HUGE.CN: Zacks Initiates Coverage of FSD Pharma Inc.

By Steven Ralston, CFA



FSD Pharma Inc. (CSE:HUGE.CN) (OTC:FSDDF) is a cannabis-platform company which is targeting many verticals that compose the legal cannabis industry. The platform can be bifurcated into two components. One, management is concentrating on the cultivation, processing and distribution of high quality, pharmaceutical-grade cannabis, along with the extraction of cannabinoids (such as CBD and THC) and the manufacture of cannabis-related products. The first commercial crop of pharmaceutical-grade cannabis has been harvested at the company’s Cobourg facility and is being offered for direct sale through the company’s website via the fulfillment of prescriptions. Two, the company has entered into strategic alliances and R&D agreements in an effort to advance the development of pharmaceutical and synthetic cannabinoids for a variety of clinical applications, including pain management, fibromyalgia, IBS and coronary artery disease.

Management is especially focused on the high-value pharmaceutical-grade cannabis market, namely the development and commercialization of FDA-approved medications. Regulatory approvals for pharmaceutical products require research and clinical trials, both of which call for use of high quality cannabinoids with extreme consistency from batch to batch. Synthetic cannabinoids, which function similarly to natural cannabinoids by binding to the same receptors within the endocannabinoid system, in particular, are expected to play a compelling role by delivering the necessary level of consistency that will be sufficient to achieve regulatory approval.

FSD’s vertically-integrated operating structure and Scientific Advisory Board (SAB) enable management to shrewdly pursue R&D opportunities in the pharmaceutical industry. The company’s management team is being advised by the knowledgeable and experienced members of the SAB about the development of promising pharmaceutical cannabinoid products and the pursuit of strategic alliances, collaborative agreements and acquisitions. FSD Pharma recently acquired Prismic Pharmaceuticals, which is pursuing pharmaceutical applications for the micro-palmitoylethanolamide molecule and its effect within the endocannabinoid system. Currently, FSD Pharma is targeting several pharmaceutical applications, including pain management (Prismic), fibromyalgia (Prismic), irritable bowel syndrome (SciCann Therapeutics) and coronary artery disease (SciCann). In addition, FSD Pharma is pursuing alternative production methods of cannabinoids through a collaborative effort with Solarvest, which has been commissioned to investigate the development of cannabinoid production by employing algal technology.

FSD Pharma’s In-house Cultivation Strategy

Management’s primary fundamental tenet is that all the company’s cannabis endeavors (both internally and through relationships) produce and/or market the highest quality medicinal-grade cannabis. Internally, the company’s lead cultivation project is the development of an indoor hydroponic cannabis facility located in Cobourg, Ontario, approximately 120 km (73 miles) east of Toronto on Highway 401.

The cultivation and processing of cannabis is conducted by FV Pharma Inc., FSD Pharma’s wholly-owned subsidiary. FV Pharma is a licensed producer (LP) under the Cannabis Act of Canada, having received an ACMPR (Access to Cannabis for Medical Purposes Regulation) Cultivation License in the Province of Ontario on October 13, 2017, and on February 19, 2019, FV Pharma received a Standard Processing License, which permits the processing of over 600 kg of dried flowers per year. In addition, FV Pharma received a Sale for Medical Purposes License (seed and plant) from Health Canada on April 18, 2019 and a Full Sale for Medical Purposes License (added dried and fresh cannabis) that became effective on June 21, 2019.

In November 2017, FV Pharma acquired a 620,000 square foot building complex, a former Kraft food production plant (located at 520 William Street, Cobourg Ontario). With part of an office building being utilized as FV Pharma’s headquarters, management plans to transform the entire facility, including surrounding acreage, into a state-of-the-art, indoor cannabis cultivation and processing facility. Being a former food-grade facility, the current production space was designed to conform to regulatory directives pertaining to food safety.

The building space is planned to be developed in phases, beginning with first part of Phase 1, which dedicated 25,000 square feet to indoor hydroponic cultivation and processing. The initial allotted space should be capable of producing four or five crops annually or an estimated 2,550 kg of dried cannabis per year. The 25,000 square feet is fully licensed and produced its first crop for sale in late August 2019.

The second part of Phase 1 consists of increasing grow capacity by making an additional 220,000 square feet of space operational for the cultivation of cannabis and other related ancillary functions, which is contingent on pending approval by Health Canada and an estimated $55 million in capital funding. Phase 2 involves increasing the total amount of grow space to 820,000 square feet, which would catapult FV Pharma into the realm of large-scale, medical-grade cannabis production.

