During the last month, we highlighted MediPharm Labs Corp. (TSX: LABS) (OTCQX: MEDIF) (FSE: MLZ) as one of the most attractive ways to play the international cannabis market.
Earlier this week, MediPharm Labs reported third quarter financial results that came in below expectations the market responded negatively to the numbers. We consider the market’s response to be an overreaction and believe that the weakness has created a great short and long-term opportunity.
During the quarter, MediPharm reported less than $5 million of revenue which is a more than 60% decline when compared to the prior quarter. The decline in revenue can be attributed to lower bulk extract volumes and average selling prices that was partially offset by growth in formulated finished goods sales and international sales.
Following the market’s response, MediPharm is valued at less than $100 million (CAD). As of September 30th, the company reported to have more than $36 million and we find this to be significant. With this amount of cash on hand, MediPharm is well positioned to execute on a multi-national expansion and outlined its plan to accelerate growth and improve profitability.
So far this year, we believe that MediPharm Labs has been nothing short of an execution story and consider it to be the global leader in specialized, research-driven cannabis extraction, distillation and derivative products. The company works with industry leaders like Canopy Growth Corporation (WEED.TO) (CGC) and we expect the business to benefit from two key tailwinds, Canada’s 2.0 market and strategic international markets.
Taking Market Share in Strategic International Jurisdictions
One of the most interesting takeaways from the quarter is related to the parts of the value chain that MediPharm Labs can capitalize on. A few weeks ago, the company reported to have entered into an exclusive multi-year contract with STADA, a European pharmaceutical leader, and believe that the market does not fully appreciate the potential that is associated with it.
Going forward, MediPharm is well positioned to record strong growth and expect the international leverage to play a key role in the success of the business. The company is focused on a vertical that is not saturated and has the early mover advantage in several key markets.
From Europe to South America, MediPharm is focused on two jurisdictions that we are bullish on. When you combine the potential that is associated with these markets with the leverage that it has to the opportunity in Australia, we believe that MediPharm has the recipe for success and consider the recent weakness to be transitory.
Focused on Cutting Costs and Ramping Revenues
In the earnings report, MediPharm highlighted the actions it has taken to cut costs and we are favorable on the direction the management team is bringing the business. In the near term, the company plans on accelerating research and development and new product commercialization for both businesses and consumers. We are favorable on how MediPharm is capitalizing on Canada’s cannabis 2.0 market and expect this aspect of the business to ramp up in 2021.
Another key near-term value driver is related to MediPharm’s transition from selling concentrate from the wholesale market to white label contract manufacturing. From a margin standpoint, we expect the transition to have a significant aspect on how profitable the business is and will monitor how the management team is able to execute on this.
An Execution Story that is Trading for a Discount
After conducting an independent operational review, MediPharm was able to identify areas that are prime for improvement as well as opportunities to grow from a cash flow and a margin standpoint. These actions should result in MediPharm Labs announcing significant improvements in the performance of the business in 2021. As revenue under new customer agreements ramp up, we expect the market to become more favorable on MediPharm and this is an opportunity to be aware of.
Currently, several of MediPharm’s competitors are trading at higher valuations and we think that the market is incorrectly valuing MediPharm. As the company continues to execute on strategic international markets, we expect the business to report ramping revenues, improving margins, and positive adjusted EBITDA.
At current levels, we find the valuation to be compelling and believe that the strength of the balance sheet needs to be taken into account. We expect 2021 to be a year of incremental growth for the international side of the business and believe that the market is discounting the potential that is associated with it.
If you are interested in learning more about MediPharm Labs, please send an email to firstname.lastname@example.org with the subject “MediPharm Labs” to be added to our distribution list.
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