Pharmadrug Inc: A balanced approach to psychedelic healthcare and wellness
Pharmadrug Inc. is a specialty pharmaceutical company focused on the development and commercialization of controlled-substances and natural medicines such as psychedelics, cannabis and naturally-derived approved drugs. The company has three business segments:
1) In the European cannabis space, Pharmadrug is an EU-GMP approved distributor of medical cannabis in the German market with a Class 1 Narcotics license. Medical cannabis in the EU is already a €1bn market, and we are forecasting rapid growth over the next decade based on continued regulatory liberalization. In recent months Pharmadrug has added new supply agreements with cannabis producers, and we believe that these will allow the company to achieve significant volume growth during 2021 and 2022.
2) In retail psychedelics, Pharmadrug has established a retail brand focussed on the Netherlands-based market for legally sold ‘magic truffles’. During 2021 we expect significant expansion on the initial operation which is in place with material revenue generation by the second half of the year. The Dutch-based retail psychedelics operation also provides a platform for Pharmadrug to expand into other legalized psychedelics markets as and when regulatory liberalization allows.
3) Pharmadrug also has a biotech operation focussed on plant-derived pharmaceutical medicines. The company is positioning itself to become a leader in developing the medical application of the naturally occurring psychedelic, N,N-Dimethyltryptamine (DMT). Pharmadrug recently announced a research agreement with the University of Michigan to evaluate the action of DMT on normal, diseased and altered states of consciousness. This program complements the company’s existing DMT programs which focus on the anti-oxidative properties of DMT. In addition to the DMT programs, Pharmadrug is working with a plant-derived drug called Cepharanthine, outside of the psychedelic medicine space, to produce a therapy targeting esophageal cancer.
In this report, we examine the growth drivers for each of the three segments, and the overall revenue growth outlook for Pharmadrug.
Three-pronged strategy
The psychedelics space has become an emerging growth sector in the investment markets, with a number of listed companies evaluating new applications for psychedelic compounds. Pharmadrug stands out from the peer group in terms of its balance of near-term and longer-term revenue drivers, with biotech offering potentially outsized value-creation on a +5-year timeframe, while cannabis represents an establish current revenue stream, and both cannabis and retail psychedelics offering significant revenue growth potential during 2021 and 2022. We argue that this balanced approach presents a compelling investment case for shareholders.
Furthermore, in recent months the company’s balance sheet position has been improved due to the exercise of warrants and the crystalizing of gains on some investments. The resulting cash position is sufficient, in our view, for the company to finance its activities through 2021 and realize the next phase of Pharmadrug’s growth journey.
Investment conclusion
Pharmadrug is a pharmaceutical and consumer wellness company focussed on plant-based medicines. The company has three distinct areas of focus: the European medical cannabis market, retail psychedelics, and biotech.
European cannabis
Pharmadrug GmbH is a German EU-GMP-approved pharmaceutical distribution company with a Class I Narcotics license, which allows the company to import and distribute medical cannabis to pharmacies in Germany. The German operation provides Pharmadrug with a platform for establishing Europe-wide operations in future.
The European legal cannabis market exceeds €1bn and is growing rapidly. We expect medical cannabis sales in Europe to exceed €50bn by 2028. We examine these growth dynamics on pages 6-7.
Retail psychedelics
Psilocybin truffles are a naturally occurring psychedelic which is legally sold in the Netherlands, meaning full recreational legality rather than ‘decriminalized’ or another grey market status. Pharmadrug has established a proprietary brand called Slim Winkel to operate retail stores and an e-commerce site to serve the Dutch market.
Biotech
In January 2021 Pharmadrug announced the acquisition of a company called Sairiyo Therapeutics, a biotech enterprise focussed on the repurposing of drugs and developing improved formulations for regulated pharmaceutical applications targeting serious and life-threatening illnesses. Sairiyo’s lead drug candidate is a reformulation of a compound called Cepharanthine, which will initially target esophageal cancer.
Investment summary
Pharmadrug is an early mover on DMT - a natural psychedelic with significant pharmaceutical potential
Also within its biotech portfolio, Pharmadrug has development programs working with the psychedelic compound N,N-Dimethyltryptamine (DMT). The company has a research program evaluating the action of DMT on different states of consciousness, and is also separately working with the anti-oxidative properties of DMT to target life-threatening conditions including kidney transplant complications and stroke.
