2021 has been a banner year for the cannabis sector and we have not even completed two months of the year.
So far this year, one of the most significant developments for the cannabis sector was Jazz Pharmaceuticals’ (JAZZ: Nasdaq) acquisition of GW Pharmaceuticals (GWPH: Nasdaq) for more than $7 billion of stock and cash. The transaction values GW at $220 per share and we are favorable on the credibility that the deal provides the cannabis sector.
Following the acquisition of GW, we noticed a spike in interest in cannabis companies that are focused on the biotech side of the industry. Although many of the talking heads on CNBC have been attributing the spike in interest to Reddit, we believe the sector has reached an inflection point where investors are focused on operators that are capitalizing on high growth verticals of the cannabis value chain.
Going forward, we expect companies which focus on the commercialization of active pharmaceutical ingredients (APIs) and have leverage to the biotech side of the industry are uniquely positioned to be a beneficiary of long-term growth opportunity. Currently, there are only a few companies to be levered to the biotech side of the cannabis value chain and we are favorable on the long-term potential that is associated with the vertical.
One of the ways we can explain this phenomenon is by providing analysis on the development and evolution of the cannabis industry. If you were to analyze the ten largest Canadian Licensed Producers (LPs), you would notice that these operators were able to raise billions-of-dollars of equity capital (in aggregate) and that most of the money was spent of the construction of massive state-of-the-art cultivation facilities…in Canada…where it is freezing for more than half of the year.
While these operators were constructing these facilities, we highlighted the exorbitant amount of capital that was being allocated to these projects as well as the risks that was associated with the trend. Fast forward to today and you will see that most of these operators are running low on cash, are raising debt capital, and are closing these facilities due to costs.
Last month, we highlighted MediPharm Labs Corp. (TSX: LABS) (OTCQX: MEDIF) (FSE: MLZ) as an undervalued play on the cannabis API market opportunity. During the last year, the leading Canadian cannabis processor has reported several transformational developments but has been under pressure on average.
At current levels, we believe that MediPharm is trading at a substantial discount to its peers and has a favorable risk-reward profile. Going forward, we believe the company has substantial potential catalysts for growth. We are of the opinion that the market is discounting the amount of value that is associated with the continued advancement of the platform and wanted to issue an update after the acqustion of GW.
While GW and MediPharm seem like challenging businesses to compare, we see key similarities between the operators. Like GW, MediPharm is focused on developing cannabis-based treatment for serious indications. The way that MediPharm has gone about executing is different from GW and we find these differences to be worth highlighting.
Unlike GW, MediPharm has needed to form strategic partnerships in order to have a chance to penetrate the biotech side of the vertical and we are favorable on how it has executed on this. Last year, MediPharm entered into an arrangement with Stada Arzneimittel AG to be the exclusive supply partner for the international generics and consumer health products company.
The market had a muted response to the development and the response led us to believe that there is a serious disconnect between the business and the market. Stada is a leading European consumer healthcare and generics firm that has a presence in 120 countries, and we are favorable on the expertise that it adds to MediPharm. Through Stada, MediPharm could start providing medical cannabis products to the European pharmaceutical sector, starting with Germany.
One of the reasons we are favorable on the relationship between MediPharm and Stada is related to the diversity of the expertise of each business. As part of the relationship, Stada will provide marketing and medical education support while MediPharm provides a broad range of GMP-certified medical cannabis products.
CKD Clinical Trial Could Prove to be a Major Catalyst for Growth
A few weeks after the relationship with Stada was announced, MediPharm reported to have started a clinical trial to research and evaluate the effectiveness of its proprietary cannabis-derived medical products and formulations on the treatment of end-stage renal disease or chronic kidney disease (CKD).
As it relates to the clinical trial, MediPharm partnered with Canadian firm, OTT Healthcare Inc. (OTT) and signed a Master Clinical Studies agreement. In the coming months, we expect to learn more about the study and believe that MediPharm plans to expand its portfolio of clinical trials in the near future.
Patients that are diagnosed with CKD often suffer from a wide variety of debilitating health complications. By studying an illness of this nature, we could learn more about the impact that MediPharm’s proprietary products could have on the treatment of other serious or rare illnesses.
Operates an Attractive and Diverse Growth Platform
MediPharm is one of the few companies to be working with a leading pharmaceutical partner and we expect it to play an important role in the growth of the business over the long-term. The company recently made several key changes to the management team and we believe the business is better positioned as a result of the changes.
From a valuation standpoint, MediPharm is trading at a discount to its peers and we find this to be a key pillar of our 2021 thesis. As the company continues to execute on its international growth strategy, we expect to see a change in sentiment and believe that MediPharm is an operator to be aware of.
Earlier in the article, we highlighted the high-cost nature that is associated with the early movers on the Canadian cannabis industry. MediPharm does not operate a model like these Canadian LPs and find this to be an important aspect of the long-term story. We believe that MediPharm has the ability to grow at a large scale in a way that is cost effective and find this to be an attractive aspect of the story.
From an economics standpoint, we find the low-cost nature of a business like MediPharm to be attractive and believe that the market does not fully appreciate or understand the importance of this. By working with companies like Stada, MediPharm will not have to burn as much cash as it would if it took the initiative on by itself.
Is MediPharm the Next GW Pharma
GW Pharmaceuticals had to raise more than $500 million in order to bring a cannabis treatment through the Food and Drug Administration (FDA) clinical trial process. By working with strategic entities, MediPharm will not have to incur these costs and find this to be important especially during the early stages of the relationship.
If MediPharm is able to receive positive data from the relationship with Stada, the company will be able to easily tap the capital markets for additional capital and believe that our readers need to be aware of this. After GW started to report positive data, the capital raising process became much easier and we expect to see a similar trend for MediPharm if it is able to generate positive data early on in the process.
If you are interested in learning more about the growth prospects that are associated with MediPharm Labs, please send an email to email@example.com with the subject “MediPharm Labs” to be added to our distribution list.
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