Working together

SynBiotic 29 July 2021 Initiation
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SynBiotic

Working together

Consumer

Spotlight - Initiation

29 July 2021

Price

€22.05

Market cap

€58m

Share price graph

Share details

Code

SBXn.DE

Listing

Xetra

Shares in issue

2.625m

Last reported net cash at 31 December 2020

€5.9m

Business description

SynBiotic is an investment vehicle that pursues an EU-focused buy-and-build approach. The core business of the platform company is the R&D of new cannabinoid and terpene-based solutions for the health issues of pain, sleep and anxiety.

Bull

Huge worldwide market for cannabinoid products in multiple applications.

Planned investment to cover entire value chain and legal de-risking by diversifying from hemp in terms of cannabinoids and plants.

Strong leadership team and portfolio managers.

Bear

Strict and constantly changing regulatory requirements for CBDs internationally.

Execution risk in terms of planned expansion.

Potential competition from larger players.

Analysts

Sara Welford

+44 (0)20 3077 500

Russell Pointon

+44 (0)20 3077 500

SynBiotic is a research client of Edison Investment Research Limited

Management plans to utilise its experience in scaling profitable companies to accelerate SynBiotic’s strategy and become a leading platform company in the cannabinoids industry. It acquired SolidMind in June 20, followed by subsequent smaller deals, and we expect further deals as the platform grows. Increasing consumer acceptance of cannabinoids across a range of applications (from healthcare to wellbeing) ensures a huge target market. New product sources (both cannabinoids and plants) may enhance efficacy and lawful commercialisation. SynBiotic raised €6.3m of equity in December. Notwithstanding evident execution/ regulatory risk, SynBiotic seems cautiously rated at c 4x management’s projected FY21 revenue.

Across the board

SynBiotic has embarked on a well-defined buy-and-build strategy by acquiring majority stakes in profitable medical and direct to consumer (DTC) companies across the value chain of the cannabis plant. This extends from research into synthetic production to the development and distribution of innovative cannabinoid-based drugs and wellbeing products. SynBiotic’s claimed unique selling proposition is an active investigation into the potential of both the 100+ cannabinoids beyond the traditional CBD and THC and alternative plants to hemp. It is hoped that the former may result in more effective product by combining cannabinoids, while extraction from plants such as hops and cacao should reduce regulatory risk.

So far, so good

While still in its infancy, SynBiotic’s development is shaping up well with the successful integration of its financial driver, SolidMind Group GmbH, a leading brand builder in the wellbeing sector. This is complemented by subsequent smaller deals and product launches, demonstrating SynBiotic’s strategy to acquire companies in the cannabinoid space and build an EU platform to research, develop and distribute pharmaceutical and dietary supplements and cosmetic products.

Valuation: Trading at a discount to CBD peers

Due to the scale and nature of SynBiotic’s continuing evolution with reliance on early-stage unlisted investments, financial forecasts cannot be made with any certainty. This is compounded by strict and volatile regulatory risk (substantial ‘grey areas’). However, the market opportunity for SynBiotic appears clear. The shares are trading on c 4x management’s estimated FY21 sales of €15m, which gives the company little benefit of doubt, even ignoring more established CBD peers rated at over 20x revenue.

Key financial figures (€000s)

Year end 31 December

2020

Revenue

5,446

EBIT

(834)

PBT

(859)

Source: SynBiotic

Company description: Cannabinoids specialist

SynBiotic is newly established to take advantage of growing consumer acceptance of cannabinoids across a range of applications, including healthcare (pain, sleep and anxiety solutions), nutrition, cosmetics and animal food supplements. Cannabinoids, of which the two main ones are delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD), constitute the more than 120 natural active ingredients of the hemp plant (cannabis sativa). These chemical compounds can have a positive medical or cosmetic effect by interacting with specific receptors within the central nervous system. By influencing how cells communicate between brain and body, cannabinoids regulate numerous activities including mood, sleep, memory and appetite.

