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Research: Healthcare
Since beginning in earnest in August this year, 1,000 prescriptions for MGC’s phytocannabinoid products (CannEpil and MXP100) have been issued in Australia and the UK. Double the number of prescriptions were issued in October compared to September. Cash receipts for the quarter ending 30 September were A$413,000, with additional revenue of more than A$400,000 from recent sales expected to be received following the end of the quarter.
Written by
MGC Pharmaceuticals |
Rapid prescription growth in Australia and the UK |
Financial update |
Pharma & biotech |
4 November 2019 |
Share price performance
Business description
Next events
Analysts
MGC Pharmaceuticals is a research client of Edison Investment Research Limited |
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Since beginning in earnest in August this year, 1,000 prescriptions for MGC’s phytocannabinoid products (CannEpil and MXP100) have been issued in Australia and the UK. Double the number of prescriptions were issued in October compared to September. Cash receipts for the quarter ending 30 September were A$413,000, with additional revenue of more than A$400,000 from recent sales expected to be received following the end of the quarter.
Year |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/18 |
0.3 |
(5.9) |
(0.52) |
0.0 |
N/A |
N/A |
06/19 |
0.7 |
(8.4) |
(0.70) |
0.0 |
N/A |
N/A |
06/20e |
2.4 |
(8.1) |
(0.59) |
0.0 |
N/A |
N/A |
06/21e |
7.3 |
(6.1) |
(0.44) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
CannEpil and MXP100 leading the way
MGC’s proprietary products CannEpil, a high CBD, low THC (20:1) product, and MXP100 (100mg/ml CBD) are responsible for the rapid prescription growth we are seeing. CannEpil is targeting patients with drug-resistant epilepsy, while MXP100 is for those with mild neurological, inflammatory and liver conditions. MGC is an early mover in the UK medicinal cannabis market, where regulations came into effect in November 2018 allowing specialists to prescribe medical cannabis products.
Construction has commenced on Malta facility
MGC has begun construction of a ~15,000m2 GMP-certified medicinal cannabis production and cultivation facility in Malta. It will ultimately have production capacity for 8,000 units per hour of each product. Once operational (currently estimated for H221), it will become the hub of the company’s seed-to-pharmacy operations focused on supplying key markets in Europe, the UK and internationally.
Approvals to begin clinical trials
Importantly, MGC has received Human Research Ethics Committee (HREC) approval in Australia to conduct a 142-patient trial comparing CannEpil to MXP100 in drug-resistant epilepsy patients. It has also received approval for a 30-subject trial in healthy individuals investigating the effect of CannEpil on driving performance, a key safety datapoint for regulators.
Valuation: A$165m or A$0.12 per share
We have adjusted our valuation from A$157m or A$0.13/share to A$165m or A$0.12/share. The total value has increased due to rolling forward our NPV and higher net cash, while the per-share value has decreased due to an increase in the number of shares outstanding following additional capital raises totalling A$5.5m. We currently forecast that an additional A$7.5m (previously A$14m) will be raised in FY20 and A$15m in FY21.
Strong uptake of medicinal cannabis products
MGC’s CannEpil and MXP100 are exhibiting strong growth in the UK and Australian markets, reaching the 1,000-prescription level ahead of internal company forecasts. Initially, the launch was slower than expected, especially in Australia, due to regulatory and compliance matters, but those have since been resolved. Importantly, MGC’s current GMP manufacturing facility in Slovenia can produce enough medicine for approximately 5,000 patients per month at full capacity (approximately an order of magnitude more volume than is currently needed).
|
Exhibit 1: MGC product prescription growth |
|
|
Source: MGC |
As a reminder, UK regulations came into effect on 1 November 2018 that made the medical use of cannabis legal for patients with exceptional clinical need. NHS guidelines allow specialist doctors to prescribe medical cannabis products where there is clear published evidence of benefit that could not be achieved by a licensed medicine. The import licence and distribution agreements position MGC as an early mover in the UK medical cannabis market. With a population of 66 million, the UK represents a large potential market; the demand for medical cannabis products is forecast to reach €8.8bn per year by 2028, according to Prohibition Partners.
In Australia, MGC’s products can be supplied under the Therapeutic Goods Administration’s Authorised Prescriber Scheme and the Special Access Scheme, or for use in clinical trials. With a population of over 25 million, Australia is not as large a total market as the UK, but is still expected to reach US$2.1bn (A$3.0bn) per year in medical cannabis sales by 2028, according to Prohibition Partners.
