Disclaimer: We aren’t paid by companies to write analysis on Trading For Millions ― it’s 100% independent. We also aren’t licensed to provide financial advice on the blog. Trading For Millions analyses companies we own for fun ― and it’s mostly biased. You should consider your own financial position and perform research on any company detailed on Trading For Millions.
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Impression Healthcare Limited (ASX:IHL) remains our main deep value play right now. It trades on the Australian Stock Exchange (ASX), with an enterprise valuation (market cap less cash plus debt) of roughly AU$11 million at 2.2 cents per share.
If you missed our founding background analysis on the company on 8 March, click here. It’s a must-read for new readers, covering everything you need to know about the business.
Today, we plan to update the story with our latest thoughts. Plenty has happened since our last post and, yet surprisingly, the share price has barely changed.
It’s crazy stuff.
You would think something’s wrong.
But, after considerable ‘DD’ (due diligence), this is not our view.
The latest announcement was extremely positive. A massive tick in the right direction. But before diving into our thoughts on the latest story, we need to get some compliance stuff out of the way. The short story: We don’t provide financial advice on the website (we could be selling when you are buying) and write this blog merely for fun. That said, we haven’t sold a single share since publishing our original background analysis on the company here.
Position update & standard disclaimer ― do your own research
To clear things up, this section has changed a little from our original post. Foundation readers know we have plenty of skin in the game, across multiple accounts. We wouldn’t write such a high volume of analysis on Impression Healthcare if this wasn’t the case. Here’s an initial position from a smaller account to show our confidence level (dated 24 March 2019):
One analyst originally bought close to $50,000 in the company ― and at around current prices. That might not seem like much of an investment. And, while we hold significantly more shares across other accounts, the number is held in a nominee account for privacy purposes. Moreover, disclosing what we own makes us different from everyone else on the internet.
The goal is to build a small amount of money into something much more substantial. Hopefully, the name of the blog ― Trading For Millions ― becomes a self-fulfilling prophecy over time. We put our money where our mouth is and don’t publish junk on the website.
We also don’t get paid by companies to write research ― everything is 100% independent on Trading For Millions. The incentive is to make good money buying the right stocks, get the story out, and hopefully teach you a thing or two about deep value investing.
Sure, some people will say we’re selling into every rally with our other accounts ― we own a lot of shares, after all. This could be true ― anything is possible. But the blog won’t grow on the back of poor stock write-ups. It will only grow by buying good companies with potential, where you can see the story play out in real time.
The goal is to hit multiple home runs at Trading For Millions. We believe Impression Healthcare will be the start of a tremendous track record in the months and years ahead.
Aside from possible conflicted intentions stated above, we’re not in the business of providing formal stock recommendations or financial advice on Trading For Millions. If you want to know when to buy or sell a company, you’ve come to the wrong place. We don’t have a financial licence and, as stated earlier, write this blog merely for fun.
That might change one day.
But not anytime soon.
Trading For Millions is a hobby blog.
You should perform your own research on each company profiled on Trading For Millions. Our analysis is skewed to the positive side, as we hold a large amount of shares in each company profiled on the website. We’re happy to invest a large amount of money in companies we believe could return five to 10 times our original investment (nominal amount shown in the table above).
The large target might sound ridiculous.
But this is deep value investing. The goal is to buy into turnaround stories before they happen, writing about them in real time. In this case, given our collective experience, we are happy to stake our original reputation on Impression Healthcare today. Trading For Millions will track the company’s journey and will disclose whether we sell any shares going forward.
Let’s analyse the company’s latest story…
Partnering with the rising star of the cannabis industry
Impression Healthcare announced that it’s starting phase one trials for four products soon. Keeping things simple for now (more details below), the trials will be funded mostly by Cannvalate Pty Ltd (Cannvalate) ― a leading private medical cannabis company with an advisory panel of nine highly experienced and reputable medical professionals.
Dr. Sud Agarwal, CEO and co-founder, is a specialist anaesthesiologist and the former medical director of AU$234 million cap Cann Group Limited (ASX:CAN). Dr. Sud Agarwal has an incredible track record for building companies.
Cannvalate is his latest project and was established in early 2018. The company hasn’t been around for very long and might sound like a start-up to some readers. But remember, Australia only regulated medicinal cannabis two years ago, and it took around 18 months for the industry to get up and running. All medicinal cannabis groups operating in Australia are jockeying for position.
And 2018 was a massive year for medicinal cannabis in Australia.
