SynBiotic — Building the platform

SynBiotic was established to take advantage of growing consumer acceptance of cannabinoids across a range of applications, including healthcare (pain, sleep and anxiety solutions), nutrition, cosmetics and animal food supplements. The company’s strategy is to build a platform that encompasses the cannabinoid ecosystem, from research through to production and distribution, so that it can span the entire value chain. This should enable it to operate more efficiently and effectively navigate any legislative restrictions. For example, current proposals in Germany would only allow producers to import cannabis for medical purposes, but not for recreational use, thus implying that the full value chain is required to be in Germany in the recreational cannabis segment. SynBiotic’s approach means that the infrastructure is already mostly in place for it to take full advantage once recreational cannabis is legalised, while a number of its competitors are only focusing on discrete parts of the value chain.

SynBiotic’s current operations encompass the entire value chain, though revenues are mainly in the distribution part of the business. Pro forma revenues were €15m in FY21 (€8.6m reported revenue, with pro forma figures assuming all acquisitions were owned for the full year), consensus expectations are €20m for FY22 (full year results are due in May 2023) and management’s goal is to grow to €46m of revenue in FY23. Germany represents SynBiotic’s biggest market, with 92% of company revenue coming from the country during 2021, but it also sells in other European markets, with Austria the next biggest country, representing 4% of revenue in 2021.

Cannabinoids, of which the two main ones are delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD), constitute the more than 120 natural active ingredients of the hemp plant (cannabis sativa). These chemical compounds can have a positive medical or cosmetic effect by interacting with specific receptors within the central nervous system. By influencing how cells communicate between brain and body, cannabinoids regulate numerous activities, including mood, sleep, memory and appetite.

SynBiotic was known as Ledgertech until April 2020 when it was renamed in keeping with the realignment of its strategy. Its first acquisition in June 2020 was that of Solidmind Group, a nutrition wellbeing business; its managing director, Lars Müller, became managing director and then CEO of SynBiotic in November 2020. The consideration was €25m, and while initially part of the payment was agreed in cash, Solidmind shareholders received the entire consideration in SynBiotic shares. The acquisition of 72.5% of Solidmind Group was followed by the takeover of the BioCBD ecommerce activity of Umtr Group (organic CBD and hemp products) in September 2020. In November 2020, SynBiotic proposed the acquisition of Lean Labs Pharma (CBD production), owned by Lars Müller. The acquisition was paid in shares (440,000 shares), and a capital increase occurred in December 2020 to facilitate the implementation of SynBiotic’s strategy. In March 2021, SynBiotic announced a further acquisition and another capital increase: it acquired a 25.01% stake in The Hempany, a food company that markets hemp milk and other natural hemp-based beverages, for a consideration of €550,000. In April 2021, SynBiotic announced an in-kind capital increase for the takeover of Lean Labs and the remaining share of Solidmind Nutrition. It also announced the investment in NeuroTheryX (an R&D driven company), rapidly followed in May 2021 by the acquisition of GECA Pharma (which traded in pharmaceutical, cannabis-containing medicines). In November 2021, SynBiotic acquired 50.1% of the shares of Hanf Farm (organic hemp cultivation), Hemp Factory (hemp food production), Hempro International (a hemp food distributor) and MH medical hemp (CBD expertise and wholesaler with THC and BtM approval). This group of companies belonged to hemp industry pioneer Daniel Kruse, and the takeover was once again funded by a capital increase. Further capital increases were announced in September and October 2022 with the stated objective of further expanding the existing business, and also continuing to pursue the buy-and-build strategy (see the Financials section for full details). In February 2023, the intention to carry out a further capital increase (expected to be in May) was announced, though in April the board decided not to carry out a rights issue but instead issued up to 158,479 shares in a private placement, at a price of €6.31. In addition, a convertible bond of up to €1.5m will be issued and offered in a private placement, with a minimum subscription amount of €100,000. Once again, the capital raised will be used to finance further growth.

