To understand the growth opportunity at LSH, it is necessary to provide an overview of the engine behind the growth, its number 1 shareholder, Cannvalate.
Cannvalate’s register is largely a mystery although we have been informed it includes doctors, including high profile cannabis exponent Dr Sud Agarwal, and 4 young rich-listers.
Cannvalate also informs us it has a whopping 40-50% of the prescription market in Australia.
Cannvalate are not a grower and must import their oils from overseas like their competitors.
Up to 95% of oils prescribed in Australia are imported, making an already very expensive product even more expensive.
The product is currently so expensive that the overwhelming majority of Australian medical cannabis users opt for the traditional consumption methods, that is, joints and water pipes.
Cannvalate are in the process of setting up Australia’s largest extraction facility on behalf of the Valens Group, a Canadian cannabis company.
This will enable Cannvalate, already with the largest market share, to substantially undercut competitors’ products who are reliant on imported product.
The product, however, will still be expensive for the average patient, and it is not included in the government’s subsidized prescriptions list meaning the user must wear the entire cost.
Vaping provides a ready-made effective solution here.
Vaping is not only the fastest way to feel the effects of medical cannabis, but it is also the cheapest for the consumer because the body absorbs the majority of the medicine, more than even smoking joints where some of the effects are lost in the combustion.
The CBD and THC amounts in the dry herb also vary, so it lacks the precision that can be obtained with extracted oils processed into a finished product, giving the product the precision demanded of any medicine.
Oils cannot be vaped. It is necessary to dilute the oil with additives to produce a product that can be safely vaped. This is a very hot issue in the USA because if the oil is diluted with harmful ingredients on the black market, it is argued vaping can cause severe lung damage and even death.
It is imperative any patient who vapes is vaping a product they can trust.
EC Pharma is a 100% owned subsidiary of Cannvalate: “EC Pharma is an Australian based pharmaceutical company focusing on safe, vaporized cannabinoids.”
So now we have the hand, EC Pharma, and the glove, LSH.
The Size of the Market
While Australia is considered the 4th biggest market behind North America and Germany, the Australian market for a variety of valid reasons remains in its embryo stage.
It is complicated to put a number on the amount of current patients using medical cannabis. We know the number of prescriptions, but this hides the fact that one patient could responsible for multiple prescriptions.
In January 2019, it was estimated there were 9,000 patients. 2 years on in an exponentially growing market, that number will be much higher.
In September 2020, 6,000 patients were approved for medical cannabis treatment through the Special Access Scheme (SAS).
Up to December 31, 2020 the TGA had approved 85,000 SAS category B applications.
Cannvalate themselves say they have been writing 1,000 new prescriptions a month, that is on top of their existing patients.
The question is better posited how high can the medical cannabis market grow? Peter Crock, chair of the Medicinal Cannabis Industry Australia, says between 300-600,000 patients.
Gail Hester, the founder of Medical Cannabis User’s Association of Australia, suggest this number could be much higher and closer to 1 million (in a poll of 2.9 million Australians on the issue of medical cannabis, 90% responded in favor), but she adds there are 3 barriers which means patients are still only a fraction of this number.
Those 3 barriers are:
Doctor reluctance
Access
Affordability
On the issue of affordability, Gail Hester contends 44% of patients pay on average $500 per month.
As a result of the above 3 handbrakes, the black market continues to dominate the Australian market.
Indeed, a University of Sydney study published last year informs us only 2.7% of 1,388 respondents are accessing legal product.
The Business Models
Based on the above, I will make the following assumptions for future growth:
Australian medical cannabis market: 300,000 (the lower of Crock’s projections above).
Divide by half to exclude minors and patients who are strictly anti-vaping.
LSH addressable Australian market: 150,000
Cannvalate’s market share: 40% (the lower of the figure given by Cannavlate above)
LSH annual vape sales 150,000 x 40% = 60,000 units
Life span of vaporizer: 12 months (this is probably being very generous as I burn through around 4 vapes a year).
Selling price: USD$195
Gross margins: 40%
Basic LSH sells medical vapes:
Annual vape sales: 60,000 units x USD$195 = USD$11,700,000
(Gross margins: USD$4,680,000)
Medium LSH sells medical vapes & Bodytel
Annual vape sales: USD$11,700,000
(Gross margins: USD$4,680,000)
Plus Bodytel revenue: 60,000 patients x monthly SAAS fee. I will assume here USD$5 per patient per month.
60,000 x USD$5.00 = USD$300,000 per month
Annual Bodytel revenues: USD$3,600,000
Most of this will fall to the bottom line as the Bodytel system has had years of work invested into it waiting for vaporizing to be given the green light.
Annual total revenues: USD$15,300,000
Advanced LSH sells medical vapes, Bodytel & receives a % of medical cannabis sold
Annual vape sales: USD$11,700,000
(Gross margins: USD$4,680,000)
Annual Bodytel revenues: USD$3,600,000
We know from the above 44% of patients pay AUD$500 a month, so I will lower this figure to USD$200 – a figure much cheaper than smoking cigarettes.
Revenue clip: 10%
60,000 patients x USD$20 per month = USD$1,200,000 per month
Annual medical cannabis revenues: USD$14,400,000
Annual total revenues: USD$29,700,000
The opportunity is Lifespot Health’s current market capital is AUD$16,000,000 with a registry that includes prominent industry insiders.
Of course there are a lot of assumptions and variables in here, including LSH’s revenue will be limited to the Australian market.
This is where it gets interesting. Vijay Sappani, the head of Ela Capital, is a legend in North American cannabis and most notably for turning TerrAscend into a unicorn. Ela Capital has recently invested in LSH buying shares on market and then taking up the entire rights shortfall. They have also invested alongside Snoop Dogg in a smaller California based vape project, which I believe is likely to intertwine with LSH at some point.
This is all imo. It is a high risk high reward proposition. I have tried to make educated guesswork of an industry which is yet to take off and everything here is open for challenge or further discussion and is not intended to substitute your own research.
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