SynBiotic was known as Ledgertech until April 2020 when it was renamed in keeping with the realignment of its strategy, as described above. Its first acquisition in June 2020 was that of SolidMind Group, a nutrition wellbeing business; its managing director, Lars Müller, became managing director and then CEO of SynBiotic in November 2020. The consideration was €25m, and while initially part of the payment was agreed in cash, SolidMind shareholders received the entire consideration in SynBiotic shares (see below). As a result of the transaction, Lars Müller received a total of 480,000 Synbiotic shares. The acquisition of SolidMind Group was followed by the takeover of the BioCBD e-commerce activity of Umtr Group (organic CBD and hemp products) in September 2020. The consideration was in the low single-digit millions, paid mainly in shares at €25 per share. In November, SynBiotic reported the proposed acquisition of Lean Labs Pharma (CBD production), owned by Lars Müller, (which reported revenues of €2m and profit before tax of €1.1m in FY20). The consideration was c €10m, of which 90.9% was paid in shares (400,000) and the balance (€1m) was supposed to be paid in cash, though a further announcement (see below) has clarified that the balance has also been paid in shares. A capital increase (1 for 6 at €17/share) occurred in December and raised €6.3m (net) which will be used to facilitate the implementation of SynBiotic’s strategy. In March 2021, SynBiotic announced a further acquisition. It is drawing up a further capital increase and will acquire a 25.1% stake in The Hempany, a food company that markets hemp milk and other natural hemp-based beverages. The initial consideration will be €550,000, with an option to acquire an additional share by 30 June 2022, increasing its stake up to 80%. The purchase price for the remaining shares may be between €0.6m and €2.5m, though 75% of this can be paid with SynBiotic shares.

In April, SynBiotic announced an in-kind capital increase for the takeover of Lean Labs and the remaining share of Solidmind Nutrition. The company’s share capital of €2.625m will be increased by €0.715m. 275,000 new shares are offered for subscription to Lars Müller for his remaining stake (9.1%) in Solidmind Nutrition. 440,000 shares are offered to doinglean Ventures, an investment company owned by Lars Müller, which owns Lean Labs. The new SynBiotic shares are offered in exchange for ownership of Lean Labs.

Most recently, the acquisitions of NeuroTheryx and GECA have also been announced, although financial terms for these have not been disclosed.

Strategy

With a buy-and-build strategy, SynBiotic aims to become a leading platform company in the cannabinoids industry by acquiring majority stakes in medical and DTC companies across the value chain of the cannabis plant. This extends from research into synthetic production, to the development and distribution of innovative drugs and non-prescription wellbeing products based on cannabinoids.

SynBiotic’s current investments are as follows:

Research and development: SynBiotic has invested in companies with research facilities in order to help grow its brand recognition in the industry via published studies and to create new medical and DTC products for commercialisation through the group’s production companies. Minority shares are taken in these investments to ensure preferential access to the technology.

GreenLight Pharmaceutical (25% owned) has eight therapeutic R&D programmes based at four universities in Ireland and the UK. Plant-based medicines targeting three disease areas: cancers including prostate, ovarian and breast; neurological conditions including epilepsy, Alzheimer’s disease and addiction; and inflammatory or immune-related conditions including arthritis and arthritis-related depression, eye disease and diabetes.

New venture (under negotiation): company focusing on using alternative plants with cannabinoids.

NeuroTheryX Canada (proposed 100% holding by April 2023): a proven active ingredient research platform. It has a drug research platform and has close cooperation with academic institutions and pharmaceutical companies. It has a robust pipeline of therapeutic products, especially in the cannabinoid space.

Production and biotech: research-led products. Aim is to take majority holdings in investments.

Lean Labs Pharma (proposed 100% owned): CBD production company based in southern Germany.

Distribution: buy and build strong medical and DTC brands to enhance distribution to customers. For the DTC market the focus is on the fastest-growing segments in the cannabinoid industry: supplements, cosmetics and pet health. Targeted >50% holdings.