Regulatory bodies, once significantly understaffed, have become far more efficient by founding new divisions and training additional staff. Combined with a growing availability and awareness of medicinal cannabis products in Australia, the industry has become more appealing to the medical community and the widespread public.
That’s good news.
Thanks to the tremendous growth experienced over the past year, Cannvalate has quickly grown into one of Australia’s largest medicinal cannabis companies. In fact, according to Stockhead on 30 October last year, the private company grew so quickly it planned to list on the ASX earlier in the year for $65 million.
The listing seems a little delayed, mind you.
Perhaps, given the unparalleled growth story, the original $65 million valuation was too small. If correct, don’t be surprised if Cannvalate lists for a higher valuation this year. That would raise eyebrows in the investment community and should be favourable for Impression Healthcare’s valuation ― the market might finally wake up to the partnership’s potential and that of Impression’s other projects.
According to Impression Healthcare’s announcement on 21 March, the private company accounts for more than 30% of the medicinal cannabis prescriptions market in Australia. That’s a fair chunk of prescriptions and the number could grow quickly, considering the company’s business model and the infant stage of the medical cannabis prescriptions industry in Australia.
If you are wondering, Cannvalate developed a technology system which showcases its medicinal cannabis product suite to a network of 1,000-plus doctors and 600-plus pharmacies capable of prescribing and dispensing medicinal cannabis products. That’s why the private company has grown quickly ― there aren’t many competitors in the growing medicinal cannabis prescriptions space today.
Cannvalate could be worth closer to $100 million by the time it lists on the ASX this year ― especially if its growing network of doctors and pharmacies takes off in the months ahead. Now, regardless of whether this happens (we think it will), Cannvalate is currently one of the largest medical cannabis distribution arms in the country.
That fact is undisputable.
Cannvalate is clearly more than your average hopes-and-dreams ‘start-up’ company. Impression Healthcare has partnered with a fast-growing, reputable and (potentially) pending future monopoly of the medical cannabis prescriptions space.
That shouldn’t be understated.
Think about it.
If Cannvalate controls 30% of the medical cannabis prescriptions market in Australia (as per the latest announcement), and Impression Healthcare brings multiple products to its growing army of doctors and pharmacies in the months ahead, what do you think that could do for Impression Healthcare’s share price?
We will let your mind ponder.
The potential up for grabs is unfathomable.
Cannvalate already has an established distribution channel, where Impression Healthcare won’t need to find its own customer base. The biggest challenge for the company is bringing products to market for this reason. Fortunately, as analysed in our founding post (here) and demonstrated by the latest binding agreement, Impression Healthcare has a large pipeline of cannabinoid products it could bring to market.
Impression Healthcare looks on the verge of becoming one of Australia’s largest pot stocks in the months ahead, given its world-class partnerships and near-term product range. Assuming everything goes to plan, the company could be making money from medical cannabis within the next six months.
That’s much sooner than the market thinks…
The six-month commercial pathway for cannabinoid products
Cannvalate has established the Swinburne-Cannvalate Medicinal Cannabis Research Collaboration ― Australia’s first cannabis-only contract research organisation.
The research organisation produces commercially focused, cost-effective clinical trials on novel cannabinoid-based drugs. Put simply, it undertakes unproven cannabinoid-based drug trials on behalf of companies, such as Impression Healthcare. The trials are led by an elite research team of professors, 11 medical specialists and 12 postdocs, plus an army of associates.
Cannvalate has proposed, and will largely fund, four separate, randomised clinical trials to be completed on behalf of Impression Healthcare:
- Dronabinol for Obstructive Sleep Apnoea Syndrome;
- Synthetic CBD Oil for Improvement of Radiological signs of Traumatic Brain Injury and Neurocognitive Function in Australian Rules and Rugby Players following Concussion;
- Cannabidiol (CBD) Chewing Gum for Severe Periodontitis (Gum Disease); and
- CBD Oil for Temporomandibular Joint Dysfunction.
From the announcement dated 21 March:
The proposed trials represent in excess of $3M worth of expenditure with Impression’s cash contribution limited to $80,000 (plus GST) per trial, to be paid following notification of each trial being accepted for registration through the Australian New Zealand Clinical Trials Registry. Impression expects to receive the R&D rebate for its expenditure.
Successful outcomes from the completion of these trials will be the basis of justification for a commercialisation application with the Therapeutic Goods Administration (TGA) for the creation of specific products and product sales under the Special Access and Authorised Prescriber schemes.
Impression will then supply Cannvalate with these products for distribution. Under the agreement, intellectual property rights (IP) of developed IP vest in IHL.
