Funding to progress CannEpil, with CimetrA data soon
MGC Pharmaceuticals is an emerging pharmaceutical company selling plant-derived, medicinal products in the UK, Ireland and Australia. Core marketed products are the food supplement, ArtemiC, promoted to help reduce COVID-19 symptoms, and medicinal cannabis products sold in Australia, UK and Ireland. ArtemiC Rescue is now a non-prescription OTC product for sale in the US and AMC, the US partner, has placed a US$2mln (A$3mln) order for delivery in H2FY23.
MGC's core investment case rests on the value of its pharmaceutical R&D platform. The lead pharmaceutical project is CimetrA to alleviate COVID-19 symptoms with potential in other inflammatory conditions. MGC completed its COVID-19 Phase 2b study NCT05037162 with CimetrA in March. We therefore expect top-line data by June 2023. MGC estimates the potential market COVID-19 market at $13.6bln with over $100bln in further inflammatory indications.
MGC is now planning a Phase 2 study of the cannabis extract CannEpil (MGCND00EP1) in childhood refractory epilepsy starting August 2023 with a top line readout possible by late 2024. MGC's market size estimate for adult and childhood refractory epilepsy is $15.1bln. This study is supported in Australia by a specific equity investor with generous tax credits. CannEpil is now eligible for prescription on a Named Patient basis in the UK and is already sold in Ireland.
Core focus on pharmaceticals with new retail OTC opportunities
MGC's H1FY23 product sales (to 31 December 2022) were A$2.7mln, with ArtemiC generating 56% (A$1.5mln) and cannabinoids 41% (A$1.1mln). Services were negligible at about A$60k; MGC booked a significant impairment of A$3,1mln. The majority of cannabis sales are as weakly profitable generics in Australia, with a small sales component of branded CannEpil in Ireland. MGC is partnered with Sciensus Rare to distribute its cannabis-based products under Named Patient schemes. Other European markets may emerge as growth opportunities. ArtemiC H1FY23 sales mainly comprised a late H1FY23 order from US distributor, AMC (of which US$750k had been pre-paid). A fresh US$2mln order for H2FY23 delivery (H1FY24) followed the February OTC ArtemiC listing in the US; European sales via Swiss PharmaCann now seem minimal. Revenue in FY24 might therefore rise to about A$5.5mln vs our FY23 estimate of A$4mln.
Cash as of 30 December was A$1.1mln with operational cash use at A$6.7mln in H1FY23 (A$1.1mln/month). MGC drew down A$1.1mln from the Mercer facility in Q3FY23. In April, a funding round of £1.2mln gross (about A$2.2mln) was completed from institutions plus A$0.5mln raised through the broker. In addition, £630k (A$1.1mln) is available in tranches to cover about 25% of the likely cost of an Australian CannEpil study before 43.5% tax credits. We estimate that MGC might still need to use Mercer convertible loan facility from June 2023 onwards: we estimate that about A$7.5mln remains. The placing and likely conversion of Mercer loans mean that MGC could have up to 4.8bln shares in issue by June 2024.
Financial forecasts and funding
Year end Jun 30 · 2020 · 2021 · 2022 · 2023
Revenue (A$-000's) · 2,079 · 2,962 · 4,570 · 4,075
Cash(AUD$, 000's) · 1,873 · 5,433 · 1,793 · 904
EBITDA, € - 000s · (11,436) · (11,421) · (12,575) · (15,106)
Chart 1 shows the sales breakdown for H1FY23. Sales were A$2.7mln (+4%). ArtemiC revenues were A$1.5mln, principally a A$1.4mln order from US distributor, AMC. European ArtemiC sales are conducted via parter SwissPharmaCan but were minimal in H1FY23. Medicinal cannabis sales are mainly in Australia. CannEpil is sold in Ireland as there is a prescription scheme and reimbursement, we estimate sales of about A$200k.
Chart 1 - H1FY23 sales
Source: MGC, PA Graphic
For FY23 overall, we estimate sales of about A$4mln given the lack of ArtemiC orders in H2FY23; sales by SwissPharmaCann seem to have lapsed. Happily, AMC has placed an ArtemiC Rescue order for US$2mln (A$3mln) for delivery in the second half of calendar 2023 (H1FY24). This may, however, depend on AMC building up retail orders from US pharmacy chains. With this boost, total FY24 sales might be about A$5.5mln and possibly higher. The fresh ANC order could also use capacity in the Maltese GMP manufacturing plant now being certified.
