Just two years after medicinal cannabis company AusCann (ASX: AC8) acquired CannPal Animal Therapeutics in a scrip-based deal worth $17.5 million at the time, the group has today announced it will be divesting 52 per cent of its stake in the business for just $1.
There is a catch though. If CannPal's canine skin health product Dermacann is not approved as a veterinary medicine for sale in Australia within 12 months or for sale in New Zealand within two years, AusCann can fetch back its stake for $1.
The 52 per cent interest will be sold to a new special purpose vehicle called Animal Health Holdings (AHH), to be controlled by outgoing CEO and CannPal founder Layton Mills alongside AusCann's chief scientific officer Dr Margaret Curtis.
So what does AusCann gain from this apart from a one-dollar boost to its bottom line? Under the agreement, the group will have no obligation to provide any further funding to the animal health business for the continued development or commercialisation of its assets. Ongoing operational and administrative costs will need to be initially provided by AHH directors.
AHH is in confidential discussions with potential partners and other providers in order to procure funding to complete pre-agreed research and development milestones, post-completion of the CannPal partial divestment. AusCann indicates this could be through debt, equity, a combination of both, or through marketing, commercialisation and co-development agreements.
The group expects AHH will be in a better position to finalise these discussions once the divestment and new company structure are finalised.
Additionally, AHH will be able to apply for certain government grants on behalf of CannPal which were not previously available to the company given its ultimate holding company was listed on the ASX.
AusCann notes its intention with the acquisition two years ago was to accelerate the commercialisation of regulatory approved human and animal health products to offset headwinds resulting from the slower than expected uptake of the Special Access Scheme (SAS-B).
"However, following a downturn in the market as a result of COVID-19, the Global Cannabis Stock Index fell by over 85 per cent from the time of the transaction to current lows, significantly impacting the capital markets for companies exposed to the Australian cannabis sector," the company said in a backgrounder within the announcement.
"A formal process commenced in April, 2022, to explore opportunities to monetise its animal health assets through divestment or development and commercialisation partnerships.
"A data-room was established with an overview of AusCann's core animal health assets, and some of largest animal health companies globally, were invited to participate in a targeted due diligence process."
This process did not result in a proposal that the board would deem acceptable to maximise the value of CannPal's assets, ultimately leading to the divestment decision.
CannPal founder Mills is currently appearing on Nine Entertainment's (ASX: NEC) Married at First Sight in 2023.
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