MediPharm Labs (LABS.V) (MLCPF) has a first-mover advantage on one of the most attractive verticals of the cannabis industry and was founded in order to take advantage of an expected opportunity in the cannabis extraction and manufacturing space. The company operates out of a 70,000 sq. ft. state-of-the-art extraction facility and has been rapidly expanding its primary extraction capacity as well as its secondary processing (distillation and fractionation), building up cannabis inventories, and securing wholesale concentrate sales contracts and multi-year processing contracts with other Licensed Producers (LPs).
We believe MediPharm Labs is focused on producing high-quality pharmaceutical grade concentrates, a very attractive segment of the cannabis industry which provides exposure to high-growth, high-margin product categories (including vapes, oils, capsules, tinctures, edibles and infused products). The market for concentrates is significant and provides massive growth potential since all of these products are expected to be legalized by October 2019.
According to leading Canadian broker-dealers, the Canadian wholesale market for cannabis oil-based products could be a $2 billion per year by 2028. MediPharm Labs will be a beneficiary of this growth and we are favorable on the leverage to the cannabis oil market. According to BDS Analytics, flower made up 50% of US dispensary sales in 2017, while edibles and concentrates comprised a combined market share of 35%. By 2020, BDS predicts that these ratios will flip, with flower making up 36% and edibles and concentrates accounting for 50%.
Once the edibles market becomes active in Canada, we expect to see a similar trend and MediPharm Labs will see increased demand for its services. We think the market currently under-appreciates this growth potential for MediPharm Labs which this makes the company an attractive opportunity.
MediPharm Reports a Significant Development
Earlier this week, MediPharm Labs reported to have entered into purchase agreements with multiple cultivators, successfully acquiring over 5,000 kilograms of dried cannabis in the last two weeks of March. In addition to MediPharm’s ongoing monthly procurement strategy, this large volume purchase puts the company in a position to significantly increase the amount of cannabis concentrates it is selling. This is a significant bump in supply that should result in MediPharm reporting stronger revenue numbers.
MediPharm launched its White Label program as it ramps up operations well in advance of the next evolution of the Cannabis Act in Canada. Earlier this year, the company signed its first white-label customer and looks forward to providing updates over the coming months as it is in active discussions with new partners through its large, rapidly growing sales pipeline.
One of the biggest potential catalysts for MediPharm Labs is the expected legalization of derivatives and edible products in the fall of 2019. We believe that the market underappreciates the positive impact that this will have on the company and this is something that investors should be aware of. MediPharm Labs expects the pending legalization of vapeables, edibles, beverages and topicals, to significant increase the size of its total addressable market (TAM).
Once derivatives and edible products become legal, we expect to see a significant increase in the number direct-to-consumer brands and non-cannabis consumer packaged goods companies trying to form a partnership MediPharm Labs. This represents a significant opportunity for the company, and we believe that the market underestimates the growth potential.
MediPharm Labs: A Company with a First Mover Advantage
We believe MediPharm Labs will benefit from its first-mover advantage and from being Canada’s first non- cultivating LP to receive an oil production licence. Health Canada has seen a significant increase in the number of applications for this specialized licence and this will increase the amount of time it takes for fully licensed competitors to form and become fully operational. Due to this advantage, we expect 2019 to be a banner year for MediPharm Labs and expect to see the company report very strong results and possibly a near-term revenue ramp up and positive EBITDA.
MediPharm Labs has been executing flawlessly and has sourced cannabis flower/trim from more than 15 different LPs and has signed five white label/wholesale contracts for the sale of its cannabis oil and five contract processing agreements (all of which are 3-years in duration). The five private label sales contracts are valued at over $85 million. This puts the Canadian cannabis oil company in a league of its own and we believe that the market undervalues its growth prospects.
When we featured MediPharm Labs in an article earlier this year, we highlighted its 18-month wholesale concentrate contract with Canopy Growth Corp. (WEED.TO) (CGC), whereby Canopy will purchase a minimum of 450 kg of resin, with the option to purchase an additional 450 kg over 18 months. Based on current retail prices, we believe that this contract could generate approx. $50 M in revenue for MediPharm Labs.
Positioned to be a Leader Despite Increased Competition
Although MediPharm Labs will face increased competition, the company has been laser-focused on improving its platform in order to position itself as a clear leader in the cannabis oil market.
Three reasons why we believe that the company will continue to be a leader include:
- Private label production: MediPharm Labs will leverage its first-mover advantage by expanding value-add services to new and existing clients.
