MGC Pharma funded to drive projects
MGC Pharmaceuticals Ltd (LSE:MXC, OTC:MGCLF, ASX:MXC) sells plant-derived, medicinal products in the UK, Ireland and Australia. Core marketed products are a food supplement, ArtemiC, to help overcome COVID-19 infection and medicinal cannabis products sold in Australia, UK and Ireland. A dramatic new initiative is the new medical ZAM app: a real-time data collection smartphone app with proprietary artificial intelligence (AI) algorithms. MGC will pay £0.7mln in shares to acquire 40% of ZAM Software Limited, the app owner. ZAM will be rolled out from Q3 2022 onwards with continued enhancements. ZAM, MGC believes, could revolutionise health data collection with a leading position.
Sales for FY22 (to 30 June 2022) were A$4.6mln as we expected. MGC has now redefined its revenue categories into Consumer, Generic, Innovative, and Services. Of these, Consumer had sales of about A$1.4mln; this is the nutritional product ArtemiC, supplied to SwissPharmaCan (SPC). The third-party medicinal cannabis range sold in Australia accounts for generic sales of about A$2.5mln (56% of revenues); these establish a sales base. Innovative products at about A$160k (4%) include CannEpil sales in Ireland under an accessible scheme and any sales in the UK; sales are very limited by the need for special prescriptions. The clinical trials business and Australian cannabis clinic contributed under A$0.5mln. MGC appointed an experienced chief commercial officer and partnered with Sciensus Rare to distribute CannEpil and CogniCann in the EU and UK.
MGC has a broad clinical development platform. The Phase 2 CannEpil (MGCND00EP1) epilepsy study may start in H2 2022 and run until H2 2023. A small study of dementia sufferers in Australia ended early, so its results are very interesting but not conclusive. The Israeli arm of the CimetrA Phase 2b in COVID-19 recovery, starts in October and a South African arm is being set up. Partner AMC plans to seek FDA approval to run a US arm of this study at the University of South Florida. A CannEpil driving study reported no adverse effects at low doses.
Steady sales development with new medical app initiative
MGC in the quarter to 30 June 2022 disclosed full-year cash income of A$6.1mln and sales of A$4.6mln. Part of the difference is that A$1mln was received from US partner AMC Holdings in late calendar 2021 to be recognised as sales against future US shipments. We will issue a FY23 financial forecast once FY22 results are published, expected from late August.
Cash as of 30 June was A$1.8mln vs A$5.4mln in June 2021. Cash used in operating activities was A$10.1mln Investments, mainly the new Maltese plant, totalled A$2.9mln; the cost was offset by a A$1.6mln grant in Q4. In July, MGC secured its financial position with a US$10mln convertible loan agreement with Mercer Street Capital, a US-based fund and MGC’s largest shareholder. At the current exchange rate, this is equivalent to about A$14.4mln. MGC, in effect, now has A$16.2mln of cash plus loan facilities (of which US$1.2mln (A$1.7mln) has been drawn). With this funding, MGC can execute its strategic plans for at least the next year.
Financial forecasts and Mercer funding
Year end Jun 30 · 2020 · 2021 · 2022
Revenue (A$-000's) · 2,079 · 2,962 · 4,570
Cash(AUD$, 000's) · 1,873 · 5,433 · 1,793
EBITDA, € - 000s · (11,436) · (11,421) · (12,575)
MGC, unlike many development-stage pharmaceutical businesses, has a significant revenue stream from product sales. Chart 1 shows the breakdown. Most sales were of low-margin, sourced medicinal cannabis sales in Australia.
A wide range of plant-based products
Most sales in the Innovative category were probably of CannEpil in Ireland as there is an easy-to-access special prescription scheme. UK prescriptions are tougher to access. The new chief commercial officer, Robert Clements, should help revenue development. Note that pre-approval therapies sold under Early Access and Named Patient schemes, cannot be marketed. Sciensus Rare, a specialist pharmacy distributor, will now manage prescriptions.
Chart 1 - FY22 estimated sales
Source: MGC report, ProActive graphic
US ArtemiC revenues depend on partner AMC's future programme. European ArtemiC sales, expected at A$4mln per year, might be slowing, there was a small April order.
The development pipeline is in Exhibit 1. A CannEpil (MGCND00EP1) epilepsy study, NCT04406948, Phase 2b study is planned to start in H2 2022 and will take a year to run. The ongoing Phase 3 on the old CimetrA formulation has ceased recruitment. The new Phase 2b study, NCT05037162), starts in October and might run in Israel, South Africa and possibly the US if AMC gains an IND.
