In early August, MediPharm Labs Corp. (TSX: LABS) (OTCQX: MEDIF) (FSE: MLZ) released second quarter financial results and reported several substantial milestones. Although we are favorable on how the story has transformed into a domestic and international cannabis oil company, the market responded with mixed results.
With regard to MediPharm’s long-term growth prospects, we believe that the market is missing out on something significant with the business and remain bullish on such prospects and favorable on the risk-reward profile that is associated with the operation.
Although the global economy faced substantial headwinds in the first half of the year, MediPharm has been nothing short of an execution story so far this year. For MediPharm, the first half of 2020 was a transformative period for the business and was highlighted by its having strengthened its balance sheet, its entering into new international customer supply agreements, and it having recorded substantial improvements in key financial and operating metrics.
Reaching an Inflection Point with International Markets
During the quarter, MediPharm recorded impressive growth and announced major milestones in Canada and abroad. The company has been executing on a strategy to manufacture multiple products for customers in multiple jurisdictions and we are favorable on how the management team has transformed the Canadian business to that of a global operator. MediPharm is one of the first companies to capitalize on the global cannabis oil market and we are bullish on the amount of value that can be generated in each market that it enters.
When compared to the prior quarter, MediPharm reported substantial improvements on several key profitability metrics and this is a trend that our readers need to be aware of. In the second quarter, MediPharm recorded a 25% improvement in revenue and margins. We find this to be significant due to the parts of the business that supported growth.
Going forward, we expect MediPharm’s international growth strategy to play a key role in the long-term success of the business. On the international side of the operation, the company is focused on increasing market share in strategic markets and this could prove to be a massive potential catalyst for growth.
So far, the company has been capitalizing on the Australian market which has increased MediPharm’s total addressable market considerably. The company has been winning contracts with customers in burgeoning European and Asia Pacific markets, and we are favorable on the growth that will come from this side of the business. Currently, MediPharm is developing a list of sales prospects with large pharmaceutical and CPG companies.
Another important metric that was highlighted in the second quarter earnings report is related to the amount of cash that MediPharm has on hand. After the quarter ended, the company completed a $37.8 million private placement and significantly strengthened its balance sheet. With a market cap of approx. $135 million, MediPharm is trading at less than 4x cash and we find the valuation to be compelling and the risk-reward profile to be favorable.
The second quarter was a transformative period for MediPharm and we believe that the business has visible growth prospects. During the period, the company generated $13.9 million of revenue and ($2.2 million) of adjusted EBITDA. When compared to the prior quarter, revenue increased by 25% due to higher bulk concentrates sales and larger shipments of formulated finished products while adjusted EBITDA recorded a 66% improvement due to an increase in revenue and a decrease in headcount and ERP implementation expenses.
MediPharm is executing on a multi-faceted growth strategy to gain market share in medical, wellness and recreational markets around the world. The company is committed to becoming a leading global manufacturer of pharma-quality cannabis active pharmaceutical ingredients (API) and formulated products for pharmaceutical, consumer-packaged goods (CPG) and direct to consumer brands.
Going forward, MediPharm plans to accomplish this by:
- Growing its global market share by operating in multiple jurisdictions and leveraging its asset light GMP platform to maintain its competitive advantage
- Increasing the number of products that it sells and by providing end-to-end development, production and distribution of bulk API’s and finished products
- Entering new international markets and capitalizing on the increasing demand for cannabis oil
- Strengthening capabilities and innovation through maintaining its GMP certifications, expanding R&D laboratory and establishing a portfolio of clinical trials
MediPharm Labs Australia represents a bright spot on the international side of the business. In June, the wholly owned subsidiary revenue generated approximately $625,000 of revenue and we are bullish on the leverage that it has to international markets. Since the beginning of the year, MediPharm Labs Australia has entered into 12 customer agreements to supply products in Australia, New Zealand, Germany, the UK, and Denmark.
When it comes to the international opportunity, MediPharm is in the very early innings of a major growth cycle. The company has an expanded sales pipeline of new prospective customers in Asia Pacific and Latin America and has entered advance supply partnership negotiations with a leading pharmaceutical company. We believe that the market discounts the amount of value that is associated with the international opportunity and have highlighted important company developments below:
- Secured first European white-label agreement with specialist pharmaceutical company Therismos Limited (Cannaray) to supply a range of premium cannabis oil products
- Agreed to supply pharmaceutical-quality, white-label, cannabis oil products to New Zealand’s Helius Therapeutics Limited, a biotechnology company.
