Earlier this month, we published an article that highlighted 3 leading Canadian cannabis retail companies as part of a series of articles that cover the entire Canadian sector. The purpose of this series is discussing the companies that are focused on the changing landscape of the Canadian cannabis industry.
Today, we have highlighted 3 Canadian Licensed Producers (LPs) that are poised to benefit from a change in the types of cannabis products that can be sold to consumers. The Canadian recreational cannabis market represents a major opportunity and we expect to see strong growth once Health Canada expands on the types of recreational cannabis products that can be sold to consumers.
In the US, we have seen the recreational market quickly surpass the size of the medical market in the states that allow for recreational cannabis and we expect to see a similar trend in Canada once Health Canada changes regulations. The opening up of the products that can be sold to consumers will benefit the companies that are levered to this opportunity by generating more revenues and by improving margins.
One of the reasons we are excited about the cannabis concentrate and the cannabis infused product market is due to the economics associated with this vertical. The prices of these products are much higher than the prices of cannabis flower and the margins associated with these products are much higher as well.
In the US, we believe that the cannabis concentrate opportunity is the best place to be focused on. According to ArcView, cannabis flower generated $4.2 billion in sales in 2017 while cannabis concentrates generated $1.9 billion in sales and edibles generated $1.0 billion in sales. By 2022, cannabis flower is expected to be a $10.5 billion market, while cannabis concentrates are expected to also be a $10.5 billion market and edibles are expected to be $4.1 billion market.
We expect to see a similar trend in Canada over the coming years and expect the companies that are levered to the cannabis concentrate market to record strong growth. We believe that the companies that we have highlighted today are worth watching and will be monitoring how these businesses are able to capitalize on the changing landscape of the Canadian market.
WeedMD: A Cannabis Leader in the Making
In the previous article in this series, we highlighted WeedMD (WMD.V) (WMDDF) as a leading play on the Canadian cannabis retail market. During the last year, the Canadian LP has significantly advanced its fundamental story and is highly levered to the cannabis concentrate opportunity. We believe that the market does not fully appreciate WeedMD’s growth prospects when it comes to the cannabis concentrate market and believe that this is something to be aware of.
Earlier this year, WeedMD announced the launch of Color, which will serve as the brand name for the company’s portfolio of cannabis products. Prior to the launch of this brand, the Ontario Cannabis Store (OCS) would quickly sell out of WeedMD products and this is a trend that has continued following the launch of the brand.
A few weeks ago, the OCS announced that Color has been the top selling product on the market and this is a trend that excites us. WeedMD has a cult like following when it comes to its cannabis products and we are not surprised by this. A few months ago, we visited the company’s facility in Strathroy and were beyond impressed with the operation. The product that is being produced at this facility was some of the best cannabis we have seen in Canada and are favorable on the work that has been accomplished on the genetics side of the business.
One of the reasons we are excited about WeedMD is due to the current expansion. Later this year, we expect to see additional production capacity come on-line and expect to see the company harvest its first outdoor cannabis crop. Due to the work that has been done on the genetics side of the business, we expect to see the outdoor operation produce high-quality cannabis and expect this to play key role in the cannabis concentrate opportunity.
The outdoor cultivation operation is expected to produce a significant amount of premium cannabis for only a fraction of the cost of the indoor operation. WeedMD plans to process the outdoor cannabis and turn it into cannabis oil which will be used to create cannabis derivative products. Last month, the company announced plans to convert its smaller production facility into a processing facility that is only focused on the cannabis concentrate market and we are bullish on the growth prospects associated with this initiative.
Although WeedMD has a significant production footprint and major potential catalysts for growth, the company trades a huge discount to its peers and we find this to be significant. As the company continues to execute on its growth strategy, we expect to see a re-rating from leading broker-dealers and this is an opportunity to be watching.
Organigram Holdings: An Execution Story to be Watching
Organigram Holdings (OGI.V) (OGI) is a leading Canadian LP that has been nothing short of an execution story and has distribution across every province in the country. The company was an early mover when it comes to the potential cannabis infused product opportunity and has been focused on this initiative for more than a year.
We expect Organigram to prove to be a major player in the cannabis concentrate and the cannabis infused product market. Over the last year, the Canadian LP has raised several hundred millions of dollars and has been laser focused on increasing production capacity. The growth prospects associated with the increased production capacity is significant and we are favorable on the work that has been done on the branding side of the business.
Once Health Canada releases new regulations as it relates to the cannabis concentrate and the cannabis infused product markets, we expect to see Organigram respond quickly and have been impressed with the company’s ability to execute. CEO Greg Engel has done a fantastic job at turning the company around and has had his finger on the pulse of the cannabis industry.
Going forward, we expect to see Organigram continue to be a leader in the Canadian cannabis market and will monitor how it approaches the international side of the business. When compared to leading Canadian LPs like Canopy Growth and Aurora Cannabis, the company trades at a significant discount and this is an opportunity that we continue to closely follow.
Canopy Growth: A Cannabis Leader to be Watching
Canopy Growth (WEED.TO) (CGC) is one of the few Canadian LPs to have secured a strategic partnership with a global conglomerate and we expect this relationship to play a key role in the long-term growth story. In 2017, Corona beer maker Constellation Brands, Inc. (STZ) invested more than $4 billion in the Canadian LP and this relationship has already has significant impacts on Canopy Growth.
During the last decade, the amount of people smoking cigarettes has significantly decreased while the number of people using e-cigarettes has skyrocketed. The legal cannabis industry is in the middle of a transformation where the joint will likely be replaced by an edible or a vape pen. Canopy Growth is well positioned to benefit from the changing landscape of the Canadian cannabis industry, and we believe that the relationship with Constellation is worth monitoring.
Constellation Brands is a proven leader in the global beer industry, and we are favorable on the distribution that is already in place. Once regulations in the US change, Canopy Growth will be well positioned to capitalize on the edible/drinkable opportunity, and this is something that we are excited about.
When it comes to the Canadian market, we expect Canopy Growth to be one of the greatest beneficiaries of the change in the types of products that are allowed to be sold. The company has some of the best distribution in the space and is highly levered to the Canadian retail market opportunity. Once this market comes on-line, Canopy Growth will be positioned to capitalize on this opportunity, and this should prove to be a major catalyst for growth.
Over the next year, we expect to see Canopy Growth make significant investments and acquisitions of leading cannabis businesses. The company has been very busy on the M&A front and this is a trend that we expect to continue in the years ahead.
Pursuant to an agreement between StoneBridge Partners LLC and WeedMD Inc. we have been hired for a period of 180 days beginning April 22, 2019 and ending October 22, 2019 to publicly disseminate information about (WMD) including on the Website and other media including Facebook and Twitter. We are being paid $6,000 per month (WMD) for or were paid “ZERO” shares of unrestricted or restricted common shares. We own zero (0) shares of (WMD), which we purchased in the open market. We plan to sell the “ZERO” shares of (WMD) that we hold during the time the Website and/or Facebook and Twitter Information recommends that investors or visitors to the website purchase without further notice to you. We may buy or sell additional shares of (WMD) in the open market at any time, including before, during or after the Website and Information, provide public dissemination of favorable Information.