SynBiotic aims to become a leading platform company in the cannabinoids industry by acquiring majority stakes in medical and DTC companies across the value chain of the cannabis plant. This extends from research into synthetic production, to the development and distribution of innovative drugs and non-prescription wellbeing products based on cannabinoids.

We illustrate SynBiotic’s current investments below.

Despite cannabis being used for various medical purposes for thousands of years (and having a safety profile that is superior to alcohol in many respects), there are surprisingly few therapeutics containing cannabis that have been approved by major regulatory authorities, with worldwide sales of only c US$600m in 2020, according to Evaluate Pharma.

GW Pharma’s Epidiolex for the treatment of certain rare epilepsies was a game-changer as the first FDA-approved cannabinoid drug in history. It was launched at the end of 2018 and soon after, the World Health Organization called for the reclassification of cannabis and its derivatives to facilitate trade for medicinal and scientific purposes, suggesting that CBD with 2% or less THC should not be subject to international controls.

This led to the United Nations Commission for Narcotic Drugs, the UN’s central drug policy-making body, in December 2020 voting to remove cannabis for medicinal purposes from a category of the world’s most dangerous drugs (Schedule IV of the 1961 Single Convention on Narcotic Drugs) to which the strictest control measures apply, which has generally discouraged its use for medical purposes. With a vote of 27 in favour (including the United States and European nations), 25 against (including China and Russia), and one abstention, UN News states that the commission ‘has opened the door to recognising the medicinal and therapeutic potential of the drug, although its use for non-medical and non-scientific purposes will continue to remain illegal’. Although governments retain jurisdiction over the classification of cannabis, the decision signalled the intent to loosen international controls.

Recreational cannabis is a large and currently mostly illegal market. In Germany, the health minister, Karl Lauterbach, estimated that around four million people had tried cannabis at least once over the last 12 months, and a quarter of all 18- to 24-year olds in the country have used it. SynBiotic estimates the cannabis black market in Germany to be worth €4bn and potentially up to €7bn. In October 2022, the German government published the final draft of a white paper (‘Eckpunktepapier’), setting out a path to legalise the purchase and possession of up to 30g of cannabis for recreational use, and to privately grow up to three plants. The paper outlines a plan allowing consumption by adults in public or in private. Advertising cannabis products would continue to be banned. The German government wants to ensure the proposed plan would be compatible with European Union (EU) law, and hence is seeking a review, but assuming the government receives assurances on this matter, a draft law is due to be presented in Q123. SynBiotic management believes the company is well-prepared for any relaxation in legislation surrounding cannabis, with its stake in Hanf Farm, which specialises in the industrial cultivation of hemp. In addition, the joint venture (JV) with Enchilada Group, announced in April 2022, is seeking to position itself as one of the first movers in the new area of stores that sell recreational cannabis. As a reminder, the JV combines SynBiotic’s deep knowledge in the cannabis space and Enchilada Group’s expertise in the food service and franchise business.

In December 2022, US President Joe Biden signed into law the ‘Medical Marijuana and Cannabidiol Research Expansion Act’, which is the first standalone cannabis-related bill approved by both chambers of US Congress. The act creates a mechanism for FDA approval of drugs derived from cannabis and protects doctors who may now discuss the harms and benefits of using cannabis and its derivatives.

The cannabis and CBD market can broadly be divided into three distinct segments: medical cannabis, recreational cannabis (currently illegal in most jurisdictions), and the wellness and food (CBD) segment. SynBiotic believes it is well-positioned for all three of these markets, as illustrated in Exhibit 2.

SynBiotic is active in this market. Medical cannabis refers to herbal or plant-derived cannabis products that are prescribed by a doctor. Products are available as herbal materials, oils, tinctures, food or capsules.

After epilepsy, pain is probably the area with the highest quantity of evidence associated with the efficacy of cannabinoids and is an enormous market. According to the Centers for Disease Control and Prevention, 20% of adults in the United States (c 50 million) have chronic pain. In Europe, the prevalence of moderate to severe pain in the adult population is estimated to be similarly high at 19% (c 80 million). Other substantial markets are the relief of sleep-related problems and anxiety. SynBiotic believes the addressable market consists of 150 million people globally with sleep-related problems, 100 million people experiencing pain and 60 million people with anxiety.

