Deal Memo – Medibis (August 2021)

NameMedibis
AboutDelivering positive treatment outcomes through medicinal cannabis solutions
HeadquarterToowoomba, QLD
Raise DescriptionSeed
Security TypeFully paid ordinary shares
Current Round Size$1,800,000
Pre-Money Valuation $8,229,200
Current Price per Share$0.10
Previous Raise StagePre-seed
Previous Raise Valuation$740,000
Crowdfund PlatformBirchal
Existing InvestorsFounders’ capital
Equity Crowdfunding
Key CompetitorsIncannex Healthcare
Little Green Pharma
Cann Group

Many others. See link.
Related WebinarsWebinar with Birchal

The Startup Investigator Scorecard

Characteristics of Good Problem:19/ 3063.3%
Characteristics of Ideal Solution:13/ 2552.0%
Traction to Date:9/ 2045.0%
Business Model Defensibility:9/ 2045.0%
Chracteristics of Founding Team:12/ 2548.0%
Total Overall Score:62/ 12051.7%
Overall Scorecard
Peter Thiel 7 Questions (Product):18/ 3551.4%
Berkus Method (Risk):10/ 2540.0%
Supplementary Scorecard

* See below for further details of evaluation

TL;DR

Medibis is a pre-revenue startup developing a vertically integrated medical cannabis business. It is based in Toowoomba, QLD. It aims to cultivate cannabis, research and manufacture medical-grade cannabinoid products and distribute its products both locally and internationally. The startup is currently seeking seed funding to fund its Phase 1 business plan of bringing their oil-based medical cannabis products to the market. Their products will be sourced from BOL Pharma based in Israel (from Sep-21) and distributed through Aspec, which is their 4PL partner.

What is the real problem in the medical cannabis industry in Australia?

According to research reports from FreshLeaf Analytics and Prohibition Partners, the demand and uptake of legal medical cannabis products have increased significantly over the last few years. There are a few metrics that were used to measure demand/uptake.

Before we go into the metrics, there are a few background information required to understand those metrics. Unlike typical medicines where you can get prescription from a physician and buy it from a pharmacist, one can only access a medical cannabis product through 2 alternative pathways because as it stands, there are no medical cannabis product that has been approved by the Therapeutic Goods Administration (TGA) and included in the Australian Register of Therapeutic Goods (ARTG). The first pathway is through the Special Access Scheme – Category B (SAS-B) where physicians will have to apply for a special exemption with justifications so that patients can access the required medical cannabis product. The second pathway is through a Authorized Prescribers.

See below a few metrics used to measure medical cannabis demand and uptake.

  1. Number of Active Patients
    See below graph.1
  2. Number of SAS-B Approvals
    The number of SAS-B approval has increased from an average of 5,000 in previous months to 8,000 in Feb-21. These could be driven by doctors seeking re-approval of out-of-stock products and also new demand coming in. The numbers also masked the fact that some of the demand for low-dose cannabinoid products might have moved to access through pharmacies as these product category has been down-scheduled.1
  3. Number of Authorized Prescribers
    See below graph.1
Increase in Number of Active Patients
Increase in Number of Authorized Prescribers

Correspondingly, the number of medical cannabis products have also increased significantly over the last few years. See below graph.1

Increase in the Number of Medical Cannabis Products

As you can see, the challenge is actually the accessibility of medical cannabis products. And because of this, there has been a thriving grey/black market for cannabis products. Medibis aims to solve this problem through conventional pathways i.e. clinical trials and creating a body of knowledge to help physicians confidently prescribe cannabinoid products with the right formulation for the right medical cases.

Medibis has a 2 stage approach to building the business

There are 2 phases to Medibis’s business plan. Phase 1 is relatively clear and straight-forward but there is still significant uncertainty as to how Phase 2 will be delivered.

Phase 1 involves building a sales distribution pipeline for Medibis branded products and studying market demand in more detail. Medibis has secured a 3+2 years supply agreement with BOL Pharma for its custom cannabinoid products. It has also secured a partnership with Anspec, a local 4PL provider to help with product distribution. The seed funding raised will primarily used to fund Phase 1.

