Pharmadrug Releases Encouraging Q3 Financials and Forecasts Solid Profits in 2020
During the third quarter, ended September 30, 2019, Pharmadrug (CA:BUZZ – $0.03 & US:LMLLF – $0.03) reached revenues of $271,000 with a gross margin of $67,000, or 25%. Gross margin is expected to improve to 40% over the coming quarters. Recall that Pharmadrug has two supply agreements where it will be paying €4,00 per gram of cannabis while it is currently distributing its products to pharmacies in Germany at €9,50 per gram, a 58% margin. Therefore, it is reasonable to expect that the Company will achieve the 40% margin as promised in the near-term. Gross margins may even continue to increase down the line, as Pharmadrug benefits from more efficient logistics and economies of scale.
Pharmadrug recorded a $459,000 net loss for Q3. In the context of being a startup, this is a very reasonable burn rate. Assuming a 40% gross margin, the Company would likely achieve breakeven operations around $1.5 million in revenue per quarter.
Profitability and Strong Growth Expected in 2020
While Pharmadrug is off to a nice start, no one should have been expecting incredible numbers in just its second quarter of operations since purchasing Pharmadrug Production GmbH in May 2019. What should be much more exciting to shareholders are the Company’s expectations made for 2020. CEO Daniel Cohen stated, ”We expect Pharmadrug’s German operations to reach profitability in the first half of 2020 with a surge in growth to begin in the latter half of next year”.
While this is a very confident statement from the CEO, we think this goal is achievable. The Company already has two supply agreements in place with plans to close a third. These agreements will supply Pharmadrug with medical cannabis starting in Q2 2020 under the Company’s ‘Cannabion’ brand. Management’s goal is to have a run-rate of 1,000 kg of medical cannabis supply by Q4 2020 with 3,000 to 5,000 kg of medical cannabis in 2021.
The demand side also looks robust as Pharmadrug has grown to reach nearly 100 of the approximately 20,000 pharmacies in Germany in just four months. At that pace, we expect the Company to be in several hundred by the end of 2020. Pharmadrug recently bolstered its sales team to expedite its presence in the pharmacies. The Company is looking to resell its product to other distributors in Germany with discussions having commenced with several interested players. Pharmadrug also plans to export GMP medical cannabis to other EU countries as they legalize cannabis.
Based on a sales price of €9,50 per gram and cost of €4,00 per gram, the 250 kg of medical cannabis target for Q4 2020 would lead to €2,375,000 ($3.5 million CAD) in revenue and €1,375,000 ($2 million CAD) in gross margin in just that one quarter. Looking at these numbers and comparing them to the reported numbers of Q3 2019, the CEO’s claims on revenue growth and profitability suddenly become very realistic.
That amount of gross margin would be more than enough to ensure bottom line profits even when accounting for a modest increase in the current level of operating costs. The median production and sales target of 4,000 kilograms in 2021 would lead to €38 million ($56 million CAD) in sales and €22 million ($32 million CAD) in gross margin.
Pharmadrug is Excessively Cheap if it can Execute on Its Business Targets for 2020-21
After the cannabis blow up of 2019 that particularly impacted CSE-listed stocks, there are many stocks of BUZZ’s ilk that have lost a lot of value and appear to be cheap. However, few have a CEO willing to go on the record to forecast profitability in the first half of 2020, which is now just seven months away. Pharmadrug also has a straightforward, easy-to-understand and high margin business plan backed by numbers with the building blocks already in place in order for that plan to be executed.
We have mentioned this before but it bears repeating. BUZZ is trading at a shell valuation of around $3 million in market cap. The over $500,000 in revenue achieved in less than half of a year in 2019 implies an annualized revenue multiple of less than 3x and things are just getting started. Even if it were to execute on half of the production and sales goal for 2021, BUZZ would be trading at around 0.1x of expected 2021 revenue.
We continue to believe that it is an opportune time for existing investors to consider adding to their position and new investors to consider initiating a position in the stock. Anyone who has the patience and risk tolerance to hold for the next 12-18 months should be richly rewarded with strong revenue growth and the expectation of profitable operations. Smallcaps Recommendation: BUY.
|Smallcaps Recommendation: Buy||Price Target: $0.21||Latest Company Report (pdf)|
|For important disclosures, please read our disclaimer.|