View Exhibit I

FSD Pharma is leveraging the facility by signing agreements that allow strategic partners to utilize floor space for certain cannabis-related initiatives under the umbrella of FV Pharma’s licenses. For example, FSD Pharma is renting 10,000 square feet of space to Canntab Therapeutics, some of which is being allocated for the production of CBD oil-filled gel capsules. Management envisions other cannabis products (such as pills/tablets, beverages, edibles, etc.) being produced and pharmaceutical research being conducted at the facility by this and other partners.

Processing, Distribution and External Cultivation of Pharmaceutical-grade Cannabis

As part of the company’s cannabis cultivation, processing and distribution platform, FSD Pharma has made strategic investments and forged alliances with High Tide, Cannara Biotech, Huge Shops and Aura Health. Brief descriptions of each relationship follow; however, the relationships are more fully described in separate and distinct Sections below, each delving into the details of every one of agreements.

FSD Pharma is a strategic investor in High Tide, which has many cannabis-lifestyle retail locations in Alberta, British Columbia, Ontario, Nova Scotia and Saskatchewan with development permits for additional retail cannabis stores. High Tide is also rolling out other cannabis retail concepts in Alberta, Ontario, Saskatchewan and online. Potentially, this relationship creates the opportunity to broaden the wholesale supply MOU to additional Provinces.

FSD Pharma also has access to grow space closer to Montreal through a Partnership Agreement with Cannara Biotech. The agreement allows FSD to lease 105,523 square feet of Cannara’s facility in Farnham Quebec for the cultivation and processing of cannabis and cannabis- derived products. Cannara’s Farnham facility is about 70 km from Montreal versus FV Pharma’s Cobourg plant, which is approximately 430 km (265 miles) away. Furthermore, the rates for electricity are extremely low in Quebec, a cost savings for energy-intensive cannabis cultivation operations.

View Exhibit II

FSD Pharma is a strategic investor in privately-held Huge Shops, which also has a strategic alliance with Chairman’s Brands that includes the option to acquire at least ten (10) retail locations of any of the retail brands owned by Chairman’s Brands. Of particular interest is Coffee Time, a well-established chain of over 75 coffee shops in Canada. Huge Shops is eyeing key markets in Ontario for its locations once the company receives a retail cannabis operator license. Obviously, FSD Pharma’s management is optimistic that its strategic investment in Huge Shops will lead to a preferred supply agreement with Huge Shops in the future.

View Exhibit III

FSD Pharma has entered into a Consulting Agreement and a Supply Agreement with privately-held Aura Health. Under the Supply Agreement, Pharmadrug (a majority-owned subsidiary of Aura Health) has committed to purchase 1,000 kilograms of cannabis annually from FSD Pharma, once FSD’s Cobourg cannabis operations are issued an EU-GMP certificate, which Pharmadrug will assist FSD Pharma obtain under the Consulting Agreement. The two agreements provide FSD Pharma with a pathway to open distribution channels for the shipment and sale of medical cannabis into Europe, starting with Germany.

Development of Cannabinoid Pharmaceuticals

FSD Pharma entered into a strategic alliance with privately-held SciCann Therapeutics, which will provide clinical trial services to FV Pharma for cannabis-based medical products. In exchange, FV Pharma was granted exclusive Canadian licensing rights for the manufacture and distribution of SciCann’s patent-pending, cannabinoid-based and indication-specific line of medical cannabis products and will have access to a collaborative network of leading researchers located in Israel.

FSD Pharma entered into a Collaboration and Profit-Sharing Agreement with Canntab Therapeutics. Under the mutually beneficial arrangement, Canntab is renting 10,000 square feet of space at FSD’s Cobourg facility where Canntab plans to manufacture cannabinoid oil-filled gel capsules under the umbrella of FSD’s licenses and later XR tablets after receiving approval by Health Canada. In return, FSD is assisting Canntab in application process for licenses at Canntab’s own facility in Markham, Ontario. FSD Pharma will receive 50% of the profits and/or a 3.5% royalty of certain products under the Profit-Sharing Agreement. Currently, SCN-001 (aka Steady Stomach), a spilanthol-CBD combination product, is in a pilot clinical safety and efficacy study for IBS and IBD being conducted by SciCann.

FSD Pharma and Solarvest BioEnergy signed a definitive Collaborative Research and Development Agreement, under which Solarvest will be conducting research with the aim of developing a proof of concept that algae can create pharmaceutical-grade cannabinoids through biosynthesis. The production of synthetic cannabinoids through algal technology would be a paradigm shift in the cultivation process of CBDs.

