Strong Q3 sales

Abacus Health Products 26 November 2019 Update
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Abacus Health Products

Strong Q3 sales

Financial update

Pharma & biotech

26 November 2019

Price

C$5.27

Market cap

C$114m

US$0.75/C$

Net cash (US$m) at 30 September 2019

28.2

Shares in issue

21.6m

Free float

60.4%

Code

ABCS

Primary exchange

CSE

Secondary exchange

OTCQX: ABAHF

Share price performance

%

1m

3m

12m

Abs

(11.4)

(18.6)

N/A

Rel (local)

(14.7)

(23.3)

N/A

52-week high/low

C$17.80

C$4.23

Business description

Abacus Health Products is a consumer healthcare company that is combining cannabidiol with active ingredients that have known efficacy to provide relief from those suffering from pain, itch and acne, among other indications. It is marketing two separate product lines, CBD CLINIC, which is sold to registered health practitioners, and CBDMEDIC, which is marketed directly to consumers, mainly through retail pharmacies.

Next events

Launch of ingestible CBD line

Q220

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

Abacus Health Products is a research client of Edison Investment Research Limited

Abacus reported revenue of US$4.1m in Q319, up 97.4% year-on-year. Through the first nine months sales are up 99.3%. For the quarter, CBD CLINIC sales were US$2.9m, up 42.7% compared to Q318, and CBDMEDIC sales were US$1.2m, up 71.9% compared to Q219. We expect this high rate of growth for CBDMEDIC to continue as the brand can now be found in 4,600 retail locations (up from 3,000 last quarter) and will be in 7,000 as of January of 2020 thanks to the upcoming deployment in an additional major national retail pharmacy chain.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(US$)

DPS
(US$)

P/E
(x)

Yield
(%)

12/17

2.6

0.5

N/A

N/A

N/A

N/A

12/18

8.5

0.6

0.04

0.0

N/A

N/A

12/19e

16.1

(17.1)

(0.87)

0.0

N/A

N/A

12/20e

39.7

(6.8)

(0.30)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

CBDMEDIC reach continues to grow

With the signing of another national retail chain with around 10,000 locations, CBDMEDIC’s retail presence is set to grow further. In January 2020, CBDMEDIC will be in around 7,000 retail locations in 31 states. The nationwide footprint of these retail pharmacy chains totals 34,500 stores, so the number of locations that offer CBDMEDIC should continue to climb as it is more fully deployed.

CBD CLINIC provides a strong foundation

CBD CLINIC, which is marketed to healthcare practitioners, continues to grow strongly, up 42.7% for the quarter and 60.9% through the first nine months of the year. As with CBDMEDIC, CBD CLINIC is increasing its penetration and is now sold in over 14,500 health-related practitioner offices, up from 12,000 the previous quarter. Also, the recent distribution agreement with WBC Group should help penetration within the chiropractic community.

Ingestible CBD line launch set for Q220

Abacus plans to launch its ingestible CBD health and wellness line in Q220, which will help the company expand into the larger non-topical market. The company will initially launch online and in limited retail locations with a full launch to come after the FDA clarifies its view of CBD in food and supplements in the coming months, though exact timing of the FDA guidance is unknown.

Valuation: C$325m or C$15.07 per basic share

We are increasing our valuation of Abacus to C$325m or C$15.07 per basic share (C$12.73 per diluted share), from C$308m or C$14.26 per basic share (C$12.52 per diluted share), as we have increased our sales estimates for CBD CLINIC, which continues to grow very strongly, and also rolled forward our DCF by a quarter. This increase was partially offset by lower net cash and lower ingestible CBD line estimates for 2020 due to the limited initial launch.

Product sales continue to grow

Abacus reported a very strong third quarter as sales increased by 97.4% compared to Q318 to US$4.1m thanks to expanding footprints for both CBD CLINIC and CBDMEDIC. CBD CLINIC is increasing its penetration and is now sold in over 14,500 health-related practitioner offices, up from 12,000 the previous quarter. Also, the recent distribution agreement with WBC Group should help penetration within the chiropractic community as its wholly owned subsidiary, MeyerDC, is the official distributor of the American Chiropractic Association. According to the Bureau of Labor Statistics, there are over 50,000 chiropractors in the United States. In total, we calculate over 500,000 licensed chiropractors, acupuncturists, massage therapists and physical therapists practising in the United States so there is plenty of room for the brand to grow in these target markets past the current 14,500. Additionally, the newly designed product design (set to launch in 2020) may help increase the attractiveness of the product to customers.

Exhibit 1: New CBD CLINIC product design

Source: Abacus Health Products

With the signing of another national retail chain with around 10,000 locations, CBDMEDIC can now be found in the top three pharmacy chains (which based on store counts are CVS, Walgreen’s and Rite-Aid according to IQVIA). In January 2020, CBDMEDIC will be in around 7,000 retail locations in 31 states up from 3,000 locations in 24 states at the end of Q219. The nationwide footprint of these chains totals 34,500 stores, so the number of locations that offer CBDMEDIC should continue to climb as it is more fully deployed, though the pace of this deployment will vary by chain and state.

With regards to the ingestible line, the company plans a limited launch in Q220 with an initial focus of online sales with limited retail location penetration. A full launch will depend upon FDA clarification on its view of CBD in food and supplements, which may include dose limitations as many retailers will likely want to wait until the guidance is released prior to putting CBD containing supplements on shelves. Guidance is expected in the coming months though the exact timing is unknown.