- Secondary extraction leadership: The company’s focus on secondary extraction will enhances the services offered while strengthening margins.
- International opportunities: MediPharm Labs has been executing on the international medical cannabis market and we believe that this is one of the biggest potential catalysts for the company.
MediPharm Labs is led by a management team that has had its finger on the pulse of the cannabis industry and we are confident in their ability to execute on the burgeoning cannabis oil market. The company has seen significant demand for its services, and this is related to the capital invested into its state-of-the-art facility, and the expert-level human capital invested into developing its proprietary processes. This is a major differentiator for MediPharm Labs and is an important part of the story.
A Company with Catalysts for Growth
When we are looking at companies in the cannabis industry, we look for companies that have clear and defined avenues for growth. MediPharm Labs is a company with several significant growth drivers which we are highly bullish on. One of the reasons why we are favorable on MediPharm Labs is the potential catalysts for growth. These catalysts include:
- Incremental processing contracts: MediPharm Labs recently announced four wholesale concentrate contracts with large LPs and we expect to see more agreements like this. We believe that additional contracts will continue to de-risk the story and should be a catalyst.
- Increasing capacity: The company currently has five primary extraction lines, with an expected 150,000 kg of dried flower annual processing capacity. In the back half of 2019, the company plans to commission two additional lines which will increase capacity and support growth.
- Offering new services: Prior to Canada legalizing the sale of concentrates and edibles in the fourth quarter of 2019, we expect to see MediPharm Labs expand its product offering to meet the evolving needs of its clients.
- Reporting better than expected numbers: Following the issuance of a Sales License, MediPharm Labs has been executing flawlessly and continues to sign major agreements. The company has been seeing an increase in the number of companies providing product for processing and we expect the company to continue to report strong numbers. The current valuation is attractive based on these above-average growth prospects and we are monitoring how the team continues to execute.
- Receipt of an Australian license: MediPharm Labs has started to build an extraction facility in Australia to gain an early mover advantage in the Australian and Pacific/Asian markets. The facility is expected to be completed and operational in the back half of 2019, pending the granting of the necessary licenses. MediPharm Labs recently announced a significant agreement with AusCann and we are bullish on the growth potential associated with this emerging cannabis market.
- The issuance of the EU GMP certification: We believe that the issuance of the EU GMP certification will be one of the biggest potential catalyst for MediPharm Labs and will allow it to capitalize on the EU market (twice the size of the US from a population standpoint). The export market opportunity for MediPharm Labs is massive and this represents a major growth opportunity.
Undervalued when Compared to its Peers
One of the reasons we consider MediPharm Labs a compelling opportunity is its current valuation, especially when compared to its peers. Although the recent rally has resulted in MediPharm Labs valuation increasing, we still consider it to be a more attractive growth opportunity that the companies below:
- Radient Technologies (RTI.V) (RDDTF) has a market cap of approx. $270 million is an extraction company focused on patented Microwave Assisted Processing (MAP) technology. Earlier this year, the company received its Standard Cannabis Processing License and expects to have 90,000 kg of processing capacity by the end of the year. We think the company’s relationship with Aurora is a value driver but do not believe that the valuation should compete with MediPharm.
- Neptune Wellness Solutions has a market cap that is approx. $350 million and is a Quebec-based extractor. Earlier this year, the company received standard cannabis processing license and plans to sell extracts and finished products to businesses and consumers, pending sales license approval. The company expects to have 240,000 kg of processing capacity by March and has a strategic relationship with Tetra Bio-Pharma to co-develop formulations for wellness and pet markets.
- Valens has a market cap of approx. $275 million and is a vertically integrated Canadian cannabis company focused on proprietary extraction methods as well as cannabinoid isolation and purification through distillation. The company leases and operates a 25,000 sq. ft extraction facility and has an extraction capacity of approx. 72,000 kg of cannabis per year.
Although we are favorable on these operators, we believe that MediPharm Labs offers a more compelling growth opportunity and we expect to see the valuation increase. The company is generating revenues that compete with leading Canadian LPs and we expect to see a shift in the coming months.
A Stock on our Radar
MediPharm Labs recently announced the sale of over $10 million in cannabis extracts, along with four wholesale concentrate sales contracts that are valued at over $85 million. The last two months have been significant for the company and this has caused us to increase our estimates. Based on MediPharm Lab’s growth prospects, we expect to see it generate positive EBITDA in 2019, which is would be a major milestone for the cannabis oil company.
This is a company we are closely monitoring and that is very high on our radar. To stay up to date with MediPharm Labs, please contact firstname.lastname@example.org.
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