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AusCann Group Holdings Ltd: THE INVESTMENT CASE

AusCann Group's vertically integrated model provides point of difference in medicinal cannabis industry

Control of the supply chain offers operational advantages and financial benefits.
picture of cannabis plants
By developing a fully integrated pharmaceutical cannabinoid operation, the company optimises supply chain management

AusCann Group Holding Ltd (ASX:AC8) has adopted a strategy that should see it ideally positioned to take advantage of burgeoning global demand for medicinal cannabis.

While there has been an influx of ASX-listed companies targeting this market, there are few that are developing a vertically integrated model, as is the case with AusCann.

Supply chain control offers definite operational advantages, and traditionally, brings financial benefits to any research, manufacturing, production and distribution business.

By developing a fully integrated pharmaceutical cannabinoid company, taking charge of all aspects from cultivation through to manufacturing and distribution, Auscann has distinct advantages over many of its peers.

Disseminating the players from the stayers

Of course, the sector ran hot following the Australian Federal Government decision to allow manufactured cannabinoid medicines to be exported from Australia.

READ: Auscann Group’s shares surge following green light for medicinal cannabis export

AusCann was no exception with its shares more than doubling as the news broke.

While it was a ‘rising tide lifts all boats' situation early in the piece, investors have now identified the companies that are best positioned to take advantage of the regulatory change.

Much of the groundwork already achieved

AusCann was established with the aim of providing Australia and select international markets with high-quality, economical and clinically-validated cannabis-derived medicines.

The company has made good progress on a number of those fronts in a relatively short period of time.

Auscann is developing a vertically integrated model.

It has been a busy 12 months, as Auscann forged relationships with overseas partners and negotiated distribution agreements with major pharmaceutical groups in Australia.

Darby highlights supply chain progress

Auscann managing director Elaine Darby said: “We are very pleased with the operational momentum achieved in the first half and we expect this to continue for the remainder of the year.

“The completion of our supply chain has dovetailed nicely into progress we have made early in 2018.

“We have made a strong start to the second half of the financial year with the signing of a distribution agreement with Australian Pharmaceutical Industries (ASX:API).

This will facilitate the Australia-wide distribution of our products and we expect to update the market on further developments in relation to the supply of cannabinoid medicines.”

API agreement strengthens supply chain management

in January, AusCann entered into a heads of agreement with ASX-listed Australian Pharmaceutical Industries Limited.

READ:AusCann Group Holdings to access large Australian pharmaceutical network

Under the terms of the agreement, the two parties have formalised a wholesale partnership for the distribution of AusCann’s cannabinoid medicines throughout Australia.

The agreement will allow AusCann to distribute imported cannabinoid medicines from its Canadian partner, Canopy Growth Corporation, ahead of establishing its own local supply of medications.

API provides access to a large market

Not only does API offer brand power, but it also provides access to a large network of retail outlets with a broad geographic reach.

The company has stores in every state and territory of Australia, and its brands include Priceline Pharmacy and Soul Pattinson.

Such is the company’s reach that it only recently opened a new distribution centre in Western Australia, and in fiscal 2017 generated Australia wide revenues of about $3 billion.

The other key takeaway from the agreement is that it represents an endorsement of AusCann as a reliable supplier, an accolade that many of its peers are yet to earn.

Darby said: “Establishing a relationship with a leading wholesale distributor in the industry provides AusCann with an excellent partner for the distribution of our medications.

“The agreement is further evidence of the growing market and validity of what we’re doing in Australia.”

Tasmanian Alkaloids provides competitive advantage

AusCann is working closely with Tasmanian Alkaloids (TasAlk), in establishing the group’s growing and manufacturing operations.

The AusCann/TasAlk alliance is the only group in the industry with a Therapeutic Goods Administration (TGA) manufacturing licence.

Operating since 1976, TasAlk produces about 40% of the world’s opiate crop in Tasmania, a region that is globally revered for its 'clean green' reputation.

While it will still be recognised as a premium source of products such as meat, seafood and vegetables, Australia’s smallest state may emerge as a large producer of medicinal cannabis.

Importantly, TasAlk has established relationships with many of the world’s leading pharmaceutical groups.

Management meets regulatory demands

Acquisition of the necessary licences to complete its entire supply chain has been an important investment.

From an operational perspective, the company has also been working closely with government, lawyers, consultants and advisors to progress towards commercialisation.

AusCann was granted its manufacturing licence in August 2017, completing its supply chain.

The group is now one of the few Australian-based companies that can cultivate, manufacture, and supply Australian-produced cannabinoid medicines to patients.

Second cultivation licence secured

AusCann secured its second cultivation licence for its 50:50 joint venture, DayaCann with Fundacion Daya in Chile.

DayaCann is the only licensed producer in Chile, a country that has a supportive regulatory framework for the production of cannabinoid medicines.

The group’s production capabilities will be enhanced following the establishment of on-site manufacturing infrastructure in 2018.

DayaCann has a proven growing record with the first crop yielding over 400 kilograms of dried cannabis.

The second crop has been planted and is scheduled for harvest by mid-2018.

DayaCann intends to develop final dose form medicines for the treatment of pain in the Latin American market.

As at December 31, 2017, the net realisable carrying value of DayaCann’s assets was around $839,000.

Financially robust

AusCann invested $4.8 million in the first half on research and development, operating costs, joint venture expenses, consulting and legal fees.

The company ended the half with $12.3 million in cash and is well-funded to maintain its operational momentum.

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