Sciensus Rare, a specialist pharmacy distributor, now manages the prescription and fulfilment process in Ireland and the UK. CannEpil is now registered under the Named Patient scheme so can be prescribed in the UK as an unlicensed pharmaceutical by specialists. However, the NHS will not fund the prescription so all are private or charitable. In Ireland, a similar scheme is funded. Sciensus is exploring new geographic markets, particularly Denmark. Note that unlicensed pharmaceuticals like CannEpil cannot be promoted, only supplied to order.
UK market starting to open
The 11 April placing was somewhat complex reflecting the tough funding environment. The main element was an equity placing with institutional investors to raise £1.2mln (A$2.2mln)
Table 1 - April Funding
Source: MCG, ProActive
The UK broker sold additional shares to qualified private investors. This raised £254k (A$462k). These shares were all issued at 0.44p or A$0.08. Every two shares subscribed gained an option to buy a further share at 0.66p (A$0.012) before April 12, 2024. If all are exercised, this could raise a further A$2.9mln in FY24. Finally, Cantheon is supporting the CannEpil study with £630k (A$1.2mln), details are below, this cash may be received over FY24 and FY25 paid in tranches.
We cautiously forecast about A$4mln of sales in FY23 as we think H2FY23 sales will be lowered due to reduced ArtemiC sales. Sales should grow to over A$5mln in FY24 but cash will remain tight with the A$4.5mln clinical CannEpil trial to fund upfront. MGC will continue to be reliant on Mercer funding; A$7.5mln remains. Value progress depend on the outcome of CimetrA and CannEpil studies over the next 21 months and if a retail US ArtemiC market develops.
FY23 financial outlook
R&D pipeline
MGC’s R&D pipeline consists of six developmental projects but only two are active due to funding constraints:
- CimetrA, a 4:3 ratio formulation of two plant extracts (Curcuma longa and Boswellia serrata) for symptomatic treatment of Covid-19 infection. Note this is the new formula, the previous formula added artemisinin; still included in ArtemiC Rescue, the US OTC product.
- CannEpil, a 20:1 CBD:THC formation for treatment-resistant epilepsy in children/adolescents; a 102-patient Phase 2 study is pending initiation.
- CogniCann, a 3:5 CBD:THC formulation for treatment of aggression/agitation associated with Alzheimer’s disease (potential to move to Phase 2). This produced interesting data for a partly-completed small Australian study.
- InCann, a 20:1 CBD:THC oral formulation for the treatment of ulcerative colitis and Crohn’s disease (preclinical, no plans disclosed for development).
- IrniCann, a 3:1 molar ratio of formulation of CBG (cannabigeriol):CBD which has shown promising results in cell-based studies for glioblastoma. This is some way off any clinical studies.
- Psylocybin research services: MGC has authorisation in Slovenia to carry out research on this controlled psychedelic substance. This appears to be a contract research service, not a therapeutic development area.
CimetrA and CannEpil are core projects, Exhibit 2, while the others have a lower priority and are expected to be taken forward only as funding permits.
Exhibit 1 - MGC Pharmacetutical develoment plan
Source: MGC
CimetrA - COVID-19 and imflammation
CimetrA, the lead project, is in a 240-patient Phase 2b study (NCT05037162). This will evaluate if CimetrA reduces symptom severity and improves clinical outcomes in patients with moderate COVID-19. This trial was completed on 1 March 2023, so we can expect top-line data in the next few months.
An earlier study with a different formulation (now sold OTC in the US) is no longer recruiting.
Exhibit 2 - CimetrA summary
Source: MGC
Commercial aspects
The commercial opportunity for CimetrA is now much smaller than when the programme was first envisaged in 2020-21. It will also take much longer to develop as the US FDA is no longer allowing emergency use authorisations for COVID-19 therapies and full Phase 3 data will be essential. The expected Phase IIb data will be crucial.
MGC still estimates that the market could be potentially worth US$13.6bln. However, independent market research notes that the COVID-19 market is rapidly diminishing at a -44% CAGR.
