ODI Pharma announced on June 25^th that the company has completed a first delivery of products to the Swiss market, a new market for ODI Pharma. The delivery will be made to the leading medical cannabis provider in Switzerland and will be facilitated through ODI Pharma’s Swiss subsidiary.

The delivery is the first one outside of the collaboration agreement with Synoptis Pharma, which includes 23 countries in Eastern Europe, why it marks an important strategic milestone for ODI Pharma and in line with the company’s goal to widen the company’s market footprint and adapt to changing market dynamics. This first order to the Swiss market is a first step towards a wider market engagement, even though it is less significant in terms of order value.

The Swiss Medical Cannabis Market

Switzerland has one of the oldest medical cannabis schemes and most developed CBD industries, but patient numbers have remained low as access has been limited and costs has remained high. However, from august 2022 cannabis for medical purposes, classed as containing more than 1% THC, was reclassified from a ‘prohibited narcotic’ to a ‘controlled substance’. Before the change, patients were required to apply to the government for an exceptional license to get access to medical cannabis. With the reclassification, any physician with the correct operating license can prescribe medical cannabis and permits from the government are no longer required. After the change, the Swiss market has returned to growth after several years of a declining number of patients, and Statista estimates that sales of medical cannabis will grow by approximately 8.3% in 2024, reaching USD 24.6m.

Analyst Group’s View of the Market Entry

In our equity research report on ODI Pharma, we stated that the company is dependent of the collaboration agreement with Synoptis, which poses a risk in the event that the agreement is terminated for any reason. Additionally, ODI Pharma can expand to new markets, such as Western Europe, on their own, which is expected to be a long term strategic objective for the company. The entry on the Swiss market marks a first step in this direction to increase revenue diversification and hence the reliance on the agreement with Synoptis. Moreover, the Swiss market is expected to grow and is also seen by industry experts as a candidate to be the next European country to legalize cannabis for recreational use. Although this is not a market addressed by ODI Pharma, it is expected that such a development could increase the general acceptance of cannabis, which could, in turn, benefit the medical market and sales of ODI Pharma’s products.

Since the delivery is made to the leading medical cannabis provider in Switzerland, we expect the business model to be similar to the collaboration with Synoptis Pharma, i.e., that ODI Pharma acts as an intermediary between the supplier and the distributor, while also outsourcing costs such as product shipping. This means that the costs associated with the Swiss expansion are expected to be low and that ODI Pharma is estimated to be able to keep a low cost base going forward, paving the way for improved profitability as the company scales up in various markets. Although the Swiss market is not initially expected to contribute significantly financially, we see potential for higher sales volumes going forward.

How Analyst Group sees ODI Pharma as an investment

The third quarter was a breakthrough quarter for ODI Pharma, with net sales amounting to SEK 13.9m and an EBIT margin of 11% during the company’s broken fiscal year, proving the significance of the collaboration with Synoptis Pharma and the scalable business model. ODI Pharma’s unique business model has resulted in the company being, and expected to remain, one of the very few profitable companies in the cannabis industry. According to Analyst Group, this presents an attractive investment opportunity. With estimated net sales of SEK 127m by 2025/2026, and with an applied P/S multiple of 2.8x, a potential present value per share of SEK 17.4 is derived in a Base scenario.

ODI Pharma published on May 30 the company’s Q3-report for 2023/2024, which showed a strong financial development. The following are some key points that we have chosen to highlight in connection with the report:

• Reported net sales of SEK 13.9m (0,0) – significantly higher than any other previous quarter
• Proof of a scalable business model – the EBIT margin amounted to 11%
• Stable financial position

A Breakthrough Quarter

The Q3-report showed a breakthrough quarter for ODI Pharma as the net sales amounted to SEK 13.9m (0,0), the first significant sales figures in the company’s history. The sales growth is attributable to the exclusive collaboration agreement with Synoptis Pharma, under which ODI Pharma is the exclusive supply partner for Synoptis in 23 countries. As a market leading pharmaceutical brand in Poland as well as all over eastern Europe, Analyst Group expects Synoptis Pharma to have an ambitious growth plan in these countries regarding medical cannabis, which we expect ODI Pharma to continue to capitalize on by being the exclusive supply partner. Moreover, as we currently are two months into Q4-23/24, we expect that the strong momentum has continued into the current quarter, leading to a robust start of the last quarter in ODI Pharma’s fiscal year.

Given that the orders for ODI Pharma are expected to have significant individual value, the revenue may vary between upcoming quarters. In other words, sales could be affected in a particular quarter depending on whether a major sale occurs in the last week of that quarter or in the following week, thus being recorded in the next quarter. Following the breakthrough quarter in Q3-23/24, we anticipate somewhat lower revenue in the upcoming fourth quarter, albeit with significantly higher sales compared to previous quarters. However, in the long term, we foresee continued sustainable and stable growth, with quarterly fluctuations diminishing as ODI Pharma continues to expand.

Proof of the Asset-Light Scalable Business Model

Despite the large ramp-up in sales during the quarter, the cost base remained stable, demonstrating scalability. The total operating expenses during the quarter amounted to SEK 1.2m, which was a decrease from the previous quarter where the operating costs amounted to SEK 1.8m. However, the cost base increased by 26% Y-Y. Nevertheless, we view this development as evidence of ODI Pharma’s scalable business model, where operating costs can be kept low even with a rapid increase in sales. With a reported gross margin of 20% and with a stable cost base, ODI Pharma managed to report an EBIT margin of 11% in the quarter as well as a profit margin of 9%. Once again, we see this as evidence of a functioning business model where ODI Pharma operates as an intermediary between the producer and the distributor, Synoptis Pharma. According to Analyst Group, this positioning creates the conditions necessary to deliver continued profitability in the future.

The cash position amounted to SEK 5.9m at the end of Q1-24 compared to SEK 6.5m at the end of Q4-23. The cash position was affected by a negative development in net working capital as well as paid interest, regardless ODI Pharma had trade receivables amounting to SEK 7,4m at the end of the quarter, which is expected to be converted to cash. We expect ODI Pharma to repay an outstanding loan of EUR 350,000 over the coming quarters to reduce interest expenses and strengthen the balance sheet, which is anticipated to be achieved through organically generated cash flow.

To summarize, Analyst Group sees the results of the report as proof of that the collaboration agreement with Synoptis is a game changer for ODI Pharma in terms of scaling up sales and commercialize the company’s products. Moreover, the stable cost base in the quarter is seen as a proof of concept of the scalable business model, where ODI Pharma is expected to be able to keep the cost base low while creating a rapid scaling up of sales.

We will return with an updated equity research report of ODI Pharma.