Phase 2 involves building a vertically integrated cultivation and manufacturing facility, initially aimed at a capacity of 4 tons per annum. The proposal is estimated to cost ~$25m, and funds would need to be acquired from further capital raising. The plan for Phase 2 is not yet finalized as it may depend on how Phase 1 performs. Medibis is open to various other operating options such as :

  1. Contract growing agreements with existing facilities
  2. Leasing ringfenced portion of an existing facility

There have been a few tractions to date in preparation for Phase 2:

  1. Securing a conditional land purchase agreement
  2. Securing a conditional service agreement with FKG, a construction company
  3. Securing the “Major Project Status” for its plan to build a medical cannabis cultivation and manufacturing facility in QLD

There are currently 25 projects across Australia with a “Major Project Status” with a majority of the projects mining-related, but there are 6 of those projects working in developing medical cannabis cultivation and manufacturing. Medibis is one of them.

Medibis is focused on improving product accessibility, but lack of clear product differentiation is a concern

There is no clear differentiation between the cannabinoid products Medibis has proposed to sell for Phase 1 and the existing offerings in the market. Medibis planned to sell products with various formulations and THC/CBD concentrations in the oil-based format. 65% of existing medical cannabis products are oil-based.1 The key point of difference is the fact the product formulations is from an established supplier from Israel, BOL Pharma and there is currently no formulations from Israel in Australia. The differentiation might be obvious to insiders, but may not be obvious from a customers’ perspective.

To compensate for that, Medibis is planning to focus on creating a body of knowledge about medical cannabis through secondary research and funding clinical trials. The idea is to make these resources widely available to educate physicians about medical cannabis use cases and how/when they can be prescribed to patients. The quality of the materials produced is important to give physicians the confidence to prescribe medical cannabis products to effectively treat certain conditions that existing medication is performing poorly.

Founding team has limited startup and medical experience, but compensate with getting help from external expertise

Angus and Andrew has extensive experience in Electrical and Instrumentation (E&I) commissioning and project management in the mining industry. Their technical expertise will help in delivering Phase 2 of the project where key parts of the project will involve the planning, design, development and construction of a medical cannabis cultivation and manufacturing facility. However, the founding team lacks experience in the medical, pharmaceutical, clinical research and commercial development field.

To compensate for this, Angus has partnered with a few medical consultants specialized in biotech commercialization, clinical research and pharmaceutical supply chain. They have also seek help from advisors that will help them in commercial development and pharmaceutical export. However, the current arrangement meant that the consultants may not be fully aligned with the interest of the business as these consultants have other priorities. This may also pose key personnel risk to the business due to the founders’ lack of medical background.

Summary

There are still significant uncertainty and risk around Medibis plan to build a successful business in the medical cannabis market. There are some traction in terms of establishing partnerships and supply chain for Phase 1 of the business. But the profit model is not clear. Some ground work have been done in preparation for Phase 2, but there are still uncertainty in terms of future funding required to deliver Phase 2 and concern that access to medical and recreational cannabis in Australia may not materialize in the short term which is essential to drive growth. There is also concern that with a few major projects in the pipeline in the next few years, it may create excess capacity in the market.

The founding team’s lack of medical and pharmaceutical background was compensated by partnering with local medical consultants but may still pose key personnel risk. The traction to date however shows that the team is capable of securing commercial partnerships and delivering key outcomes.

There are many competitors in the medical cannabis market in Australia, and many have struggled to grow revenue and dominate the market. This could signal further challenges ahead for new players coming into the market but also opportunity for new entrants such as Medibis to try something new. See this link for a list of Top 20 players in the Australian market.

It’s a good problem that Medibis is trying to solve but it’s traction to date might not be enough to justify it’s $9m pre-raise valuation due to the uncertainties around its business plan, the team and current operating climate. This is an opportunity to be a part of a medical cannabis business very early in the journey but there are many more established players that are listed on the ASX to invest in if your risk appetite is smaller.

1 Australian Medicinal Cannabis Market: Patient, Product and Pricing Analysis (FreshLeaf Analytics)

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The Startup Investigator

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