Exhibit 3 - CimetrA - envisaged further markets
Source: MGC
MGC sees CimetrA as having potentially broader use on a US$100bln market, Exhibit 2. However, this will require clinical validation in Phase 3 studies. CimetrA would also face competition from established and powerful therapeutic agents.
Further preclinical data on CimetrA
MGC has released data from a CimetrA preclinical study conducted on human immune cells. This used a model of acute bacterial infection so does not directly translate into viral COVID-19 infection. Potential reduction of IL-6 by VA340 (CimetrA) was noted. IL-6 is a validated target with approved therapies but not in COVID-19. A response on anti-inflammatory Haeme Oxidase-1 (HO-1) was noted, HO-1 is known to be increased by certain plant compounds including curcumin. This data adds to the Investigational New Drug package being prepared for FDA review.
ArtemiC as an OTC product
The ArtemiC range is innovative, with a patented (in Slovenia) formulation of well-known, natural ingredients using nano-technology from Graft Polymer. The FDA allows the registration of the counter medicines that can be sold without a prescription — although a doctor could prescribe them. OTC listing requires the products to be regarded as safe so using known ingredients and that no medical claims are made. (Note, this is different to a prescription medicine moving to an OTC formulation.) As an OTC product, sales depend on the usual retail factors like branding, promotion, distribution and price. Interestingly, the product is ArtemiC rescue which adds the antimalarial artemisinin to the mix; this is now removed form CimetrA. AMC, the US partner, is seeking pharmacy chain distribution for the product. A US$2mln order has been placed with MGC.
Exhibit 4 - ArtemiC Rescue OTC listing
Source: FDA
CannEpil - refractory epilepsy
CannEpil is a mix of mainly cannabidiol (CBD) and the psychoactive tetra-hydro cannabinol (THC), Exhibit 3. CBD alone at high doses can help to control some rare type of childhood epilepsy, Jazz Pharma sells the licensed products. MGC needs to establish in a formal clinical trial that its mix of CBD and THC can control general refractory epilepsy. This will initially be trialled in children and adolescents before moving to an adult study, we assume. Proving efficacy in adults opens the potential US%13.1bln market foreseen by MGC.
Exhibit 5 - CannEpil profile
Source: MGC
Clinical development for refractory epilepsy
An update on the clinicaltrials.gov website (23 March 2023) lists NCT04406948. This is a 103 patient, placebo controlled study starting August 2023 and ending in late summer 2024. If this runs to schedule, it will have top-line data in autumn 2024.
The two primary endpoints are:
- The proportion of patients showing a >50% reduction in the frequency of seizures at week 12 of the study, in the treatment versus placebo groups; and
- The change in the number of epileptic seizures at Visit 2 vs Visits 3 and 4 cases documented by patient diaries over 16 weeks in treatment and placebo groups.
The CBD to THC ratio is 20:1 as previously noted. Up to 800 mg per day split into two doses can be given — this is similar to Epidiolex (Jazz Pharma) which is CBD only and approved.
The two listed trial centres are Israel and Slovenia. So far, we are not aware that regulatory approval (a Clinical Trial Authorisation which gives IND status in the EU) has been granted for the Slovenian centre. However, in the placing, a specialist fund, Canthoen, agreed to subscribe for £630k (A$970k) of shares to support this study paid as the trial progresses.
MGC also noted on 11 April that a study would now be conducted in Australia. Cantheon is closely linked to the new Australian CRO being retained to run the CannEpil study: Ingenu. As Cantheon subscribes for equity after MGC pays the CRO invoices, in effect, MGC is getting a 25% cash rebate. By running a study in Australia, generous R&D tax credit support estimated by MGC at £1.1mln ($A1.7mln) can be claimed. This indicates that the overall trial cost will be about A$3.9mln. The Australian tax credit for small companies like MGC is very generous at 18.5% of the normal corporate tax rate (25%, so 43.5% in total). However, it is paid after the receipt of the final accounts for the company's financial year, so costs incurred in FY24 (to 30 June 2024) will not be reimbursed till autumn 2024 or later.
We also note that the ZAM software project is progressing with the first patient using the App in an observational, charity-funded study in the UK. MGC acquired a 40% stake in ZAM software for £700,000 (A$1.3mln) in Q1FY23 settled with 65.8mln shares.
Cash flows
The placing was summarised in Table 1 (above) giving 3.1bln shares in issue based on the announced placing.
