eResearch |Canada plans to legalize cannabis derivatives such as oils and edibles on October 2019, and these new products are expected to outsell dried cannabis sales over the next five years. In the state of Colorado, dried cannabis sales dropped to 44% of total cannabis sales in 2018 compared to 67% in 2014, even though total cannabis sales increased. According to Zion Market Research, the cannabis oils market generated US$147 million in 2018 and is expected to reach US$2.4 billion by 2025 (CAGR of 49.5%). This new segment is attractive for cannabis companies due to its higher margins, diversity in product channels, and speed in product development.
Cannabis companies are either purchasing extraction machinery from companies such as Waters Corporation (NYSE: WAT; LSE: 0LTI; DB: WAZ) or vertically integrating their own operations by investing in extraction capabilities. High demand for cannabis derivatives requires immense scaling of oil extraction, which is too capital intense for cannabis production companies to invest into R&D for yield efficiency and infrastructure to support the separate operation.
Companies specifically focused on cannabis oil extraction such as MediPharm Labs Corp. (TSXV: LABS; OTCQX: MEDIF, DB: MLZ) are able to capitalize on this need by focusing only on cannabis extractions and providing scaled capabilities in supplying raw materials, formulations, processing, and packing for cannabis derivatives.
MediPharm was the first Canadian company to receive a license for cannabis oil production under the Access to Cannabis for Medical Purposes Regulations (ACMPR) without being a licensed cultivator, and operates through a B2B model by extracting cannabis oils for sale to other companies to white label under their own name or for processing other companies’ dried cannabis into oils at a fee-for-service basis.
The Company received its sales license in Canada on November 2018, and has already signed over 20 multi-year contracts including five 3-year contracts to process dried cannabis into oils and five 3-year contracts to white label their products; partnered companies include Canopy Growth Corp. (TSX: WEED; NYSE: CGC; LSE: 0UO9; DB: 11L1), TerrAscend Corp. (CSE: TER; OTC: TRSSF; DB: TED), AusCann Group Holdings Ltd. (OTC: ACNNF; ASX: AC8; DB: UVP), among others. Medipharm expects C$85 million in revenue over 15 months starting December 2018 from just their white-label agreements.
The Company currently processes 150,000 kg of dried cannabis annually with expected processing capacity to rise up to 250,000 kg once its fully funded expansion is completed this year. This in comparison to competitors Valens GroWorks Corp. (TSXV: VGW; OTC: VGWCF; DB: 7LV) with a processing capacity of 240,000kg and Neptune Wellness Solutions Inc. (TSX: NEPT; Nasdaq: NEPT; DB: NTU), with a processing capacity of 200,000kg, which is expected to grow to 1,500,000kg through asset acquisitions of SugarLeaf Labs, a commercial hemp company located in the United States.
On June 2019, MediPharm exported their first successful shipment of medical cannabis concentrates to Australia, where the Company is developing an extraction facility with expected completion by end of this year.
Currently trading at 5.5x 2019 consensus Revenue estimate of C$111M and 23.1x 2019 consensus EBITDA estimate of C$26M, MediPharm is at a significant discount to cannabis production and distribution companies, which trade on average 11.6x 2019 consensus Revenue estimates and 43.8×2019 EBITDA estimates.
//
MediPharm Labs Corp. (TSXV: LABS; OTCQB: MEDIF, DB: MLZ)
Headquartered in Barrie, Canada, MediPharm is a medicinal cannabis company that produces pharmaceutical grade and GMP certified cannabis oil products, and supplies raw materials, formulations, processing, and packing for the creation of ready-to-sell derivative products. MediPharm is currently trading at C$4.69 per share with a market capitalization of C$555.5 million.
Valens GroWorks Corp. (TSXV: VGW; OTC: VGWCF; DB: 7LV)
Headquartered in Kelowna, Canada, Valens is a cannabis extraction company with various proprietary technologies for extraction of cannabis oils, and has received processing contracts from several licensed producers including Canopy Growth Corp, Tilray, The Green Organic Dutchman, and Organigram. Valens is currently trading at C$4.18 per share with a market capitalization of C$529.9 million.
Neptune Wellness Solutions Inc. (TSX: NEPT; Nasdaq: NEPT; DB: NTU)
Headquartered in Quebec, Canada, Neptune is a diversified wellness products company that brings 50 years of combined experience in the extraction, purification, and formulation of different oils in the wellness product market. On January 2019, it received its license from Health Canada to process cannabis into oils. Neptune currently trades at C$6.13 per share with a market capitalization of C$498.6 million.
//