SOLIDMIND Group (100% owned from March 2021): development and distribution of nutritional supplements. The company’s most important product is Hempamed, CBD-based oil. Hempamed is one of the top three CBD brands in Germany with over €7m in online revenue in 2020 according to management. Its leading affiliate programme in Germany attracts around 200 new and unique customers a day with 30% repeat business, and the product receives consistently good reviews (4.9 out of 5 stars on www.trustedshops.de, for example). A new TV campaign achieved a 1.25x return on advertising spend. Hempamed contains the full spectrum of natural hemp plant and according to SOLIDMIND works better than pure CBD isolate (ie no THC), although no trial results have been published by the company to validate this claim. After extraction through a CO2 process Hempamed oils are gently filtered to keep as close to the original plant as possible. The company also sells ‘SOLIDMIND sleep’, a high-dose mix of minerals, amino acids and vitamins.

BioCBD: organic CBD and hemp products with over €2m in revenue forecast by management in 2020.

Hempany: SynBiotic has taken a stake in The Hempany GmbH (25.1%, as discussed above) and now distributes The Hempany’s hemp milk under the brand ‘hemi’. Hemi is organic, low-carb and naturally free of gluten, nuts, soy and lactose, and will compete in the fast-growing alternative milk market with brands such as OATLY and Alpro.

Cannexo Pharma (50.1% holding): product development, sales, marketing and trading for pharmaceutical products, wellness and health products, in particular products in the categories of medicinal cannabis, cannabinoids and hemp products. Cannexo GmbH has not yet commenced its operating activities.

GECA Pharma: SynBiotic has taken over 100% of GECA Pharma, which has a turnover of c €900,000 from its trade in medicinal cannabis flowers alone. GECA Pharma has all necessary licences (wholesale licence, licence to handle narcotics and licence to trade in medicinal products) in accordance with the relevant regulation. The acquisition provides SynBiotic with both expert knowledge in medicinal cannabis and the required licensing.

Princess Stardust: SynBiotic acquired 25.01% of Princess Stardust’s shares in June 2021. The company is based in Berlin and is present in the CBD lifestyle products segment.

A novel approach

SynBiotic is confident about the following differentiators in particular:

With a view to maximising the efficacy of its products, SynBiotic is actively looking beyond CBD and THC to the 100+ minor cannabinoids which exist in cannabis plants. These are less researched because of the cost of harvesting them, but new synthetic processes should make them more available. While the long-term reward may be the development of a new drug with considerable medical potential, this approach has the more immediate goal of achieving synergistic effects from mixing chemical compounds found in cannabis (ie the interaction between cannabinoids – the so-called ‘entourage effect’ – though we note recent research has cast doubt on the existence of this interaction). SynBiotic has not reported on any trials planned.

Diversification into alternative cannabinoid-bearing plants from hemp and cannabis plants, which may enjoy fewer legal restrictions. After the analysis of over 100 plants, options include hops, cacao and liquorice. A newer potential solution using biosynthesis is the growth of cannabinoids in yeasts, which enables the extraction of very rare cannabinoids, such as CBG, in large quantities, though the hurdle here is achieving cost-effective production on a commercial scale.

Market overview

Cannabis is thought to be one of the oldest plants cultivated by humans with multiple medicinal uses (including problems with the eyes, gynaecological disorders and to fight inflammation) documented in ancient Egyptian texts. In all, cannabis was used to treat a wide variety of different indications, including pain, spasticity, cancer, epilepsy, nausea, anorexia, and infectious disease. Despite cannabis being used for various medical purposes for thousands of years (and having a safety profile that is superior to alcohol in many respects), there are surprisingly few therapeutics containing cannabis that have been approved by major regulatory authorities, with worldwide sales of only c US$600m in 2020 according to Evaluate Pharma.

However, GW Pharma’s Epidiolex for the treatment of certain rare epilepsies was a game-changer as likely the largest FDA-approved cannabinoid drug in history. It was launched at the end of 2018 and is expected to have US$1.3bn in sales in 2024 based on consensus forecasts. Soon after, the World Health Organisation called for the reclassification of cannabis and its derivatives to facilitate trade for medicinal and scientific purposes, suggesting that CBD with 2% or less THC should not be subject to international controls.