Malta construction beginning
MGC has begun construction of a ~15,000m2 GMP-certified medicinal cannabis production and cultivation facility in Malta after signing a long-term lease and receiving the necessary approvals. It will ultimately have the production capacity for 8,000 units per hour of each product. The company expects to be able to leverage the key expertise that it developed as it obtained EU GMP certification for its Slovenian medical cannabis manufacturing and production facility to expedite development in Malta. Thanks to the country’s warm climate, the Maltese facility is expected to produce high-yielding cannabis crops at a relatively low cost. Once operational, it will become the hub of the company’s seed-to-pharmacy operations focused on supplying key markets in Europe, the UK and internationally. We continue to expect it to come online in H221.
China upside potential
On 17 April, MGC signed a marketing and distribution agreement with the Chinese e-commerce platform YuShop Global, to sell its CBD and hemp-enhanced nutraceuticals products in China. The products include CBD Hemp Protein Powder, BCAA CBD capsules, CBD Water Soluble Solution and CBD Herbal V-Pen. Chinese consumers will be targeted via YuShop’s online platform and network of retail channel partners including 1,500 luxury spas.
Although MGC’s primary focus is on medical cannabis products, the YuShop agreement, which provides access to the large Chinese health products market, could provide an important near-term revenue stream for the company. Chinese consumers are expected to purchase over US$20bn of vitamins and supplements in 2020.1 MGC retains 65% of gross margin after retail costs and commissions on the products sold.
SEO Agency, 25 November 2018: The Huge Vitamins and Dietary Supplements Market in China
YuShop conducted a 28-day beta test of flagship MGC nutraceutical products online and within 20 retail locations in four Chinese cities, which generated positive results according to the company. Following that, an eight-week market test campaign was conducted, which generated a strong initial response and resulted in the commencement of an initial sales and marketing campaign.
Given the early stage of the project, we do not yet include revenue from China in our financial forecasts or valuation.
Valuation
We have adjusted our valuation from A$157m or A$0.13/share to A$165m or A$0.12/share. The total value increased due to rolling forward our NPV and higher net cash, while the per-share value decreased due to an increase in the number of shares outstanding following additional capital raises totalling A$5.5m in net proceeds.
Exhibit 2: MGC Pharmaceuticals rNPV valuation
Product |
Launch* |
Peak sales (A$m)*** |
NPV (A$m) |
Probability |
rNPV (A$m)**** |
rNPV/share (cents/share) |
Juvenile epilepsy Europe & Australia |
2019/24** |
160 |
98 |
20–100% |
18.9 |
1.4 |
Adult epilepsy Europe & Australia |
2025 |
490 |
262 |
20% |
51.5 |
3.8 |
Dementia Europe and Australia |
2025 |
830 |
442 |
5% |
19.8 |
1.5 |
Flower and resin API & food-grade resin sales |
2018 |
60 |
20–100% |
82.3 |
6.0 |
|
MGC Derma/Cannaglobal |
7.5 |
0.6 |
||||
Admin and unallocated R&D costs |
20–100% |
(18.9) |
(1.4) |
|||
Net cash (as of 30 September 2019) |
100% |
4.3 |
0.3 |
|||
Valuation |
|
|
|
|
165.4 |
12.1 |
Source: Edison Investment Research. Note: *Financial year of product launch. **Sales of investigational CannEpil begin in FY19 at 100% probability, registered pharmaceutical in FY24 at 20% probability. ***Peak sales estimates rounded to nearest A$10m. ****Risk-adjusted R&D costs are offset against income for each drug development project.
Financials
The company recently announced its September Quarter Activity Report and its cash flow report for the quarter ending 30 September 2019 (the first quarter for FY20). Cash receipts from customers totalled A$413,000. Total net cash used in operating activities was A$3.3m. As a frame of reference, in the same quarter a year ago cash receipts were A$135,000 with cash used in operations of A$1.3m. We have made a slight change to our SG&A expense estimate for FY20 and increased it by A$0.3m. We also introduce our FY21 estimates, which include A$7.3m in sales (representing significant growth over our A$2.4m estimate for FY20) and an operating loss of A$6.1m.
During this most recent quarter, MGC raised A$4.75m in gross proceeds in an institutional placement and an additional A$1m in a priority offer (the net amount raised from financing activities was A$5.46m). As of 30 September, the company had A$4.3m in cash on hand. We currently forecast that an additional A$7.5m (previously A$14m) will be raised in FY20 and A$15m in FY21, which we expect to be used on clinical development (CannEpil and CogniCann) and capital expenditure on the Malta facility.
The company has engaged Canaccord Genuity to assist it in a dual listing on the London Stock Exchange (LSE), which is expected to occur in the coming months (although of course, this would depend on market conditions). We believe that a share offering conducted concurrently with a listing would provide much of the capital that we forecast will be required over the next couple of years.
