SynBiotic — Working together

SynBiotic is newly 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. 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, as described above. 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 (see below). As a result of the transaction, Lars Müller received a total of 480,000 Synbiotic shares. The acquisition of SolidMind Group was followed by the takeover of the BioCBD e-commerce activity of Umtr Group (organic CBD and hemp products) in September 2020. The consideration was in the low single-digit millions, paid mainly in shares at €25 per share. In November, SynBiotic reported the proposed acquisition of Lean Labs Pharma (CBD production), owned by Lars Müller, (which reported revenues of €2m and profit before tax of €1.1m in FY20). The consideration was c €10m, of which 90.9% was paid in shares (400,000) and the balance (€1m) was supposed to be paid in cash, though a further announcement (see below) has clarified that the balance has also been paid in shares. A capital increase (1 for 6 at €17/share) occurred in December and raised €6.3m (net) which will be used to facilitate the implementation of SynBiotic’s strategy. In March 2021, SynBiotic announced a further acquisition. It is drawing up a further capital increase and will acquire a 25.1% stake in The Hempany, a food company that markets hemp milk and other natural hemp-based beverages. The initial consideration will be €550,000, with an option to acquire an additional share by 30 June 2022, increasing its stake up to 80%. The purchase price for the remaining shares may be between €0.6m and €2.5m, though 75% of this can be paid with SynBiotic shares.

In April, SynBiotic announced an in-kind capital increase for the takeover of Lean Labs and the remaining share of Solidmind Nutrition. The company’s share capital of €2.625m will be increased by €0.715m. 275,000 new shares are offered for subscription to Lars Müller for his remaining stake (9.1%) in Solidmind Nutrition. 440,000 shares are offered to doinglean Ventures, an investment company owned by Lars Müller, which owns Lean Labs. The new SynBiotic shares are offered in exchange for ownership of Lean Labs.

Most recently, the acquisitions of NeuroTheryx and GECA have also been announced, although financial terms for these have not been disclosed.

With a buy-and-build strategy, 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.

SynBiotic’s current investments are as follows:

SynBiotic is confident about the following differentiators in particular:

Cannabis is thought to be one of the oldest plants cultivated by humans with multiple medicinal uses (including problems with the eyes, gynaecological disorders and to fight inflammation) documented in ancient Egyptian texts. In all, cannabis was used to treat a wide variety of different indications, including pain, spasticity, cancer, epilepsy, nausea, anorexia, and infectious disease. 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.

However, GW Pharma’s Epidiolex for the treatment of certain rare epilepsies was a game-changer as likely the largest FDA-approved cannabinoid drug in history. It was launched at the end of 2018 and is expected to have US$1.3bn in sales in 2024 based on consensus forecasts. Soon after, the World Health Organisation 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.

In December 2020, this led to the United Nations Commission for Narcotic Drugs, the UN’s central drug policy making body, 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 recognizing the medicinal and therapeutic potential of the drug, although its use for non-medical and non-scientific purposes will continue to remain illegal.’ Although this vote may have no immediate impact on loosening international controls because governments retain jurisdiction over the classification of cannabis, UN News refers to news reports that this decision ‘could drive additional scientific research into the plant’s medicinal properties,’ thereby reinstating its historical status.

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. OTC medicinal cannabis (containing THC) is currently only legal in a few European Union (EU) countries, with Germany seen as the pioneer as it currently has over 100,000 patients and the number continues to grow rapidly.

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 ten 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 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 may well explain 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.

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 decision. 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-man supervisory board, chaired by entrepreneur Sebastian Stieztel, SynBiotic’s sole member of the management board, CEO Lars Müller, is backed by the highly experienced operational management of its portfolio companies.

Lars Müller combines 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 in 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 & PIPE transactions) and has, in addition to his work as an investor, also carried out various operational interim mandates within the scope of portfolio management.

Historical financials for SynBiotic (ie for the year to December 2020) are predictably unrepresentative of the current business in view of its expansion, notably the acquisition of SOLIDMIND at the end of June 2020, and the subsequent acquisitions towards the end of FY20 and since the start of FY21. For FY20, there was a pre-tax loss of €859k on revenue of €5.5m, which is already significantly different to the H120 pre-tax loss of €97k on €50k revenue. The main expenses were raw materials, advertising, commissions and legal and consulting fees. The latter arose from the realignment and financing of the company, and the multiple acquisitions.

It is thus more helpful to look at management’s revenue target of €46m in 2023 up from its estimate of €9.2m (pro forma) in FY20. It assumes that this will be driven by both strong organic growth (20%) and add-on acquisitions (>55%) in line with its strategy, although there is no detail on exactly where the organic growth will come from.

We believe the €6.3m (net) capital increase announced in December is a key driver of growth. While targeted primarily at acquisitions (we expect to see more of these coming through in the next few months but have already seen Hempany, NeuroTheryX and GECA since the start of the year), the proceeds are set to strengthen R&D (c 25%) and the marketing of brands such as Hempamed and BioCBD. The sales figures from the 2020 TV campaign for Hempamed exceeded management expectations, so the campaign was extended in January 2021. SOLIDMIND, the financial driver of the group, is reported on the press section of the SynBiotic website in August to have made a positive start within SynBiotic. Hempamed was launched with confidence into the UK market via a dedicated online shop. Management has guided towards Hempamed’s gross margins being around 80% for its B2C sales, which it believes is significantly higher than the competition.

The launches of a new cannabinoid-containing extract CBPlus (two strengths), a new herbal medicine brand, Kick-Off, and a novel food application in the UK and EU should help drive some of the organic growth. In respect of the latter, novel foods are foods which have not been widely consumed by people in the UK or EU before May 1997. This means that the foods do not have a ‘history of consumption’. Before a novel food can be legally marketed in the UK, it is required to have a pre-market safety assessment and authorisation, which typically takes two years and can be expensive. The novel food status of CBD extracts was confirmed in January 2019; there are currently no authorised CBD extracts or isolates on the UK food market.

The current SynBiotic shareholder structure is:

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 2021 revenue. We look at other cannabis companies, though we recognise SynBiotic is significantly smaller than its competitors, and there is a lack of visibility regarding how the forecast revenues will be achieved. We use 2021 revenue to mitigate the COVID-19 impact. On that measure SynBiotic appears cautiously valued, notwithstanding in particular the execution risk, as discussed.