Sharing some thoughts on a company called Little Green Pharma (LGP) that I have been following for a few years and have recently started buying IRL and here on Strawman.

In a nutshell this is a deep value play.

LGP is a medicinal cannabis business. There was furious excitement for medicinal cannabis companies in 2021 when share prices peaked. Since then market sentiment has fallen and the share price for these companies is in the dog house. Most of these companies are loss making. We are now in a period of consolidation for this sector. When market sentiment is poor like it is in the cannabis sector the baby can get thrown out with the bathwater.

The industry is a strange mix of “health and wellness” companies, biotech’s rolling the dice on specific applications for humans and in some cases animals, the cannabidiol (CBD) sleep bros and traditional dry flower growers/producers for medicinal purposes. Majority are private companies in Australia.

According to data from Australia’s Therapeutic Goods Administration (TGA) medical cannabis approvals for new patients through an Authorized Prescriber have continued to grow in 2023. From January to June 2023, the aggregate of all new patients reported was 307,846 compared to 137,111 new patients from January to June 2022 and 30,662 from the same period in 2021.

The Australian Government Office of Drug Control lists 44 entities who are approved manufacturers and suppliers of medicinal cannabis products. Most of these are private companies. Of the handful of public companies I can't find any that are profitable. LGP have said they are cash flow positive in March excluding their R&D rebate. I think their business is at an inflection point and no one is looking.

In my opinion medicinal cannabis flower sales are growing because there is a transition from illicit sales to prescription sales. This is a reflection of the softening regulation occurring in all markets which makes the logistics of transport, storage, accounting and access of cannabis easier. As the public perception of cannabis becomes less negative it use is moving into new areas such as elderly people with terminal cancer.

LGP was the first company in Australia to grow medicinal cannabis for domestic use. Their main facility is in WA. In 2021 LGP acquired one of Europe’s largest medicinal cannabis cultivation and manufacturing facilities in Denmark for $21m from Canopy Growth. This was at a significant discount to the asset value.

Majority of sales are in Australia. LGP had record quarterly revenue of $7.3 million, up 34% on previous quarter. 

Flower sales were up 57% on the previous quarter and are growing strongly. LGP has strong branding and a good product. Australian sales were up 27% from the prior quarter predominately due to the introduction of CherryCo flower. See this review (https://www.youtube.com/watch?v=ZrtqEhzbIR4)

European sales are choppy. On 1 April 2024 cannabis was legalised in Germany with its removal from the Narcotics List and there are early signs of strong patient uptake. LGP’s Danish facility is two hours from the German border and in an excellent position to capitalise on likely improved medicinal cannabis access pathways. LGP was one of two companies supplying a French medicinal cannabis pilot which ended on 27 March 2024. They will have early access to this market. LGP also sell to UK and have just started selling to Poland and Switzerland.

Also the US Drug Enforcement Administration have just confirmed they will recommend reclassifying cannabis from Schedule I to Schedule III. The news has resulted in a re-rating of North American cannabis companies with the MJ ETF and the MSOS ETF both increasing by over 25%. This sector re-rating is expected to flow through to other cannabis companies including LGP given the historical mirroring of the North American markets. The proposed rescheduling would remove s280E taxes which tax cannabis operators at their gross margin level (versus net income) and generate potential momentum for other pro-cannabis legislation at the federal level and increased institutional interest in US cannabis stocks.

The US cannabis companies are the biggest. Most seem to be loss making.

Here is a snap shot of the largest by revenue Curaleaf Holdings (CURL):

Revenue $1.3b

Operating income $43m (noted almost half a billion dollars for Selling and Administration expenses!)

Net income $-280m!! (after tax, impairment of goodwill, interest on debt)

Haemorrhaging cash big time. A lot of consolidation is happening/ gonna happen.

LGP finished FY24 with a positive operating cashflow of $0.5 million. This included a $5m research and development rebate. The month of March being operating cashflow positive in its own right without the R&D rebate. 

Management and employees own about 20% of the company so strongly incentivised.

LGP’s net tangible assets are significantly above it’s enterprise value. This means that the value the market has given LGP as a business (about $40m) is less than the value of it’s assets (about $80m)! In other words the share price is deeply discounted. This company has been priced to fail but the market is wrong in my opinion.