Three business segments
Source: Proactive Research
We argue that Pharmadrug is uniquely positioned within the market-listed psychedelics space, in having three distinct and complimentary business segments which offer:
Existing revenue generation with strong growth drivers in place
- An existing revenue stream in European medical cannabis, and near-term potential revenue upside in cannabis and in retail psychedelics
- Substantial revenue growth potential in the medium term, particularly in European cannabis
- Even larger revenue opportunities longer term in the biotech space
The following diagram illustrates the growth potential:
Revenue potential by business segment - illustration
Source: Proactive Research
Biotech value may in practice be realized my monetizing the IP before it reaches the revenue stage
In practice the value of the Biotech business is more likely to be realized by selling or licensing the IP, in our view, rather than by Pharmadrug pursuing the development all the way to revenue generation. However, we find it useful to visualize the relative timeframes for each of the business segments in revenue terms.
In this report, we examine Pharmadrug’s capabilities and market opportunities in each of the three segments, and the scale of the revenue potential.
Biotech
In the biotech space, Pharmadrug has two drug candidates currently in pre-clinical stages of development, targeting three life-threatening conditions:
- N,N-Dimethyltryptamine (DMT) is a natural psychedelic occurring in the Amazonian ayahuasca brew. This is a major investigative stage program for Pharmadrug, targeting a variety of different indications.
- Cepharanthine is a naturally occurring compound derived from the plant Stephania Cephalantha Hayata, which has a history of pharmaceutical usage spanning back 70 years. Pharmadrug is targeting a new treatment based on Cepharanthine for esophageal cancer, a disease that claims over 15,000 lives per year in the USA alone.
Two drug candidates, addressing multi-billion dollar end markets
Two drug candidates
Source: Proactive Research
We consider the two drug candidates separately:
DMT (N,N-Dimethyltryptamine)
DMT is a naturally occurring psychedelic that is found in at least 50 different plant species. The compound was first isolated in 1946 but has been in use by Amazonian tribes for centuries in the form of ayahuasca which is used in shamanic rituals. More recent scientific study has shown that DMT is also endogenously produced within mammals and may form a significant functional component of our neurochemistry.
Research agreement with U. Michigan lays an important foundation for Pharmadrug's DMT research
In March 2021 Pharmadrug announced a sponsored research agreement with the University of Michigan Medical School to evaluate the action of DMT on normal, diseased and altered states of consciousness to develop novel therapeutic strategies for clinically unmet medical needs. Scientific studies have shown that DMT can produce mood-elevating and calming properties which make it a potential treatment for depression and other neuropsychiatric disorders. This potentially gives Pharmadrug exposure to a US$100bn market for mental health therapies.
The agreement with the University of Michigan reinforces Pharmadrug’s position in DMT research, building on the company’s previous initiation of work in this field:
In February 2021 Pharmadrug announced the appointment of Dr Stephen Barker to its scientific advisory board. Dr Barker is Professor Emeritus at Louisiana State University and has been involved in research into DMT for over 40 years.
Also in February 2021, Pharmadrug announced two research programs for the use of DMT in treating life-threatening illnesses – acute ischemic stroke, and ischemia-reperfusion injury in kidney transplant patients. Both of these potentially life-saving treatments utilize the action of DMT on the sigma-1 receptor (Sig-1R) and critical downstream pathways which enhance the production of anti-oxidant proteins. Pre-clinical models and animal trials have shown that this mechanism could mitigate damage to the kidney and the brain in the respective applications.
Pharmadrug has applied for Orphan Drug Designation for both the stroke program and the kidney program. This designation is an incentive scheme by the US government to encourage pharmaceutical companies to invest in therapies for rare diseases and conditions, and if granted, it carries benefits including R&D tax credits and seven-year marketing exclusivity for the indication covered by the designation.
We argue that DMT is among the less well-explored compounds in the psychedelics space, with others in the industry more focussed on LSD, psilocybin, or MDMA. We believe that Pharmadrug’s research programs, and in particular the new agreement with the University of Michigan, could position the company to become a leader in realising the therapeutic value of DMT.
Reformulation allows Cepharanthine to be repurposed for multiple new indications
Cepharanthine
Cepharanthine has been used in pharmaceutical applications for over 70 years, particularly in Japan for the treatment of conditions including snake bites, malaria, and hair loss. Pharmacological properties of Cepharanthine include anti-oxidative, anti-inflammatory, immuno-regulatory, anti-cancer, anti-viral, and anti-parasitic properties.
One limitation of Cepharanthine in its original form is poor bioavailability, meaning the active compound is not readily absorbed into body tissues and cells. Pharmadrug is working with a modified formulation that offers higher bio-availability. This technology was developed by Sairiyo Therapeutics, the developmental drug company acquired by Pharmadrug in January 2021.
The modified version of Cepharanthine has numerous potential applications. Initially Pharmadrug is targeting a new treatment for esophageal cancer. This form of cancer has a five-year survival rate of only 20% with currently existing treatments, and claims over 15,000 lives per year in the USA.