In December 2020, this led to the United Nations Commission for Narcotic Drugs, the UN’s central drug policy making body, voting to remove cannabis for medicinal purposes from a category of the world’s most dangerous drugs (Schedule IV of the 1961 Single Convention on Narcotic Drugs) to which the strictest control measures apply, which has generally discouraged its use for medical purposes. With a vote of 27 in favour (including the United States and European nations), 25 against (including China and Russia), and one abstention, UN News states that the Commission ‘has opened the door to recognizing the medicinal and therapeutic potential of the drug, although its use for non-medical and non-scientific purposes will continue to remain illegal.’ Although this vote may have no immediate impact on loosening international controls because governments retain jurisdiction over the classification of cannabis, UN News refers to news reports that this decision ‘could drive additional scientific research into the plant’s medicinal properties,’ thereby reinstating its historical status.

Key current and prospective market applications for SynBiotic

Medical

SynBiotic is active in this market.

Medical cannabis refers to herbal or plant-derived cannabis products that are prescribed by a doctor. Products are available as herbal materials, oils, tinctures, food or capsules.

After epilepsy, pain is probably the area with the highest quantity of evidence associated with the efficacy of cannabinoids and is an enormous market. According to the Centers for Disease Control and Prevention, 20% of adults in the United States (c 50 million) have chronic pain. In Europe, the prevalence of moderate to severe pain in the adult population is estimated to be similarly high at 19% (c 80 million). Other substantial markets are the relief of sleep-related problems and anxiety. SynBiotic believes the addressable market consists of 150 million people globally with sleep-related problems, 100 million people experiencing pain and 60 million people with anxiety.

The legalisation of medical cannabis is advanced across Europe with doctors since 2017 able to offer cannabis-containing medicines to patients with a serious illness. Doctors still tend to prescribe cannabis preparations only when other therapies are ineffective against pain, as very few cannabis products have been approved for pain; however, acceptance of medicinal cannabis is increasing steadily. OTC medicinal cannabis (containing THC) is currently only legal in a few European Union (EU) countries, with Germany seen as the pioneer as it currently has over 100,000 patients and the number continues to grow rapidly.

Cosmetic products

SynBiotic intends to move into this segment via acquisitions.

Prohibition Partners, a business consultancy for the cannabis industry, estimates the global CBD skin care market at US$710m in 2018, with projected sales of US$959m by 2024 (ie CBD cosmetics will represent about 10% of the global skin care market in the next five to ten years). Touted as the newest super-natural ingredient, CBD is considered to have a wide range of applications in skin, body, makeup and hair care, as well as being a potential alternative to traditional cosmetic ingredients. Starting with oil-based products focused on CBD’s anti-inflammatory properties, the growth in CBD products in beauty care has extended to skin creams, lotions, serums, soaps, sun care, hair products and makeup.

According to SynBiotic, CBD can be used in cosmetics in the EU if the products are made from cannabis, cannabis resin, cannabis extracts and cannabis tinctures derived only from the seeds and leaves of the plants. The market is barely established in Germany, though CBD-containing cosmetics can be marketed in most EU countries.

Food supplements

SynBiotic is active in the market for CBD-based dietary supplements, which has grown steadily in recent years.

Animal food supplements

SynBiotic has recently entered this market, with CBD oils for cats and dogs.

According to FEDIAF (the trade body representing the European pet food industry), Europeans spent c €18.5bn in 2019 on pet-related products and services, of which the CBD market represents a very narrow segment. In 2019 less than 0.5% of non-CBD consumers reported buying CBD for a pet (representing only 3% of CBD consumers).

Although limited by comparison with the broader CBD market, according to Frontier Financial Group, the CBD pet products market has significant growth potential.

Competition

A challenging intellectual property landscape may well explain the lack of involvement in this area by larger biotechnology and pharmaceutical companies. While the clinical trial process in developing an FDA-approved cannabinoid product is no shorter, the period of exclusivity is especially short if the product is simply a reformulation of THC or CBD. Hatch-Waxman exclusivity is only three years for a product that is not a new chemical entity. Patents in this area tend to be particularly narrow owing to the high level of prior art affecting the patentability of THC and CBD formulations. Any granted patents will likely be challenged once exclusivity expires.