Thesis: significantly undervalued company at a profitability inflection point driven by a transition of cannabis flower sales from illicit to prescription  

Risks:

The cannabis sector is still bloated and full of loss making companies many of which will fail

This is a commodity business to some degree with a rapidly shifting regulatory framework

• LGP has imported it first shipment of THC 16 "Billy Buttons" from it's recently acquired Danish facility in just over 2 months since acquisition.
• This product is now available for sale through all pharmacies.

To meet all the regulatory requirements to supply and import product within this timeframe is a significant achievement.  In my opinion this is evidence that management are executing in an efficent manner.

Two Important Announcements 6th and 7th September. 

#1 FIRST DANISH SHIPMENT TO AUSTRALIA, KEY APPOINTMENTS (6 Sept 2021) 

Little Green Pharma have announced its first successful shipment of cannabis flower medicines to Australia from its recently acquired Danish Facility. The shipment contained around 50kg of LGP Flower THC 16 – Billy Buttons medicine, which has a THC content of 16% and is available in the Australian market in 15g packs. This shipment was able to be successful in just over 2 months following the acquisition of the new facility. 

Little Green Pharma's Billy Buttons THC 16 is available for sale through all pharmacies in Australia, and the company anticipates a further two shipments of cannabis flower medicines from the same Danish facility to arrive by the end of October. The increase in demand for this type of product is evident as doctors becomes more comfortable with prescribing such a product, as well as its method of administration. The rapid onset of therapeutic benefit that cannabis flower can provide is why it is frequently prescribed to patients. 

This is a great step for the company and shows that it can meet demand, having the facilities to ramp up production where needed. They are experiencing some serious tailwinds as the advantages of medicinal cannabis becomes more widely accepted. The growth potential for this company as a first mover in Australia is significant and they have already established themselves with facilities and quality product, as well as strong alliances with the pharmaceutical regulatory bodies across the world. 

Highlights:  

• LGP has successfully imported its first shipment of ~50 kilograms of “Billy Buttons” THC 16 cannabis flower medicine from its recently-acquired Danish Facility into Australia – in just over 2 months since acquisition  

• Billy Buttons THC 16 has a tetrahydrocannabinol (THC) content of 16% and is available for sale in Australia in 15g packs  

• LGP expects to import two further flower shipments of cannabis flower medicines from its Danish facility by end October 2021  

• These shipments are expected to help meet the growing demand in Australian for cannabis flower medicines  

• LGP has also appointed Morten Snede, former Managing Director of LGP’s Danish Facility, as CFO and Tony Roberts, former Managing Director of Tasmanian Botanics, as its General Manager (EU).  

#2 LITTLE GREEN PHARMA EXPANDS INTO PSYCHEDELIC MEDICINES (7 Sept 2021) 

Little Green Pharma has announced today that it has been granted a Schedule 9 licence from the WA Department of Health to supply psilocybin. This licence will grant LGP the right to supply psilocybin to eligible licence holders under the Medicines and Poisons Act 2014 (WA). Psilocybin is currently the subject of extensive global research for the treatment of mental illness when used in conjunction with psychotherapy. It is being studied for its application in conditions like depression, PTSD and anxiety. 

When it comes to these Schedule 9 substances, being granted a licence is a major hurdle that needs to be cleared before you can even enter the field. LGP has quite an extensive history in producing and creating an effective supply chain for Schedule 9 drugs through its very successful cannabis operations. It will use its existing infrastructure in Western Australia to cultivate medicinal grade psilocybin mushrooms that can be used in research trials. 

The next steps that the company says they are working on are extending their Good Manufacturing Practices (GMP) licence to cover psilocybin, and planning to sponsor a ground-breaking Perth based clinical trial into psilocybin assisted psychotherapy. They have also had Dr Stephen Bright join their Clinical Advisory Board as its foundation member. In my opinion, they could not have a better person to advance their case for psilocybin as Dr Bright is a clinical psychologist and the co-founder and Vice President of PRISM (an entity dedicated to the advancement of psychedelic research). He is also a Senior Lecturer at Edith Cowan University and is one of Australia's most highly respected authorities on psychedelic medicine and its use in treating psychological disorders. 

LGP Managing Director Fleta Solomon said: “The field of psychedelics is a logical fit with our long term stated goals of solving real patient problems and transforming their lives. We have developed so much experience over the years through the cannabis industry and we genuinely believe we can now bring that to bear on the development of the psychedelics field in Australia. The existing investment in our West Australian cannabis cultivation and manufacturing facility means we can meaningfully enter the field with minimal incremental capital spend.” 

