A new investment from a pharma company bodes well for cannabis company Avicanna (Avicanna Stock Quote, Chart, News TSX:AVCN), says Raymond James analyst Rahul Sarugaser, who issued a client update on the company on Tuesday.
Sarugaser has revised his rating downward from “Outperform 2” to “Market Perform 3” and dropped his target price from $3.00 to $2.50, citing a longer lead-up to the company’s revenue ramp.
Avicanna has two majority-owned subsidiaries with licensed facilities in Santa Marta, Colombia, for the cultivation and processing of cannabis along with a research and development business out of Toronto working on plant-derived cannabinoid pharmaceuticals, therapeutics, cosmetics and extracts.
The company announced on Tuesday the close of a non-brokered private placement for $2.56 million at $0.80 per share with a group of strategic investors which included Tasly Pharmaceuticals, a US$3.1-billion market cap Chinese pharmaceutical, biologics and nutraceutical company.
“Coupled with our reduced expenditure and re-focused business model, the money raised gives us the runway to execute our business plan,” said Aras Azadian, CEO of Avicanna, in a press release. “We are excited to announce the strategic investment from Tasly, as we believe this investment from the global pharmaceutical company is validation of Avicanna's pharmaceutical approach and a strategic first step in developing a working relationship which we anticipate will involve their participation in our pharmaceutical pipeline.”
Commenting on the financing, Sarugaser said not only does it remove for the time being a financing overhang but with Tasly as a partner, it “may be the precursor to a larger co-development deal that is yet to come.”
Avicenna also reported its fourth quarter fiscal 2019 earnings last week, reporting minimal sales of $122,000, as the company essentially remains in a pre-revenue stage, with an EBITDA loss of $7.6 million, which was primarily driven by SG&A of $7.1 million. (All figures in Canadian dollars except where noted otherwise.)
On the quarter, Sarugaser noted that management expected a 30-per-cent reduction in SG&A in 2020.
“While we do not rely on a comparables analysis for our valuation, we do employ it as a sanity check. Due to the modest estimated revenue in FY20, AVCN's 2020 EV/Revenue multiple is 6.4x as compared to peers, Pharmacielo and Khiron Life Sciences, which are trading at 2.0x and 1.3x, respectively,” Sarugaser wrote.
“While the potential for upside remains in the form of chunky revenues from Aureus API sales, first sales of AVCN's medical cannabis products through Shoppers, the development of AVCN's clinical programs, and the possible evolution of a commercial relationship with Tasly, we, at present, have limited visibility on these processes, and so we revise our recommendation to Market Perform,” he wrote.
On the Shoppers Drug supply agreement, which AVCN signed in January, Sarugaser said it gains the company access to the customer base of Canada’s largest pharmacy chain and puts it shoulder-to-shoulder with other R&D and data-driven cannabinoid product developers.
Sarugaser’s revised estimates are calling for 2020 revenue and EBITDA of $7 million and negative $11 million, respectively, while his $2.50 target reflected at press time a 12-month return of 55 per cent.