Valuation

We are increasing our valuation of Abacus to C$325m or C$15.07 per basic share (C$12.73 per diluted share) from C$308m or C$14.26 per basic share (C$12.52 per diluted share) as we have increased our estimates for CBD CLINIC, which continues to grow very strongly, and also rolled forward our DCF by a quarter. This increase was partially offset by lower net cash and lower ingestible CBD line estimates for 2020 due to the limited initial launch.

Exhibit 2: Valuation based on DCF

Discounted cash flow (US$000)

539,006

Probability of commercial success

40%

Risk-adjusted discounted cash flow (US$000)

215,602

Net cash (US$000) at 30 September 2019

28,240

Valuation (US$000)

243,842

C$/US$ exchange rate

0.75

Valuation (C$000)

325,123

Basic shares (m)

21.6

Value per basic share (C$)

15.07

Options (m)

4.0

Fully diluted shares (m)

25.6

Value per diluted share (C$)

12.73

Source: Edison Investment Research

Financials

We have increased our sales estimates for 2019 to US$16.1m from US$15.9m and for 2020 to US$39.7m from US$39.3m. Our 2019 forecast was increased due to a higher than expected sales run rate in the quarter. In the longer term we have increased our expectations for CBD CLINIC sales. For 2020, we have lowered our estimates for the ingestible CBD line as it appears the initial launch will be more limited than we had expected; however, we have left longer-term forecasts the same as we have not changed our view on the market potential.

We have also increased our SG&A estimates for 2019 to US$25.5m from US$21.3m due to higher than expected marketing and advertising spending. This higher spending is due to targeted television and radio advertising to promote CBDMEDIC as well as expenses associated with the partnership with Rob Gronkowski and expenses related to the new agreements with Gillette Stadium and Patriot Place. For 2020, we are increasing forecast SG&A spending to US$30.6m from US$30.2m. Our operating loss estimate is now US$16.6m for 2019, up from US$12.6m previously while our 2020 estimate has changed slightly from an operating loss of US$6.4m to US$6.3m.

Exhibit 3: Summary of estimate changes

US$m

2019e

2020e

Old

New

Old

New

Revenue

15.9

16.1

39.3

39.7

SG&A

21.3

25.5

30.2

30.6

Operating profit/(loss)

(12.6)

(16.6)

(6.4)

(6.3)

Source: Edison Investment Research

The company reported US$28.2m in net cash on its balance sheet at the end of Q319 and has guided towards EBITDA profitability by the end of 2020. We believe the current cash level will be enough to fund operations through sustainable profitability.

Exhibit 4: Financial summary

US$'000s

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

2,575

8,537

16,109

39,669

Cost of Sales

(1,249)

(3,484)

(6,067)

(13,884)

Gross Profit

1,327

5,053

10,042

25,785

Research and development

(1)

(119)

(881)

(1,233)

Selling, general & administrative

(759)

(3,958)

(25,522)

(30,627)

EBITDA

 

 

567

965

(16,817)

(6,531)

Operating Profit (before amort. and except.)

 

 

567

970

(16,589)

(6,303)

Intangible Amortisation

0

0

0

0

Exceptionals/Other

0

0

0

0

Operating Profit

567

970

(16,589)

(6,303)

Net Interest

(42)

(410)

(473)

(478)

Other (change in fair value of warrants)

0

(1,020)

(4,255)

0

Profit Before Tax (norm)

 

 

525

561

(17,062)

(6,782)

Profit Before Tax (IFRS)

 

 

525

(459)

(21,318)

(6,782)

Tax

0

0

0

0

Deferred tax

0

81

3,952

0

Profit After Tax (norm)

525

561

(17,062)

(6,782)

Profit After Tax (IFRS)

525

(378)

(17,365)

(6,782)

Average Number of Shares Outstanding (m)

N/A

13.0

19.7

22.7

EPS - normalised ($)

 

 

N/A

0.04

(0.87)

(0.30)

EPS - IFRS ($)

 

 

N/A

(0.03)

(0.88)

(0.30)

Dividend per share (c)

N/A

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

0

158

7,057

7,731

Intangible Assets

0

0

0

0

Tangible Assets

0

57

532

1,207

Other

0

102

6,525

6,525

Current Assets

 

 

830

6,504

31,834

25,968

Stocks

46

1,004

2,163

4,940

Debtors

404

913

2,727

2,727

Cash

345

3,814

23,420

14,777

Other

35

773

3,524

3,524

Current Liabilities

 

 

(96)

(4,600)

(6,997)

(6,997)

Creditors

(96)

(4,600)

(6,997)

(6,997)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

0

(2,198)

(289)

(289)

Long term borrowings

0

(2,198)

0

0

Other long term liabilities

0

0

(289)

(289)

Net Assets

 

 

733

(135)

31,605

26,413

CASH FLOW

Operating Cash Flow

 

 

(30)

829

(19,416)

(7,741)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

0

(63)

(602)

(902)

Acquisitions/disposals

0

0

0

0

Financing

0

(170)

39,595

0

Dividends

0

0

0

0

Other

0

(22)

22

0

Net Cash Flow

(30)

575

19,599

(8,643)

Opening net debt/(cash)

 

 

(375)

(345)

(1,367)

(23,419)

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

0

0

0

Other

(0)

448

2,453

0

Closing net debt/(cash)

 

 

(345)

(1,367)

(23,419)

(14,776)

Source: Edison Investment Research, company reports


General disclaimer and copyright

This report has been commissioned by Abacus Health Products and prepared and issued by Edison, in consideration of a fee payable by Abacus Health Products. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Abacus Health Products and prepared and issued by Edison, in consideration of a fee payable by Abacus Health Products. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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