Highlights:  

• LGP granted Schedule 9 licence to supply psilocybin by WA Government Department of Health  

• Licence is a key element of LGP’s entry into the burgeoning international field of psychedelic drugs to treat mental illness  

• LGP has established a special purpose subsidiary to conduct LGP’s psychedelic business with Mr. Shaun Duffy employed as CEO  

• LGP progressing plans to manufacture psilocybin from its WA production facility  

• WA based ground-breaking psilocybin clinical trial planning well advanced  

• Dr Stephen Bright appointed as foundation member of Clinical Advisory Board 

Really looking forward to the coming 18 – 24 months for LGP. They are advancing areas of research that I spent a lot of time looking at in both Biomedical Science and Psychology, and I believe they are at the forefront of the next wave in psychiatric medicine and treatment.  

Full announcement from the 6th of September.

Full announcement from the 7th of September.

DISC: currently hold in RL and have a buy order in on SM. 

What is Little Green Pharma: 

Little Green Pharma is a vertically integrated medicinal cannabis company in Australia and Denmark. They were also the first Australian medicinal cannabis company to produce locally-grown medicines for patient use in Australia and around the world. Their cannabis is also EU-GMP recognised for overseas markets such as Germany, France and the UK. There are approximately 12,000 patients who use the pharmaceutical grade cannabis that LGP produces and the company has sold more than 60,000 units since August 2018. 

LGP has an ESG focus and looks to solve societal and environmental challenges through six key commitments: 

1. Environmental Sustainability 

2. Lifetime Well-being 

3. Ethical Capacity  

4. Economic Vitality 

5. Access and Inclusion 

6. Societal Enablement 

How does to company operate? 

Little Green Pharma captures value by operating across the entire medicinal cannabis supply chain. This includes cultivation & production, manufacturing, product innovation, and patient access & education.  

Cultivation and Production: 

• EU GACP cultivation facility in Denmark  

• AU GACP cultivation facility in Australia  

• Total biomass cultivation capacity of >23 tonnes p.a.  

• Total dried cannabis flower capacity of ~13.5 tonnes p.a.  

• Total cultivation footprint exceeding >23,500 m2 

Manufacturing: 

• EU-recognised GMP manufacturing facility in Denmark  

• AU GMP manufacturing facility in Australia  

• Additional exclusive 5-year agreement with third-party  

• GMP manufacturer based in Western Australia 

• Capability to expand product range into multiple delivery formats 

Product Innovation: 

• R&D pipeline includes three scientific validation studies and two regulatory approval studies  

• Partnership with Curtin University for exclusive use of ARISE delivery technology for medicinal cannabis formulation  

• Exploring alternative delivery systems and product registration pathways 

Patient Access and Education: 

• Sponsor of QUEST Initiative investigating the effect of medicinal cannabis treatment on quality of life  

• Partnership with HIF to support patient access and rebate cannabis medicines  

• Proprietary Medical Portal driving patient access and education for medical practitioners  

• Supporting prescriber community through LGP Engagement Team 

Sales and Distribution: 

• ~3 years track record of Australian sales  

• Strong brand selling seven LGP-branded medicines  

• Patients in the UK, Germany, France, New Zealand and Brazil currently accessing LGP medicines  

• Primary supplier to French government trial  

• Agreements with Polish and Danish distributors  

• European subsidiaries as platform to supply European market 

Company Ownership 

The board owns approximately 12% of the company and institutional investors own 36%. The board is made up of: 

• Mr Alistair Warren - Company Secretary 

• Dr Neale William Fong - Non-Executive Director 

• Mr Michael David Lynch-Bell - Non-Executive Chairman, Non-Executive Director 

• Mr Angus McDougall Caithness - Executive Director 

• Ms Fleta Jennifer Solomon - Managing Director 

Thoughts:

After putting a bit of time into researching this company over the last few weeks, I am impressed by what they have been able to achieve. I like that they are positioned in a market that is still quite new, with lots of room for growth. They are also increasing their value by having operations that expand across the medical cannabis industry from cultivation and production to sales distribution. They also have partnerships that allows them to look for ways to innovate and stay at the forefront of this industry, especially as an Australian company in the space. I think Australia is a perfect place for a company like this as we have the land to be able to set up big facilities and supply countries in various parts of the world. 