Impression Healthcare will pay a maximum of AU$80,000 per trial. The Swinburne-Cannvalate Medicinal Cannabis Research Collaboration will pay around $3 million for the trials ― a number that could blow out to $4 million, assuming $1 million per phase one trial. Put simply, Impression Healthcare is paying basically nothing for unlimited potential upside (retains the IP).
Looking at the potential monetary loss, if every product fails phase one trials (the chances of this happening are statistically low), Impression Healthcare’s worst-case scenario is losing $320,000 based on the deal structure. In fact, if the R&D rebate returns 50% of the amount, the potential monetary downside could be halved.
That’s a pretty good deal and a major endorsement of Impression.
But, for whatever reason, the market hasn’t caught onto the risk-reward opportunity yet. The market thinks that Impression Healthcare is broke and the trials are all smoke and mirrors (worth nothing), which won’t amount to commercial sales anytime soon.
Focusing on the funding side, if the company needed to raise money, there’s a good chance it could have raised ― at least ― $500,000 on the back of the recent announcement from Cannvalate. But that didn’t happen, suggesting there’s no need to raise money. Instead, the company negotiated a back-end options deal with Cannvalate:
Look at the option expiry dates ― around one million dollars’ worth expire within one year. If the trials see positive results, there’s a good chance these will be exercised. That said, if the share price remains unchanged and the trials are showing positive results, Cannvalate might decide to acquire the company for cents on the dollar, rather than exercise the options.
We would hate to see a cheap takeover and hope the market wakes up soon! There’s significant share price growth potential up for grabs.
Regardless, expiring by the end of next year, Cannvalate has another $9.12 million worth of options, which it can convert up to 14 cents. That would give it a nice chunk of the company, leveraged to significant share price growth, if the share price takes off on the back of commercialisation this year.
The deal structure is a large vote of confidence for Impression Healthcare. Cannvalate is aligned with the interest of shareholders, and leveraged to the success of the company.
Most deals aren’t aligned with shareholders, mind you.
Shareholders get squeezed at nearly every opportunity by most companies.
For this reason, and many others, we don’t think there’s long until the market wakes up to the story. If the share price moves sharply higher soon, there’s a chance Impression Healthcare’s four cent options could be exercised early (expiring 30 September 2020). That should net more than $10 million for the company.
Now, don’t get your hopes up ― we’re merely speculating. It’s rare for options to be exercised early and most expire out of the money. But, assuming everything comes together and the share price is trading above 5 cents soon, as expected, we won’t be shocked if there’s an innovative funding deal to get the options across the line early.
But who knows…
There should be enough cash to last up to six months based on our numbers, as analysed in our founding post on 8 March. That’s enough time to see the share price move above 5 cents and why we suspect the next capital raising will be above that number, if everything comes together and the options aren’t exercised early.
Alternatively, assuming the trials pass with flying colours (the more the better), the company could negotiate a working capital facility to commercialise its products. It doesn’t necessarily have to go back to shareholders for more money, which the market expects. Stockhead reported on 21 March:
CEO Joel Latham says they want to get a product on the market this year.
He told Stockhead he expects a sleep apnoea trial for synthetic cannabis drug dronabinol to start within two months and a trialed product on the market within six months.
He said they hope the other three trials can be run in conjunction with each other and they’re currently in talks with their Canadian supplier, which they signed an MoU with in December last year, for cannabidiol (CBD) oil for one.
The best news is the trials could start within weeks and last for around 90 days (three months) ― a time period that includes evaluating the results. Plus, as explained in more detail below, the four trialed products ― and many more ― could be commercialised before 30 September.
To think, the share price hasn’t changed on this news!
The Swinburne-Cannvalate Medicinal Cannabis Research Collaboration is virtually paying for the four upcoming trials on behalf of Impression Healthcare, which offer tremendous revenue potential in a growing medical cannabis market ― inside and outside of Australia. The company retains all IP for the four proposed products, and can continue the trial process for a potential worldwide launch following successful phase two and three trials.
The nuts and bolts of it (assuming success): There’s near-term revenue potential from the four trialled products under the SAS & APN within six months. And uncapped revenue potential in the next couple of years, if the company advances to phase two or three trials. There’s also the potential of more product deals being done during this time.
What’s not to like about the story?
Remember, some of these trials could start within weeks based on the binding deal. That suggests plenty of news flow lies ahead ― especially considering the other non-binding agreements, which could be converted to binding deals by mid-year. RespireRx Pharmaceuticals Inc., in particular, offers huge share price upside.
To think, there’s more to the story…
A world-class opportunity