Exhibit 3: Financial summary
|
A$000s |
|
2018 |
2019 |
2020e |
2021e |
Year end 30 June |
AASB |
AASB |
AASB |
AASB |
||
PROFIT & LOSS |
||||||
Sales |
297 |
656 |
2,412 |
7,328 |
||
Other |
0 |
0 |
0 |
0 |
||
Revenue |
|
|
297 |
656 |
2,412 |
7,328 |
Cost of Sales |
(119) |
(357) |
(1,482) |
(4,210) |
||
Gross Profit |
177 |
300 |
930 |
3,118 |
||
R&D expenses |
(951) |
(2,866) |
(2,769) |
(2,825) |
||
SG&A expenses |
(5,455) |
(5,893) |
(6,011) |
(6,131) |
||
Other/exceptionals |
(2,625) |
6,641 |
0 |
0 |
||
EBITDA |
|
|
(8,854) |
(1,818) |
(7,850) |
(5,838) |
Operating Profit (before amort. and except.) |
|
|
(9,182) |
(2,078) |
(8,110) |
(6,098) |
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Operating Profit |
(9,182) |
(2,078) |
(8,110) |
(6,098) |
||
Net Interest |
192 |
202 |
24 |
24 |
||
Profit Before Tax (norm) |
|
|
(5,888) |
(8,397) |
(8,086) |
(6,074) |
Profit Before Tax (reported) |
|
|
(8,990) |
(1,876) |
(8,086) |
(6,074) |
Taxes |
0 |
(27) |
0 |
0 |
||
Profit After Tax (norm) |
(5,888) |
(8,424) |
(8,086) |
(6,074) |
||
Profit After Tax (reported) |
(8,990) |
(1,904) |
(8,086) |
(6,074) |
||
Average Number of Shares Outstanding (m) |
1,125.5 |
1,209.1 |
1,366.7 |
1,380.4 |
||
EPS - normalised (c) |
|
|
(0.52) |
(0.70) |
(0.59) |
(0.44) |
EPS - diluted |
|
|
(0.80) |
(0.16) |
(0.59) |
(0.44) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
8,490 |
9,277 |
14,017 |
24,017 |
Intangible Assets |
7,083 |
5,034 |
5,034 |
5,034 |
||
Tangible Assets |
1,334 |
1,470 |
6,211 |
16,211 |
||
Investments |
73 |
2,772 |
2,772 |
2,772 |
||
Current Assets |
|
|
11,504 |
3,720 |
3,854 |
3,039 |
Stocks |
712 |
139 |
139 |
139 |
||
Debtors |
932 |
1,227 |
1,227 |
1,227 |
||
Cash |
9,859 |
2,354 |
2,488 |
1,673 |
||
Other |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(7,231) |
(2,181) |
(2,181) |
(2,181) |
Creditors |
(961) |
(1,594) |
(1,594) |
(1,594) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Other |
(6,270) |
(588) |
(588) |
(588) |
||
Long Term Liabilities |
|
|
(73) |
(17) |
(7,517) |
(22,517) |
Long term borrowings |
(22) |
0 |
(7,500) |
(22,500) |
||
Other long term liabilities |
(51) |
(17) |
(17) |
(17) |
||
Net Assets |
|
|
12,691 |
10,798 |
8,172 |
2,357 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(6,007) |
(6,485) |
(7,850) |
(5,838) |
Net Interest |
120 |
158 |
24 |
24 |
||
Tax |
0 |
(27) |
0 |
0 |
||
Capex |
(459) |
(362) |
(5,000) |
(10,000) |
||
Acquisitions/disposals |
119 |
(585) |
0 |
0 |
||
Equity Financing |
4,701 |
27 |
5,460 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
(1,527) |
(7,274) |
(7,367) |
(15,815) |
||
Opening net debt/(cash) |
|
|
(11,344) |
(9,837) |
(2,354) |
5,012 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
21 |
(209) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(9,837) |
(2,354) |
5,012 |
20,827 |
Source: MGC Pharmaceutical accounts, Edison Investment Research
|
|
Research: TMT
Having delivered 16% top-line growth in H119, 4imprint’s trading update indicates similar progress is likely for the full year. We previously assumed some slight tailing off in H2, so have now edged up our FY19 revenue estimate by $10m, lifting EBITDA by $0.6m. Management’s revenue target of $1bn by FY22e looks likely to be achieved well ahead of schedule. The extension to the Oshkosh distribution centre was completed on time and within the $5m budget, facilitating that forecast revenue growth. We regard the current share price as well underpinned, with further potential upside.