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Technical420 Deep Dive: There Is Still A Ton Of Value For Investors To Extract From The Cannabis Oil Trade

Mar 23, 2021 • 7:37 AM EDT
10 MIN READ  •  By Michael Berger
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During the last year, the cannabis industry has recorded impressive growth as new markets open across the globe. 

The opening of new markets has led to an increase in the number of export agreements, and this has greatly benefitted Canadian cannabis companies. One of the most attractive aspects of this trend is related to the amount of cannabis concentrates that are being sent to emerging international markets. 

The trend toward cannabis oil represents a shift from previous export agreements that primarily involved cannabis flower and we expect the shift to continue to trend toward cannabis oil. Prior to the legalization of cannabis derivative products in Canada (referred to as cannabis 2.0), several companies put a major emphasis on the cannabis oil markets and constructed facilities that met European Union good manufacturing practices (EU GMP) standards. 

Going forward, we expect to see consumers show a preference for products that are made from cannabis oil such as edibles, vape pens, beverages, concentrates, shatters, topicals, and more. Today, we want to highlight 5 companies that are highly focused on the cannabis oil market and believe our readers need to be aware of these operators. 

MediPharm Labs is a Misunderstood Cannabis Oil Operator

Earlier this year, we highlighted MediPharm Labs Corp. (TSX: LABS) (OTCQX: MEDIF) (FSE: MLZ) as one of the most attractive Canadian cannabis oil companies. Our view on the company is based on the growth of the business in Canada and abroad, its valuation, and the potential catalysts it has for growth. 

From legal cannabis markets to the pharmaceutical sector, we believe that MediPharm represents a differentiated growth opportunity and is trading at a discount when compared to its peers. We are of the opinion that the pharmaceutical industry represents a significant opportunity for MediPharm and are favorable on how this aspect of the story has advanced. 

In January, MediPharm reported a record number of shipments of finished goods in the fourth quarter. During the quarter, the company shipped 550,000 units, and we are impressed with how the business has bounced back. When compared to the prior quarter, MediPharm reported a more than 200% increase in the number of units that were shipped. 

The number of units that were shipped does not include any international sales which we believe is an attractive vertical of the business. From Australia to South America, MediPharm has been laser focused on the international cannabis concentrate market and we consider the business to be a leader in this vertical. In the back half of the year, we expect the company to report increasing revenue growth from international markets.

Since inception, MediPharm has been focused on using state-of-the-art equipment to develop premium concentrates for businesses and consumers. As a result of the continued execution, the company has created a reputation for quality and purity, and we believe this trend supports the growth of the entire business.

During the fourth quarter, MediPharm entered into a supply agreement with Nova Scotia Liquor Corporation. The company has retail distribution agreements with six provinces (B.C., Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia) and we are bullish on the growth prospects that are associated with the domestic business.

Earlier this year, MediPharm Labs announced an important milestone and was issued a Cannabis Drug License (CDL) from Health Canada. The license is necessary for the company to manufacture and supply cannabis-based drugs. The products that are allowed with a CDL include pharmaceutical prescription drugs that have a drug identification number (DIN).

In the near-term, MediPharm is well positioned to supply cannabis based pharmaceutical drugs and active pharmaceutical ingredients (APIs) to other CDL license holders and clinical research trials for novel drug discovery. We believe the market is discounting the impact that this initiative will have on the business and find the risk-reward profile to be favorable.

Going forward, the opportunity for MediPharm with its existing pharmaceutical customers to produce existing approved cannabis drugs or to develop and manufacture new and innovative drugs through later stage clinical trials is significant. Currently, there are thousands of active cannabis focused clinical trials taking place and we expect the CDL to serve as a substantial growth driver for the business over the long-term.

We believe that MediPharm Labs is an execution story that is trading at a considerable discount. At current levels, we find the valuation to be attractive on several metrics and believe that MediPharm has a favorable risk-reward profile. Going forward, we expect the company to announce strong growth and will monitor how the story advances from here.