Looking forward to going through the FY21 results once they have been audited.

DISC: I currently own shares.

Purchase of Denmark cultivation/ production facility

- LGP recently purchased (21/6/21) a Denmark cultivation and production facility for A$21.4m

- This is capable of producing 12 tonnes pa of dried flower

- Its production facility in West Australia is hitting output capacity limits as a result of orders which has an output of 1.5 tonnes pa of dried flower

- This increases output from 1.5 -> 23 tonnes pa

- New facility in EU avoids many EU export/import barriers allowing early mover advantage in EU markets

- Efficiency gains through economies of scale

- Maintains LGP's focus on medicinal cannabis

Headwinds

- The Faculty of Pain Medicine of the Australian and New Zealand College of Anaesthetists (ANZCA) has recomended to its pain specialists and anaesthetists to, "Do not prescribe currently available cannabinoid products to treat chronic non-cancer pain unless part of a registered clinical trial."

- The Dean of the Faculty of Pain Medicine, Associate Professor Mick Vagg, a specialist pain medicine physician, said while managing chronic, non-cancer pain is complex, there has as yet been no evidence from clinical trials to support the use of medicinal cannabis as a treatment.

- A study called the QUEST (Quality of Life Evaluation Study) is being run by Sydney Uni.  It has recruited 805 patients and includes Professor Stephan Schug as an advisor who is a recently retired Chair and Director of Anaesthesia and Pain at Royal Hospital.

- I am an anaesthetist.  There is currently a very low prescriber rate for cannabis products amoung our profession.

- The outcome of these higher quality studies are important in determining whether these products will be incorporated into the armentarium of doctors 

DEMECAN makes a firm purchase order for 21,300 units (320kg) of high THC cannabis flower medicine.  For delivery during the quarter ended 31 December 2021.  Annualised run-rate based on DEMECAN CYQ4 purchase order would be ~1,300kgs per annum, exceeding original target of 1,000kgs per annum, equivalent to ~$10.2m in revenue.

LGP is continuing to execute.

1 Dec 20: LGP has truly broken out of its trading range and going up parabolically.  There was some resistance at the intra day high and historical high of $0.68.  

Difficult to assess fundamentally the valuation of this company as it has a very short listing history and cannabis oil that they sell has been ramping up so strongly.

Technically though, hang on for the ride.

20 Nov 20: There was a spike above 40c which was the top of the trading range but then it was quickly beaten down back into the trading range and went down to 35c on 18th Nov.  Then there was a good annoucement of their first order shipped to Germany which saw the share price rise strongly over the last 2 days above the trading range.  If it can hold over 40c, it could signal a new up phase.

Fundamentally the company is continuing to increase the sale of their cannabis oil and their period of high capital expenditure seems behind them.  With continued sales growth and a founder with a significant sake in the company, the bodes well.

It is still below the IPO price of $0.45.

21 Oct 20: I was trying to get a cheaper entry into LGP at around $0.30, the price prior to the breakout.  I gave up as there was no sign of it retracting and bought in.  No wonder as TIGA was building a substantial position during that time : (

2 April 2020

COVID-19 Report extract

Financial position

The Company does not anticipate having to raise additional funds in the foreseeable future as no further capex is required on the cultivation facility and significant pre-ordering of consumables associated with manufacturing was largely completed during the first quarter of CY2020.

To ensure LGP remains in a strong financial position given the current economic environment, LGP has been implementing measures to minimise its cost base, including a reduction in discretionary spend, deferral of non-essential research and development, and renegotiation of existing contracts.

In addition, to the extent permitted by the ASX Listing Rules the Board and key executives have agreed to take 20% of their salaries in shares (escrowed for 12 months).

26 March 2020

COMMISSIONING OF CULTIVATION FACILITY EXPANSION COMPLETE

Highlights:

•Little Green Pharma completes commissioning of cultivation facility expansion on time and on budget

•Expanded cultivation facility will allow production of up to 110,000 bottles of medicinal cannabis oil per annum, approximately 10 times current capacity

•First planting targeted for Q2CY2020, subject to Office of Drug Control permitting

•Expansion of LGP’s cultivation capacity will assist in fulfilling sales agreements for the German and UK markets