The legalisation of medical cannabis is advanced across Europe with doctors since 2017 able to offer cannabis-containing medicines to patients with a serious illness. Doctors still tend to prescribe cannabis preparations only when other therapies are ineffective against pain, as very few cannabis products have been approved for pain; however, acceptance of medicinal cannabis is increasing steadily. Over-the-counter medicinal cannabis (containing THC) is currently only legal in a few EU countries, with Germany seen as the pioneer as it currently has over 100,000 patients and the number continues to grow rapidly. The German medical cannabis market is expected to be worth €0.84bn by 2025. (source: Prohibition Partners, The European Cannabis Market, vol. 06)

SynBiotic is well-placed to enter the recreational cannabis market once legalisation takes place. Germany is seen as paving the way towards legalisation of cannabis for recreational use, and other EU countries may follow. As discussed above, SynBiotic estimates the current black market in Germany for recreational cannabis to be worth €4bn a year, and potentially up to €7bn. While initial plans were for recreational cannabis to be available for distribution in shops and pharmacies across Germany, more recent proposals have seen the scope scaled back; under current proposals, adults in Germany will be able to grow and consume recreational cannabis privately or through non-profit members’ clubs by the end of the year.

Given the inherent uncertainty in how long the legalisation process will take, SynBiotic is purposefully embracing a broader and more diversified strategy as it awaits legalisation to progress. This includes its expertise in the wider CBD space:

The vast majority of European countries allow for the sale of CDB-containing food and wellness products. However, the legalisation of recreational cannabis, as is being proposed in Germany, is likely to boost the wellness and food segment.

SynBiotic intends to move into this segment via acquisitions.

Prohibition Partners, a business consultancy for the cannabis industry, estimates the global CBD skin care market at US$710m in 2018, with projected sales of US$959m by 2024 (ie CBD cosmetics will represent about 10% of the global skin care market in the next five to 10 years). Touted as the newest super-natural ingredient, CBD is considered to have a wide range of applications in skin, body, makeup and hair care, as well as being a potential alternative to traditional cosmetic ingredients. Starting with oil-based products focused on CBD’s anti-inflammatory properties, the growth in CBD products in beauty care has extended to skin creams, lotions, serums, soaps, sun care, hair products and makeup.

According to SynBiotic, CBD can be used in cosmetics in the EU if the products are made from cannabis, cannabis resin, cannabis extracts and cannabis tinctures derived only from the seeds and leaves of the plants. The market is barely established in Germany, though CBD-containing cosmetics can be marketed in most EU countries.

SynBiotic is active in the market for CBD-based dietary supplements, which has grown steadily in recent years. SynBiotic’s Hempamed brand is present in cannabis oils, with products aimed at different markets such as improving sleep, stress reduction and muscle regeneration

SynBiotic has recently entered this market, with CBD oils for cats and dogs.

According to FEDIAF (the trade body representing the European pet food industry), Europeans spent c €18.5bn in 2019 on pet-related products and services, of which the CBD market represents a very narrow segment. In 2019, less than 0.5% of non-CBD consumers reported buying CBD for a pet (representing only 3% of CBD consumers).

Although limited by comparison with the broader CBD market, according to Frontier Financial Group, the CBD pet products market has significant growth potential.

A challenging intellectual property landscape explains the lack of involvement in this area by larger biotechnology and pharmaceutical companies. While the clinical trial process in developing an FDA-approved cannabinoid product is no shorter, the period of exclusivity is especially short if the product is simply a reformulation of THC or CBD. Hatch-Waxman exclusivity is only three years for a product that is not a new chemical entity. Patents in this area tend to be particularly narrow owing to the high level of prior art affecting the patentability of THC and CBD formulations. Any granted patents will likely be challenged once exclusivity expires.