- Agreed to supply white-label, cannabis oil products to Cannasouth Plant Research New Zealand Limited.
- Agreed to supply white label pharmaceutical-quality cannabis oil products to Burleigh Heads Cannabis Pty Ltd., an Australian wholesaler to medical patients and pharmacies across Australia via the online CanView marketplace.
- Agreed to supply formulated cannabis oil products to Beacon Medical Australia, a subsidiary of VIVO Cannabis. The first shipments were completed in the second quarter.
- Signed a multi-faceted strategic manufacturing agreement with biopharmaceutical company Avicanna to leverage MediPharm Labs specialized contract manufacturing capabilities to produce medical cannabis products to sell through Medical Cannabis by Shoppers and Pura Earth Health & Wellness.
- Introduced Ace Valley Vapes and shipped the products to Canadian provinces as previously announced under a white-label agreement with AV Cannabis Inc.
- Formed a supply arrangement with Argentia Gold Corporation to bring cannabis-infused products to retailers in Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick. The first shipments were completed in the second quarter.
- Commenced filling and packaging services for COVE™ and Spinach™ adult-used brands under a multi-year manufacturing agreement with a leading Canadian LP
Over the last two years, the MediPharm story has recorded impressive advancements and the management team has been executing flawlessly on a global growth strategy. During this time, the company has evolved and launched its own line of branded CBD products and increased the breadth of the offerings to fill a demand gap in a market that is looking for high quality and high potency products.
On the licensing and certification side of the business, MediPharm has reported several major milestones so far this year. One of the significant developments was the granting of a Therapeutic Goods Administration (TGA) GMP certification and the securing of a license to manufacture therapeutic goods for MediPharm Labs Australia. This is part of the company’s strategy to create a global pharmaceutical-quality supply chain and serve new international emerging medical markets.
MediPharm has also completed a number of developments at its flagship Canadian facility and has improved demand planning, procurement efficiencies to meet qualification requirements of large pharmaceutical and CPG companies. The company also completed the construction of an upgraded quality control laboratory for in-house testing of input materials and completed the construction of a dedicated R&D Laboratory in Barrie, Ontario to accelerate process optimizations, product innovations and advance medical cannabis science.
A Global Growth Story
When analyzing MediPharm’s expansion strategy, we determined that it is in the early innings of a growth strategy centered around increasing its addressable global market based on its ability to serve customers from its multi-jurisdictional, GMP-certified and fully licensed manufacturing footprint.
Although the COVID-19 pandemic slowed the growth of the global cannabis industry and the development of the retail marketplace in Canada, MediPharm should continue to record growth on the international side of the business as it continues to diversify its customer base and work on the development of recreational and medical cannabis products. We are bullish on the amount of value that can be generated through this strategy and expect it to lead to long-term growth and value creation.
MediPharm has attractive near and long-term growth prospects and we believe that the market undervalues the work that the team has accomplished in Canada and abroad. Going forward the company plans to put a major emphasis on the opportunity in the European Union (EU), Asia-Pacific and South America.
In the near term, we expect the company to increase the number of product formats and the depth of its finished formulated product capabilities. This focus should drive revenue growth throughout Canadian and Australian domestic channels and into other international markets. MediPharm is working to be granted a European GMP certification and we expect this to be one of the largest potential catalysts for growth.
Currently, MediPharm is working to deliver high-quality consumer packaged products under white label agreements with leading LPs, biopharmaceutical and consumer products companies. The company is operating at a high level and has been commercializing the isolation and fractionation of specific cannabinoids previously achieved at R&D scale. MediPharm has done a great job at differentiating itself through these strategic initiatives and we are favorable on how it has become focused on broadening medical and wellness applications by entering into clinical trials.
Expect Strong Growth in the Back Half of the Year
In the back half of the year, MediPharm plans to further broaden its in-house branded product portfolio and capture additional consumer market share with new branded products. We expect the company’s products to gain traction at the consumer level and will monitor how the management team is able to execute on this.
At current levels, MediPharm is trading at a substantial discount to its peers and we are monitoring this trend. When compared to other Canadian cannabis operators, MediPharm represents a differentiated growth opportunity that has visible potential catalysts for growth and we are favorable on this.
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