The Next Generation of Cannabinoid Production.

David Kideckel, PhD, MBA 647-776-8240

We are initiating coverage on Willow Biosciences Inc. (“Willow,” “WLLW,” “Company”) with a Speculative Buy rating and a $5.00/sh price target.

Highlights

• Investment Summary: Willow is a biotechnology company focused on the biosynthetic production of cannabinoids. As explained in our thematic report, biosynthetically produced cannabinoids will be a fundamental addition to the supply chain dynamics of the cannabis sector. More specifically, we believe that pharmaceutical and CPG (Consumer Packaged Goods) companies may prefer biosynthetic cannabinoids given their advantages related to scalability, reliability, consistency, and cost. We view Willow to be among the first early movers in a nascent industry, which has disruptive potential. As a first step, Willow is planning to focus on the CBD market through its partnership with Noramco (private, NR), one of the world’s largest suppliers of active pharmaceutical ingredients (APIs). Currently, Willow’s market value implies a significant undervaluation as the Company is not yet in a revenue-generating phase and there is limited visibility on the biosynthetic production of cannabinoids. We believe Willow will rerate towards the value implied by its fundamentals as the Company moves towards its revenue-generating phase and clarity over the industry’s outlook improves.
• Scale-up and Commercialization of Cannabinoids via Biosynthesis: As a first step towards commercializing cannabinoids, Willow intends to target the CBD market through its partnership with Noramco. Willow has a two-pronged business strategy based on two complementary paths related to scientific and commercial progress. Willow’s scientific development path, which is expected to complete by H2/21, is associated with the scientific progress relevant to the yeast strain producing CBD. This path primarily involves the optimization of the catalytic activity in each stage by resolving four major throughput bottlenecks. By the end of these four stages, the unit cost of producing CBD would be more than 80% lower than the current cost of production. We believe the cost will play a critical role in producing rare cannabinoids as the ongoing cost of producing them in the plant is exorbitantly high. This may be a key competitive advantage for Willow going forward.
• Commercial Milestones Will Be Key Catalysts For Rerating of the Stock: We believe that the milestones related to commercialization may act as key triggers for the rerating of Willow’s share price. Willow expects to commence its sales to customers in the wellness segment in H2/21. The sales of cosmetics, food, and beverage will start in H1/22 and sales to pharma companies will begin in H2/22, according to Willow. Other key triggers may include the selection of a scale-up development partner, collaboration with CPG/Pharma companies, and up-listing to the TSX. The improvement in the regulatory outlook of the industry and favorable R&D outcomes within the pharmaceutical industry as they relate to cannabinoids will be key triggers over the long term.

Initiating Coverage with a $5.00 Price Target and a Speculative Buy Rating
We are initiating coverage on WLLW with a Speculative Buy rating, and a 12-month price target of $5.00/sh, based on our discounted cash flow valuation, using a 20% discount rate and 3.0% terminal growth rate. Our rating is reflective of the process and regulatory risk associated with the use of biosynthesis for producing cannabinoids and demand uncertainty for biosynthetically produced cannabinoids.