The drug market for esophageal cancer treatment has been growing strongly in recent years, and is now approaching US$1.5bn per year.
Esophageal cancer - a growing market for a potentially life-saving drug
Esophageal cancer drugs market
Source: Proactive Research, based on multiple market sources
An important feature of Pharmadrug’s development of Cepharanthine for esophageal cancer is that the program has been awarded Orphan Drug Designation (ODD) by the FDA. The designation as Orphan Drug is an incentive scheme by the US government to encourage pharmaceutical companies to invest in therapies for rare diseases and conditions, which typically means conditions affecting less than one in 200,000 people. Benefits of Orphan Drug Designation include R&D tax credits and seven-year marketing exclusivity for the indication covered by the designation.
The following articles provide some background material about the potential use of Cepharanthine against cancer, and about its general pharmacological properties.
https://pubmed.ncbi.nlm.nih.gov/29340044/
https://pubmed.ncbi.nlm.nih.gov/31132753/
European cannabis
We believe that Europe is set to become the fastest-growing cannabis market in the world during the next decade, and to exceed the size of the North American market by 2030. Growth will initially be driven by the medical market, which is the current target market for Pharmadrug.
The following chart illustrates our forecast for the European cannabis market.
European legal cannabis market to reach €60bn
European cannabis market outlook
Source: Proactive Research, based on multiple market sources
Legal cannabis in Europe is already a €1bn industry, with medical cannabis having been legalized in the following countries:
Sixteen European countries have legalized medical cannabis
Croatia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Ireland, Italy, Lithuania, Luxemburg, Malta, Norway, Poland, Portugal, Sweden, Switzerland, and the UK.
Although there are 16 EU countries (plus Norway, Switzerland, UK) that have legalized medical cannabis, the regimes vary in terms of restrictions on prescriptions and the range of conditions for which cannabis can be prescribed.
Globally cannabis is being recognized as an effective treatment for a wide range of conditions. The following diagram outlines some of these.
Conditions treated with medical cannabis
Source: Proactive Research
Germany is the European leader in allowing cannabis for a breadth of medical conditions
Not all jurisdictions with legal medical cannabis are making it available for the full range of applicable conditions. Indeed, some jurisdictions such as the UK are applying extremely narrow criteria for prescribing cannabis.
Within the EU, Germany is now leading the market for legal cannabis, with sales expected to exceed €200mln in 2021. Germany legalized medical cannabis in 2017. By 2019 there were 60,000 registered users (data for 2020 not yet available) and over 9,000 kg of cannabis imported for medical use.
Pharmadrug’s German subsidiary, called Pharmadrug GmbH, is a German EU-GMP-approved pharmaceutical distribution company with a Class I Narcotics License. Cannabis is produced by licensed producers (LPs) outside of Germany. In order to import into Germany, the LPs must obtain GMP certification and product-specific approval for their cannabis or cannabis extract. Pharmadrug’s own GMP certification allows the company to partner with LPs in this process, and the narcotics license enable Pharmadrug to distribute to pharmacists.
The following diagram illustrates the value chain.
Pharmadrug's licenses place the company at an important position in the value chain
European cannabis - the supply chain
Source: Pharmadrug
Although the German medical cannabis market has been the leading market in Europe in recent years, growth has nonetheless been held back by supply constraints due to the regulatory process. The dominant supplier into Germany has been Bedrocan BV of the Netherlands. Up until March 2021, Pharmadrug has sourced all of its cannabis for the German market through Bedrocan via a Dutch government agency called the Office of Medical Cannabis.
New supply agreements position the company to expand in German cannabis distribution
In July 2020 Pharmadrug entered into a supply agreement with the Canadian LP Eve & Co, which already held EU-GMP status. Pharmadrug is working with Eve & Co to achieve the necessary product registration to begin importing cannabis products into Germany.
In January 2021 Pharmadrug entered into another supply agreement with a major Canadian LP (undisclosed) to import medical cannabis into Germany. Both the GMP certification and product registration are already in place for this partnership.
We believe that Pharmadrug is well-positioned to substantially increase its distribution of medical cannabis in Germany, through the two new supply agreements, and potential future additional suppliers. In the coming years, we also expect Pharmadrug to leverage its German position to begin distributing to other EU markets as they expand their use of medical cannabis along the lines of the German model.
CBD products diversify the revenue stream
Cannabidiol (CBD):
Also in February 2021 the company announced that it had made significant progress towards launching its own line of consumer health products containing cannabidiol (CBD). CBD is a non-intoxicating extract of the cannabis plant, which is legal even in many jurisdictions which do not have a legal market for medical or recreational cannabis.