Management, organisation and corporate governance

German corporation law requires all public companies to have two boards: a management board and a supervisory board. The supervisory board oversees and appoints the members of the management board and must approve major business decision. This independent, non-executive panel has the duty to hold management accountable and protect the interests of shareholders.

In addition to the expertise of its three-man supervisory board, chaired by entrepreneur Sebastian Stieztel, SynBiotic’s sole member of the management board, CEO Lars Müller, is backed by the highly experienced operational management of its portfolio companies.

Lars Müller combines 10 years’ experience in scaling profitable companies as an entrepreneur with in-depth knowledge of the cannabinoid industry as founder and CEO of SOLIDMIND since 2015 where he built one of the most successful CBD brands in Germany, Hempamed (hemp-based oils), and owner of Lean Labs.

Sebastian Stietzel is a serial entrepreneur. His strength lies in strategy, operations and in coaching senior leadership, with particular expertise in post-merger-integration and capital market fitness.

Dr Marlon Braumann is a member of the supervisory board. He is also a serial entrepreneur and one of the founding partners of the European VC fund Elevat3 Capital, an investment fund mainly focused on biotech, medtech and fintech investments.

Thomas Hanke is also a member of the supervisory board. He has extensive transaction experience (private equity, venture capital, growth capital & PIPE transactions) and has, in addition to his work as an investor, also carried out various operational interim mandates within the scope of portfolio management.

Financials

Historical financials for SynBiotic (ie for the year to December 2020) are predictably unrepresentative of the current business in view of its expansion, notably the acquisition of SOLIDMIND at the end of June 2020, and the subsequent acquisitions towards the end of FY20 and since the start of FY21. For FY20, there was a pre-tax loss of €859k on revenue of €5.5m, which is already significantly different to the H120 pre-tax loss of €97k on €50k revenue. The main expenses were raw materials, advertising, commissions and legal and consulting fees. The latter arose from the realignment and financing of the company, and the multiple acquisitions.

It is thus more helpful to look at management’s revenue target of €46m in 2023 up from its estimate of €9.2m (pro forma) in FY20. It assumes that this will be driven by both strong organic growth (20%) and add-on acquisitions (>55%) in line with its strategy, although there is no detail on exactly where the organic growth will come from.

Exhibit 1: Key financial metrics (€000s)

Period to 31 December

FY20

Revenue

5,446

Pro forma revenue

9,200

EBIT

(834)

PBT

(859)

EPS (€)

(0.56)

Cash flow from operations

(1,263)

Cash flow from investing

(1,126)

Cash flow from financing

8,252

Change in cash and cash equivalents

5,862

Cash and cash equivalents at start of the year

13

Cash and cash equivalents at end of the year

5,875

Period to 31 December

Revenue

Pro forma revenue

EBIT

PBT

EPS (€)

Cash flow from operations

Cash flow from investing

Cash flow from financing

Change in cash and cash equivalents

Cash and cash equivalents at start of the year

Cash and cash equivalents at end of the year

FY20

5,446

9,200

(834)

(859)

(0.56)

(1,263)

(1,126)

8,252

5,862

13

5,875

Source: SynBiotic

We believe the €6.3m (net) capital increase announced in December is a key driver of growth. While targeted primarily at acquisitions (we expect to see more of these coming through in the next few months but have already seen Hempany, NeuroTheryX and GECA since the start of the year), the proceeds are set to strengthen R&D (c 25%) and the marketing of brands such as Hempamed and BioCBD. The sales figures from the 2020 TV campaign for Hempamed exceeded management expectations, so the campaign was extended in January 2021. SOLIDMIND, the financial driver of the group, is reported on the press section of the SynBiotic website in August to have made a positive start within SynBiotic. Hempamed was launched with confidence into the UK market via a dedicated online shop. Management has guided towards Hempamed’s gross margins being around 80% for its B2C sales, which it believes is significantly higher than the competition.

