, evolving in a range between A$ 12 cents and 47 cents per share.

Trade consideration

  • Market participants might be interested to enter at key support level: A$ 22 cents.
  • Consider reducing exposure below A$ 10 cents
  • It is recommended exiting the trade below A$ 5 cents

Recommendation

FY20 was a constructive year for Creso with favourable global regulatory policy, the appointment of world-renowned Cannabis expert Bruce Linton as senior advisor and improved revenues across the group. The Company ended FY20 in a stronger financial position, having more than doubled its cash reserves compared to FY19. The medical cannabis industry sector is expected to reach 30K Million by 2026 at +13% CAGR and we believe Creso is well-positioned to capitalise on this tremendous growth market. With the recent acquisition of Halucenex, Creso captured an early mover advantage into the emerging global psychedelic medicines market, estimated to be worth up to US$ 100 billion. Furthermore, we think the combination of Creso and Halucenex resources would benefit from several significant synergies, which are expected to eventually fast-track the company to early revenues. Creso has proven during FY20 its capabilities to become a leader in its space. We recommend long-term investors to “Buy”.

 

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