There are a number of small cannabis players. As discussed above, SynBiotic believes it has a competitive advantage with its vertically integrated approach, which spans from cultivation of cannabis through to production and distribution. Its direct competitors tend to be smaller, privately owned companies that only operate in a particular segment of the cannabis space.

German corporation law requires all public companies to have two boards: a management board and a supervisory board. The supervisory board oversees and appoints the members of the management board and must approve major business decisions. This independent, non-executive panel has the duty to hold management accountable and protect the interests of shareholders.

In addition to the expertise of its three-person supervisory board, chaired by entrepreneur Sebastian Stietzel, SynBiotic’s sole member of the management board, CEO Lars Müller, is backed by the highly experienced operational management of its portfolio companies. In November 2022, SynBiotic announced the creation of an advisory board, having secured Bruce Linton as its chairman. Linton is the founder and former chairman and CEO of Canopy Growth Corporation, and is one of the most experienced and most successful cannabis entrepreneurs and investors globally.

Lars Müller combines over 10 years’ experience in scaling profitable companies as an entrepreneur with in-depth knowledge of the cannabinoid industry as founder and CEO of Solidmind since 2015, where he built one of the most successful CBD brands in Germany, Hempamed (hemp-based oils) and owner of Lean Labs.

Sebastian Stietzel is a serial entrepreneur. His strength lies in strategy, operations and coaching senior leadership, with particular expertise in post-merger integration and capital market fitness.

Dr Marlon Braumann is a member of the supervisory board. He is also a serial entrepreneur and one of the founding partners of the European VC fund Elevat3 Capital, an investment fund mainly focused on biotech, medtech and fintech investments.

Thomas Hanke is also a member of the supervisory board. He has extensive transaction experience (private equity, venture capital, growth capital and PIPE transactions) and has, in addition to his work as an investor, carried out various operational interim mandates within the scope of portfolio management.

Full financials for FY21 are unrepresentative of the current business given the numerous acquisitions and market developments. For FY20, there was a pre-tax loss of €859k on revenue of €5.5m, which was already significantly different to the H120 pre-tax loss of €97k on €50k revenue. Pro forma revenue for FY21 was €15m, as per management guidance at the time.

We believe the €4m (net, combined) capital increases announced in September and October 2022 are a key driver of growth. As was the case with prior capital increases, we expect these to be targeted primarily at acquisitions, though the proceeds are also likely to be used to strengthen R&D and to continue to build the cannabis platform in Germany as the industry moves towards legalisation of recreational cannabis.

On 2 September 2022, SynBiotic announced its intention to increase its share capital by issuing up to 334,000 new shares at a price of €15. Due to market conditions, the price was reduced to €12 on 21 September. On 27 September, SynBiotic announced that it had completed the capital increase and issued 142,261 new shares at a price of €12, thus resulting in gross issue proceeds of €1.7m. On 28 October 2022, the company announced its intention to further increase its share capital by issuing up to 191,739 shares at €13. The latter was successfully completed in full by 31 October. On 28 February 2023, SynBiotic announced its intention to again increase its share capital to finance further growth, and on 21 April 2023 it announced that it would issue up to 158,479 shares in a private placement, at a price of €6.31. In addition, a convertible bond of up to €1.5m will be issued and offered in a private placement, with a minimum subscription amount of €100,000. Once again, the capital raised will be used to finance further growth.

In the absence of a trading record for SynBiotic, as now constituted, we look at competitor valuations in terms of market capitalisation to consensus forecast 2022 revenue of €20m. We look at other cannabis companies, though we recognise that SynBiotic is significantly smaller than its competitors, and there is a lack of visibility regarding how the FY23 revenues will be achieved. On that measure, SynBiotic appears cautiously valued. We note that its competitors’ share prices and valuations have fallen sharply over the last 12 months. This has been caused by a variety of factors, not least the market’s reduced risk appetite in an environment with rising interest rates. In addition, US legislation aimed at decriminalising cannabis and allowing cannabis companies to access capital more easily has suffered various political delays and setbacks, thus frustrating investors.