View Exhibit IV

FSD Pharma acquired privately-held Prismic Pharmaceuticals in July 2019 The acquisition represents the concrete transition of FSD Pharma’s corporate emphasis towards synthetic cannabinoids and capturing the value of novel drug discoveries. As part of FSD’s Biosciences Division, Prismic is focused on developing prescription drugs based on its patented micro-PEA development platform. Management is targeting multiple therapeutic categories where the treatment of inflammation and pain provides therapeutic relief, for example fibromyalgia, irritable bowel syndrome and post-operative pain management.

View Exhibit V

Founded in 2011, Prismic Pharmaceuticals secured the exclusive licensing rights to PEA (palmitoylethanolamide), including the micronized form, for Chronic Kidney Disease from the Epitech Group SRL in June 2013. A few months later, in August 2013, Prismic secured the rights to PEA for all conditions in all regulatory categories through a strategic partnership agreement with Epitech. As a result, Prismic holds the exclusive worldwide licensing rights (with the exception of Italy and Spain) to micro-PEA, a form of palmitoylethanolamide with particle sizes between 0.6 and 10 microns. The particle sizes of native PEA range from 100-to-700 microns.

View Exhibit VI

By 2015, through clinical work, Prismic confirmed that certain formulations of PEA had demonstrated a synergistic effect when administered concurrently with certain prescription drugs for severe and/or chronic pain, including oxycodone, morphine and other opioid analgesics. The ability to achieve the desired therapeutic pain relief effect with lower doses of these addictive drugs is a significant clinical benefit.

FSD’s management was drawn to Prismic Pharmaceuticals because of micro-PEA’s well-documented safety profile, its patent protection for all conditions in all regulatory categories, its increased oral bio-availability and its synergistic or entourage effect on certain drugs, especially those impacting the endocannabinoid system.

The large particle size of native PEA limits its solubility when administered orally. By increasing the drug’s surface area through micronization, the rate and the amount of dissolution is dramatically increased, thereby increasing the bioavailability of PEA. Consequently, when administered via a micro-PEA formulation, the amount of PEA absorbed increases significantly, which, in turn, enhances the efficacy and potency of PEA’s anti-inflammatory and analgesic therapeutic properties.

PEA has been evaluated in at least 22 clinical studies, all conducted in Europe. Having been tested on more than 4,000 patients in various states of pain, the studies have demonstrated PEA has an excellent safety profile. Despite this robust amount of clinical safety data, some suggest that too few patients have been treated for more than 60 days for PEA to be classified definitively as safe. However, over one million doses of Epitech’s Normast (600 mg ultra-micronized PEA) and Pelvilen (200 mg ultra-micronized PEA) have been administered to patients in Italy and Spain without adverse side effects. The average particle size of ultra-micronized PEA is 2.6 microns.

The PEA fatty acid amide has been studied for its anti-inflammatory and analgesic actions for the relief of inflammation and pain, respectively. There appears to be a substantial amount of efficacy data that establishes its anti-inflammatory and anti-nociceptive properties when administered orally in a micro formulation as a pharmaceutical product. In addition, there are indications that the concomitant use of micro-PEA with certain addictive drugs can achieve the same therapeutic effects while delaying the development of dependence in patients through the ability to reduce the dosing of the addictive drugs. In addition, the management of FSD Pharma/Prismic Pharmaceuticals desires to pursue the development of non-addictive therapeutic treatments for pain through the concomitant use of micro-PEA with synthetic cannabinoids.


Valuation analysis of cannabis companies is a very challenging exercise, since many are pre-revenue entities in the development stage. In addition, almost all public cannabis companies are reporting negative EBITDA and net income. However, the legalization of cannabis in Canada and other places around the world has created a unique opportunity to invest in an embryonic industry with immense potential.

Empirically, there appears to be a select subset of more advanced cannabis companies that can be defined by two quantitative factors: first, a market capitalization over $10 million, indicating investor interest and support, and second, positive and growing revenues, identifying that the company has been licensed by Health Canada and is generating cannabis-related sales. Generally, these leading companies are ramping up cultivation, increasing production capacity and pursuing opportunities in complementary cannabis verticals as well as through collaborative ventures, both of which include post-cultivation processing operations, distribution networks (including Canadian retail stores and international export/import opportunities), consumables (beverages and edibles), CBD-infused wellness products, cannabis-based medicinal therapeutics and pharmaceutical efforts (including clinical research programs), among others. These more advanced companies have also secured first mover advantage. Currently, the P/B valuation range for this subset of more advanced cannabis companies is between 1.23 and 5.60. With the expectation that FSD Pharma’s stock will attain a second quartile P/B ratio of 4.1, indicating a price target of $0.23.

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