The launches of a new cannabinoid-containing extract CBPlus (two strengths), a new herbal medicine brand, Kick-Off, and a novel food application in the UK and EU should help drive some of the organic growth. In respect of the latter, novel foods are foods which have not been widely consumed by people in the UK or EU before May 1997. This means that the foods do not have a ‘history of consumption’. Before a novel food can be legally marketed in the UK, it is required to have a pre-market safety assessment and authorisation, which typically takes two years and can be expensive. The novel food status of CBD extracts was confirmed in January 2019; there are currently no authorised CBD extracts or isolates on the UK food market.

Shareholder structure

The current SynBiotic shareholder structure is:

63% management and founder, including entrepreneurs and investors Christian Angermayer (Apeiron Investment Group) and Michael Auerbach (Subversive Capital), and Lars Müller (CEO)

26% Other institutional investors

11% free float

Valuation

In the absence of a trading record for SynBiotic, as now constituted, we look at competitor valuations in terms of market capitalisation to consensus forecast 2021 revenue. We look at other cannabis companies, though we recognise SynBiotic is significantly smaller than its competitors, and there is a lack of visibility regarding how the forecast revenues will be achieved. We use 2021 revenue to mitigate the COVID-19 impact. On that measure SynBiotic appears cautiously valued, notwithstanding in particular the execution risk, as discussed.

Exhibit 2: Peer comparison of market cap/CY21e revenue

Share price

Market cap

2021 revenue

Market cap/revenue

(m)

(m)

(x)

SynBiotic

€ 21.05

€ 58

€ 15.0

3.9

Cronos Group

C$8.95

C$3,342

C$72.2

46.3

Canopy Growth

C$23.11

C$9,100

C$556.8

16.3

Tilray

$12.73

$5,718

$559.3

10.2

Sundial Growers

$0.79

$1,565

$57.2

27.3

Peer group average

25.1

Source: Refinitiv. Note: Prices at 27 July 2021. SynBiotic FY21 revenue based on company’s analyst presentation, available on its website

Sensitivities

There is a risk that regulatory requirements will not be met. Apart from a current strict framework, the constant change in the regulatory environment for CBD and the sometimes unclear boundaries between pharmaceutical products, food and prohibited narcotics can make compliance difficult. For example, if SynBiotic produces and/or distributes food from products containing hemp, it must ensure that it is not a ‘new’ food in the sense of novel food regulation. If SynBiotic products are classified as medicinal products, they are subject to pharmaceutical approval and distribution rules. The approval process can be lengthy and varies from country to country. In addition, the legal framework for narcotics must be observed.

There is risk of significant changes in the legal framework, which is enhanced by SynBiotic’s international exposure. For example, a tightening of the UK Medicines Act or of EU legislation around narcotics drugs, or its interpretation by courts, could be highly detrimental to sales of SynBiotic products, as could a tightening of the criminal code, such as regarding driving a motor vehicle under the influence of narcotics.

Execution risk in terms of expansion, which is at the heart of the SynBiotic investment case. Planned growth is dependent on the availability of and access to profitable investments at attractive prices. The integration and management of acquisitions may not be successful. Shares may be issued for acquisitions, thereby diluting existing shareholders.

There is very little visibility as to how the organic growth will be achieved.

SynBiotic is exposed to intense global competition. In contrast to Germany, the entry threshold for competitors is lower in other countries where cannabinoid-containing products are freely available or subject to few restrictions. Competitors may be superior in terms of financial and human resources.

Because of its international activities SynBiotic is affected by economic risks in numerous countries.

Retention of key personnel as SynBiotic’s business relies on the knowhow of just a few people, notably Lars Müller (MD of SynBiotic and MD of SOLIDMIND) and Sebastian Stietzel (chairman of SynBiotic). Growth could be curbed by a failure to retain or attract suitably qualified employees. We note Lars Müller has a two-year lock-up on his shares.

Risk of litigation, resulting in substantial damages and costs. In 2019 SOLIDMIND was the subject of two notices from District Office in Ravensburg, lodging objections to the sale of prohibited products.

While the proceeds from the offer are intended to be used primarily to expand the investment portfolios, there is always the risk of overpaying for acquisitions.

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Australia

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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.

United Kingdom

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United States

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