Cannabis 2.0 in Canada has been a major topic of discussion and this is a theme that we expect to play an important role in regard to the growth of the cannabis industry.
Cannabis 2.0 refers to legalization of cannabis derivative products (i.e. vape pens, cannabis infused products, and cannabis concentrates) and this is a market that we have been excited about. In the US, demand for cannabis derivative products continues to increase and we expect to see a similar trend in Canada.
One of the reasons we are favorable on the legal cannabis derivative opportunity is due to the impact that it will have on the black market. In Canada, the black market still exists, and it has made the legal cannabis rollout more challenging than expected. On the black market in Canada, the types of products that are available to consumers is vast and the prices are cheaper when compared to Canada’s legal market.
Going forward, we expect to see a larger group of cannabis consumers transition to the legal market. We believe that the primary reason for the switch will be safety related and are of the opinion that the vaping health crisis will have a significant impact this trend. Today, we have highlighted MediPharm Labs (LABS.TO) (MEDIF) which has been highly focused on the Canadian cannabis concentrate market and this is an opportunity that we are excited about.
MediPharm: A Growth Story to Put on Your Radar
In late 2018, MediPharm Labs was granted a sales license and started to work with leading Canadian cannabis producers. The company has been highly focused on the cannabis oil opportunity and has been nothing short of an execution story as it relates to this market. A few weeks ago, MediPharm reported a major milestone and received a license amendment to allow for production to begin in the recently expanded area of its specialized manufacturing facility. This represented a major development for the business, and we are bullish on the amount of revenue that can be generated through the larger footprint.
A few months ago, MediPharm Labs reported strong third quarter financial result and recorded more than $44 million of revenue for the period that ended on September 30th. When compared to the prior quarter, the company recorded strong growth, and this is a trend that we expect to continue in 2020 and beyond. During the quarter, the company recorded more than $10 million of EBITDA and we are favorable on the way the management team is bringing the business down a path to profitability.
The numbers reported in MediPharm’s third quarter report represent the fourth consecutive quarter of positive EBITDA and revenue growth. The company has benefited from its expanding private label business, an increasing amount of exports, and increasing and growth the relationships it has with its customer base. During the quarter, MediPharm made great strides when it comes to the international side of the business and this is something we want to highlight.
A Company with Significant Growth Prospects
In 2020, we expect the international side of the business to play a more significant role in growth for MediPharm Labs. In late 2019, the company shipped its first product to Australia, and we expect the business to enter additional international markets in 2020. We believe that the market does not fully appreciate this aspect of the business and will monitor how the management team continues to execute on it.
We believe that the entry in Europe represents the most significant potential catalyst for growth and we will monitor this aspect of the story on a going forward basis. When compared to North America, the opportunity in Europe is much less saturated and we find this to be significant. We believe that MediPharm will be a major beneficiary of the legal cannabis movement in Europe and this is an opportunity to watch.
Although MediPharm Labs has been executing flawlessly on the cannabis concentrate opportunity, the shares have been under pressure and have traded lower with the market. We find the risk-reward profile to be attractive at current levels and expect MediPharm to record strong growth on a going forward basis.