Exhibit 1 - Pipeline
Source: MGC
The ZAM App, Exhibit 2, aims to use AI plus patient input data and medical records to optimise treatment using an integrated, real-time healthcare approach. This could establish MGC as a leading medical app company. Short-term, it could boost medicinal cannabis sales. Longer term, the AI might have much broader applications. It will be initially tested with 100 patients through the MGC Australian cannabis clinic
ZAM is owned by a recently established UK company, ZSL, in which MGC is taking a 40% stake for £0.7mln in shares; there are voluntary lock-up provisions. The remainder is owned, MGC notes, indirectly by Caba Tech, a website developer with a Russian HQ. Caba will continue to develop ZAM and the AI technology.
Exhibit 2 - ZAM App
Source: MGC
Financial estimates
The estimates for FY22 (30 June year-end) are unchanged except for minor adjustments to make them in-line with the disclosed quarterly cash flow disclosures: Profit and Loss Table 1, Cash Flow Table 2, Balance Sheet Table 3. We will update these and estimate FY23 once the preliminary FY22 results are presented in September.
Table 1 - P&L
Source: MGC reports, ProActive estimates
Table 2 - Cash flow
Source: MGC reports, ProActive estimates
Table 3 - Balance sheet
Source: MGC reports, ProActive estimates
Mercer funding
The Mercer deal is a convertible loan arrangement priced in US dollars. MGC gains a guaranteed amount, US$10mln, that it can access as needed; the first tranche has been drawn. The loan notes issued to Mercer can be either converted to shares as Mercer wishes or redeemed by MGC under conditions. If not converted, the loans are repaid. The shares are issued at a discount to the lowest recent volume weighted price but within limits. This can lead to a dilution of other equity holders but provides management with a known cash resource to fund core projects like ZAM and clinical studies.
- The first tranche funding of US$1.2mln was received on 3 August. MGC issued US$1.32mln of convertible notes to Mercer. These can be converted at A$0.02, till October (two months) and after that at 92% of the lowest daily volume weighted average price seen over 10 days with a minimum of A$0.014 and a maximum of A$0.02.
- MGC also issued 21,511,545 fully paid ordinary shares to Mercer on 3 August as a fee. The value at A$0.019 is about A$400k.
- The remaining US$8.8mln can be drawn in tranches over 18 months, till January 2024.
- For every US$1 of funding, MGC issues US$1.1 of loan notes, hence a 10% premium.
- Further loan notes can be converted at 90% of the lowest daily volume weighted average price reached in the previous 10 days with a minimum of A$0.014. The highest price for conversion will be A$0.02.
- Notes have an 18-month term from the date of issue. Notes not converted to shares can be repurchased by MGC at a 3% premium to face value (although this does not apply to the first US$3mln issued). Notes outstanding after 18 months from their issue must be repaid at face value.
This, in our view, is a realistic funding deal given the tough investment climate and MGC’s need for cash to progress its portfolio of projects. The notes are converted between A$0.02 and A$0.014. Ideally, MGC will raise other funds in time and so may not need to entire US$10mln facility. It does not prevent other funding activities, like equity.
Investment conclusion - lots of potential but trials need to deliver more data
MGC offers a diverse, plant-based portfolio of nutritional and medicinal products. The ArtemiC range is innovative, with a patented (in Slovenia) formulation of well-known, natural ingredients using nano-technology from Graft Polymer. The simplified pharmaceutical version of CimetrA is about to start clinical development for the relief of COVID-19 infection symptoms with a multi-national dose-ranging study.
CannEpil is an interesting product combining psychoactive THC with proven cannabidiol aimed at controlling refractory epilepsy. Cannabidiol is already marketed for rare, severe epilepsies as a single agent by Jazz Pharma with strong US sales of over U$500mln. CannEpil should start a Phase 2 in Israel and possibly Slovenia in H2 2022. Clinical data might be available by late H2 2023. We also note the interesting, but inconclusive, CogniCann data. We feel that a robust clinical dose-ranging trial in this area could be very valuable. The product could easily be approved for elderly patients if clinical data supports its use.
MGC has been investing, with grant support of over €3mln from the Maltese government, in a new production facility. This should come on stream in H2 2022 after completion and certification.
The main issues for investors are the gradual pace of clinical development, particularly of the CannEpil epilepsy product, where there is a clear US market, and the reduced FY22 ArtemiC consumer sales, which were expected to be higher to offset investment into pharmaceutical products. Medicinal cannabis sales are growing steadily but the need for complex administration of early access prescriptions will always limit revenues till MGC obtains enough clinical data to gain full pharmaceutical approval. Hence, the CannEpil trial starting in H2 2022 is especially crucial. There are no stated CogniCann clinical plans yet this could be a simpler indication to develop than epilepsy with a clear market.
The new ZAM app initiative is hard to assess, especially as we have not seen the app. Management is very enthusiastic on the potential, which we concur is very high. However, MGC has no medical IT experience, while the development and clinical validation of software is a complex area in which Caba has no known track record. Caution needs to be exercised over the management of patient medical data.