Biotech company BPH Energy (ASX: BPH) has officially entered the medical cannabis space, completing an initial investment in Chilean company Patagonia Genetics SPA.
The diversified company, which has investments in both biomedical technologies and the oil and gas sector, has been keen to invest in the sector for some time now, stating back in late 2018 that medical cannabis would complement its existing business.
In a market update today, BPH announced it has acquired a 10% interest in Patagonia, a “craft cannabis” company with a genetic collection of more than 260 cannabis and hemp strains.
Under a signed terms sheet, BPH also has the option to up its stake in the company to 49%.
BPH executive director David Breeze told Small Caps the company chose to align with Patagonia because it believes a “true craft cannabis company takes meticulous care from seed to sale”.
He said the cannabis is intended to be grown outdoor, in an environmentally friendly manner using natural light and organic fertiliser to cater to the growing demand of “cannaseurs” on the hunt for a “superior product”.
“Between the team, there is over 50 years’ combined local cannabis cultivation experience,” Mr Breeze added.
Consideration for the initial 10% investment represents about 5.5% of BPH’s capital, comprising a subscription amount of $50,000 in cash into Patagonia and the issue of 150 million BPH shares, plus another $50,000 payable to Patagonia shareholders in instalments over six months.
In addition, BPH has the option to increase its total shareholding in the company to 49% through a subscription of $700,000 into Patagonia and the issue of 450 million BPH shares.
This second tranche of the transaction remains conditional on appropriate due diligence and shareholder approval.
In its announcement, BPH also noted the deal is specifically a medical cannabis venture and Patagonia has agreed under the signed terms sheet to not apply for or pursue recreational cannabis licences, nor make investment in the recreational space or in any activities using mistella (fortified wine).
The term “craft cannabis” can be compared to the concept of craft beer and is gaining in popularity as an alternative to commercial producers.
According to BPH, Patagonia Genetics’ cannabis and hemp strains have been collected from industrial hemp cultivations of the late 1980s with germination rates verified in 2016.
“A large proportion of these are unhybridized landraces not seen in domestic markets in over 30 years, hence their genetic value,” Mr Breeze said.
He said the Patagonia collection contains a variety of hemp and cannabis strains that have been selected for their “exceptional terpene profile, production yield, pest resistance, uniqueness, CBD/THC content and medicinal properties”.
“A collection not seen in 20 to 30 years offers potentially new or forgotten terpene profiles to world markets and thus medical effects,” Mr Breeze said.
“We see value in doing further R&D on the collection and having the THC/CBD levels of each strains tested and possibly some studies done on the medicinal benefits,” he added.
Patagonia currently has 11 applications under review with Chile’s Livestock and Agricultural Service and anticipates cultivating medicinal cannabis, conducting research and development on its genetic collection, as well as cultivating stabilised seeds locally before the end of the 2020 financial year.
The company has land use agreements in place for two farms in Chile as well as an exclusive worldwide offtake rights deal with Chile’s top cannabis fertiliser company, Wonderland Agronutrients.
Patagonia believes it is the only seed bank in the world to hold the rarest ‘F1 Colombian Red’, a strain that was deemed to be “lost”.
Other notable strains in its collection include ‘Black Black’, which produces an almost pure black cannabis plant and ‘Big Big’, which produces an “enormous plant with superior yield”.
“From being able to create an entirely black bud, to producing others that taste and smell of mango, lemon, cheese, blueberry and even sea urchin, such a diverse collection really holds some untold potential,” Mr Breeze said.
“The medical markets are ever-changing and calling for different levels of CBD/THC content, so being able to cater to various demands positions us uniquely,” he added.
According to BPH, cannabis seeds can be sold in Chile as “collector’s items” with top brands currently selling individual seeds for as high as $20 each.
Competitive advantages of Latin America
BPH noted some competitive advantages of cultivation in Latin America include the “almost perfect growing conditions” such as the sunny climate, the vast available farming land, “exceptionally cheap” cost of labour compared to Europe and North America, and the “booming home-grow culture”.
“The benefit of South America is that we don’t have to substitute quality for production levels and margins given the climate, genetics in our collection and relatively cheap cost of land and labour available,” Mr Breeze said.
The reason BPH pursued an investment in medical cannabis was its belief that the sector complemented its biomedical business.
“The medical cannabis sector is showing significant growth with current developments boosting the sector’s viability,” the company stated in its announcement.
BPH’s biomedical business Cortical Dynamics is focused on commercialising a medical device that measures a patient’s brain electrical activity to indicate a response to anaesthetic drugs administered during surgery.
Cortical’s Brain Anaesthesia Response Monitor (BARM) was trialled at the Sydney Adventist Private Hospital in July with positive comments received from all four anaesthetists.
The system is now currently being trialled at the Southampton University Hospital in the United Kingdom through September.
Oil and gas interest
In addition to its biomedical pursuits, the diversified company is involved in the oil and gas sector through its 22.6% direct interest in private explorer Advent Energy.
Advent holds an 85% stake in a petroleum exploration permit in the offshore Sydney Basin off New South Wales in joint venture with Bounty Oil & Gas (ASX: BUY).
According to BPH, the permit contains two core prospects that have been externally assessed to have potential for unrisked (P50) prospective gas resources of 472 billion cubic feet and 2,131Bcf respectively, with “multi-trillion cubic feet upside”.