Table 2 shows our rough estimates of the cash position as it may unfold over H2FY23, Cash reported on 31 December was just over A$1.1mln after an A$800k loan drawdown from Mercer on 28 December. Two further drawdowns occurred in Q3FY23 totalling A$1.6mln in cash. We assume that MGC cut back Q3FY23 cash use to A$2.5mln, possibly by working capital management, but we think will rise to meet clinical objectives. This will be seen in the Q3 cash flow report in late April.
We expect that MGC might not need further Mercer funding in Q4FY23.
We note, Table 3, that MGC drew A$5mln in cash from July 2022, US$10mln facility over H1FY23 some draw downs do not seem to have been immediately announced. A further AU$1.5mln was then drawn in Q3FY23.
Table 2 - Cash flows H2FY23
Source: ProActive, MGC reports
Note that the loans are in US$ at a premium to the cash value of 10%, Exhibit 3. Hence, a US$600k loan, as in February 2023, has a conversion value of US$660k. The cash then converts to A$ at the then exchange rate.
The placing provides very useful capital but the lower than anticipated broker sales cannot avoid a further Mercer draw down in Q4FY23. We think that MGC will need to use the Mercer facility in June 2023 (we estimate A$600k). Furtehr draw down will be needed to fund H1FY24; there may be about A$7.5mln remaining. If the CimetrA Phase 2b data is positive, this could provide the basis for a further capital raise.
Table 3 - Mercer Draw down
Source: ProActive after MGC
The Mercer convertible position was valued at US$7.3mln on 31 March 2023 and could convert at A$0.01/ share or higher. Of this, US$2.1mln is the remains of the 2020 facility with US$5.2mln added from the July 2022 US$10mln facility. Note that this is the loan value, MGC drew US$4.7mln (AU$6.6mln) in cash, Table 3.
The potential number of shares if this was all converted is 990mln (Table 4) which is about 21% of the resulting fully diluted share capital. Hence, we do not expect Mercer to convert and sell shares till the market recognises MGC's inherent value. The 2020 US$2.1mln (A$3.2mln) loan needs to be repaid if not converted by February 2024.
Mercer held 91.2mln shares directly as of 21 September 2022 (the last record date), so its holding in MGC is about 3% currently.
Table 4 - Potential shares
Source: ProActive, MGC data
Financial estimates
The estimates for FY23 (30 June year-end) are shown below: P&L Table 5, Cash Flow Table 6, Balance Sheet Table 7.
We note that the Q3FY23 cash flow statement required by the Australian Stock Exchange is due by the end of April. This will give a better perspective on the cash position and current costs. As noted, continued access to Mercer funds is currently crucial even though further equity capital was raised in April.
Table 5 - P&L
Source: MGC reports, ProActive estimates
Table 6 - Cash Flow
Source: MGC report, ProActive Estimates
Table 7 - Balance sheet
Source: MGC reports, ProActive estimates
Investment conclusion - lots of potential but trials need cash to deliver more data
MGC offers a diverse, plant-based portfolio of nutritional and medicinal products. The ArtemiC range is innovative and now has a retail opportunity in the US market. The simplified pharmaceutical version of CimetrA is in clinical development for the relief of COVID-19 infection symptoms with a multi-national dose-ranging study about to report. However, CimetrA faces longer Phase 3 development times and costs and a smaller COVID-19 market.
CannEpil remains an interesting product aimed at controlling refractory epilepsy. The trial now planned to start in August 2023 will be a key test of the THC hypothesis in epilepsy. Cannabidiol is already marketed for rare, severe childhood epilepsies as a single agent by Jazz Pharma with sales at over U$800mln/year.
The main issues for investors are clinical and cash. In clinical, the gradual pace of product development, particularly of the CannEpil epilepsy product, where there is a clear US market, has been frustrating but equity and tax credit support might allow the trial to proceed. Reduced ArtemiC consumer sales have cut revenues from anticipated levels although AMC might be developing a retail US market given the late H1FY23 and a new order for H1FY24 delivery. The estimated A$10mln of issued convertible loans and the ZAM Software investment have created potential overhangs which could affect the share price. Cash remains tight after the April placing, and we think that MGC needs to continue to use the Mercer loan facility in Q4FY23 and over H1FY24 unless excellent CimetrA data allows a further equity funding.