The business model in CBD will differ from Pharmadrug’s medical cannabis business, in that the company will supply CBD-based products under its own in-house brand. Pharmadrug has already sourced its CBD supplier and begun to build an initial inventory of the product and is in talks with distribution partners. Once the product registration process is complete we expect revenues to begin during 2021.
The CBD will serve as an additional revenue source and a diversifier for the Pharmadrug European cannabis business.
Retail psychedelics
Psilocybin-bearing sclerotia, known as ‘magic truffles’ are a naturally occurring psychedelic fungus carrying the same active compound as ‘magic mushrooms'. Magic truffles are legally sold and consumed for recreational use in the Netherlands.
These products are sold through licensed retailers called smartshops, and also through online retail sites. We estimate the market for magic truffles currently runs at €20mln per year. The following chart illustrates the different retail channels.
Netherlands psilocybin truffle market
Source: Proactive Research
Pharmadrug has established its own retail brand called Slim Winkel to operate a chain of smartshops and an e-commerce platform. The stores differentiate themselves for their competitor base by their inviting layout, knowledgeable staff, and high-quality products. The brand is designed to appeal to the local Dutch consumer and to the more discerning tourist, rather than the backpacker market.
A retail brand aimed at the informed, health-conscious consumer
The Slim Winkel brand
Source: Pharmadrug
Pharmadrug acquired its first smartshop store in October 2020, in the city of Tiel. The company plans to open a flagship store in Amsterdam during 2020, as well as to continue with the rollout of the online offering. The stores will offer magic truffles as well as natural health products and related paraphernalia.
Rollout of the magic truffle retail outlets is underway
Retail outlet plans
Source: Pharmadrug
We argue that Pharmadrug has the potential to gain significant market share in the Dutch smartshop segment for retail psychedelics. This offers an immediate revenue stream for the company in 2021 and 2022.
Furthermore, experience gained in the Dutch market will position Pharmadrug strongly with respect to the global consumer psychedelics market in the event of future regulatory liberalisation in other jurisdictions beyond the Netherlands.
Key people
An important aspect of delivering on Pharmadrug’s three-pronged strategy is the quality of the executive team implementing the scientific and commercial aspects. The below are summaries for the key people:
Daniel Cohen, CFA. Chief Executive Officer of Pharmadrug Inc.
Daniel has over 20 years of capital markets experience, most recently spending several years as head of sales at Beacon Securities. During this time, Daniel successfully financed and launched multiple public companies.
Harry Resin. President of Super Smart (Netherlands retail psychedelics business)
Harry has worked in the cannabis industry for the last 17 years as a supply chain consultant to coffee shops in Amsterdam and as a founding member of an original Amsterdam seed company. He has also served as a staff writer for High Times.
A leading researcher in the effects and uses of DMT
Dr Steven A. Barker. Scientific Advisory Board member
Dr Barker, Ph.D. been involved in the research of psychedelics with a primary focus on DMT since 1976. He appeared in the 2010 documentary DMT: The Spirit Molecule and is Professor Emeritus at Louisiana State University in the Department of Comparative Biomedical Sciences at the School of Veterinary Medicine. He held the Everett D. Besch Distinguished Professor award between 2000 and 2006 for his research into the Neurochemistry of hallucinogens.
Dr. Yelena Y. Janjigian, MD. Scientific Advisory Board member
Dr Janjigian is the chief of the gastrointestinal medical oncology service in the Division of Solid Tumor Oncology, Department of Medicine at Memorial Sloan Kettering Cancer Center (MSK) in New York. An international expert in cancers of the esophagus and stomach, Dr Janjigian is currently leading several studies that could impact the standard of care for cancers in these fields.
Financial position
During the last two financial quarters, Pharmadrug has significantly strengthened its balance sheet cash position, through the exercise of warrants and the disposal of marketable securities which had gained in value. The following chart illustrates the movements in the cash position together with the additional near-term sources of further cash.
Capital raised and utilized, since Sep 2020
Source: Proactive Research
In addition to the current cash balance, the company has some CA$10mln potentially arising from warrant exercise, based on the current Pharmadrug share price, together with up to CA$1mln from the sale of marketable securities, principally relating to the company’s ownership of warrants on Red Light Holland (CSE:TRIP).
We believe that the current cash position of CA$3.5mln is sufficient to finance the company’s activities through 2021, with future cash sources potentially extending that runway further.
Pharmadrug occupies a unique position within the plant-based healthcare and psychedelics spaces
Conclusion
We argue that Pharmadrug offers investors attractive exposure to the fast-expanding psychedelic medicine space. Some of the key features include:
- Existing revenue streams in European cannabis and retail psychedelics, with visible growth drivers in the near term
- Substantial potential for value creation from the Biotech segment, particularly the DMT programs
- Sufficient balance sheet resources to finance the next stage of the growth strategy.