Aleafia Health has Been Executing on the Cannabis 2.0 Market 

Aleafia Health Inc. (AH.TO) (ALEAF) is a Canadian cannabis producer that has been highly focused on the cannabis oil market. Based on the infrastructure and facilities that are operational, the company has 50,000 kilograms of extraction capacity and is well positioned to capitalize on the cannabis oil market. We are bullish on the amount of revenue that can be generated through the company’s facilities as well as through the distribution that is already in place.

Last year, Aleafia Health became highly focused on the cannabis 2.0 opportunity and owns a diverse cannabis product portfolio that is comprised of high-margin derivative products (i.e. oils, capsules, and sprays). The portfolio has been further developed through a recent expansion to vape cartridges, sublingual strips, and ultra-high-potency CBD oil. We are favorable on the approach that Aleafia Health’s management team has employed to execute on the cannabis 2.0 market and expect this vertical to record strong growth in 2021.

In November, Aleafia Health brought its first cannabis 2.0 product to Canada’s recreational market and this is a trend that has since become more significant. The company entered the market with the launch of a vape cartridge and we are bullish on how the product has been gaining traction on the medical and recreational sides of the business.

One of the reasons why Aleafia Health is well positioned to record substantial growth is due to the amount of 2.0 products that can be created with cannabis from an outdoor operation. There is a huge difference in the quality and type of cannabis that is grown in an indoor facility and that in an outdoor facility. By using the cannabis from the outdoor operation to create derivative products, the consumer might not be able to identify the source of the cannabis that the products are derived from but will certainly recognize the quality.

Aleafia Health is executing on a multi-faceted growth strategy that is focused on ramping revenues, cutting costs, and seeing margin expansion. When it comes to the cannabis 2.0 market we are favorable on how this aspect of the business has advanced. One of the products the company sells is a US brand called Kin Slips, which utilizes a sublingual strip delivery method. This is a unique product, and we are favorable with the rapid onset time that is associated with it. Through relationships like this, Aleafia Health has been able to differentiate itself from its peers and we are favorable on how this has positioned the business for growth.

Aleafia Health is working on the production of its first edible confection product in the form of soft candies. The products were formulated and produced at the Paris Facility and should launch in the near future. We expect to see strong demand for these edible products and expect the launch to serve as a catalyst for growth.

Over the next year, Aleafia Health expects to release several new cannabis derivative products and we are favorable on the amount of revenue that can be generated by these products. Since inception, the company has focused on forming relationships with leading US cannabis brands and selling these products in Canada.

HEXO Corp. Is Out To Be The North American Beverage Leader

During the last year, HEXO Corporation (HEXO.TO) (HEXO) has become much more focused on the cannabis oil market and we attribute this to the relationship that it has with Molson Coors Inc. (TAP). The relationship is focused on developing and commercializing cannabis beverages and it needs access to a lot of cannabis oil to execute on this vertical. 

HEXO is focused on the production of CBD and THC cannabis oil and is executing on a multi-national growth strategy with Molson Coors. Initially, the cannabis beverage partnership will focus on selling CBD infused beverages in the US and THC infused beverage in Canada. The companies plan to start selling THC beverages in the US once the Federal government changes its stance on the legalization or decriminalization of cannabis. 

Going forward, we expect HEXO and Molson continue to need large quantities to execute on the cannabis beverage vertical. We expect the Canadian cannabis company to also need cannabis oil to develop and sell additional cannabis 2.0 products like edibles, vape pens, concentrates, and more. 

In 2020 we noticed a significant change in investor sentiment with HEXO and believe that the Molson Coors relationship played an important role in this. We consider the Canadian cannabis producer to be a turnaround story in the making and expect Canada’s cannabis 2.0 market to play a crucial role in this. 

What Will WeedMD Do With CX Industries?

A few years ago, we visited WeedMD’s (WMD.V) (WDDMF) state-of-the-art cultivation facility in Aylmer, Canada and were impressed with the structure of the operation. Shortly after our visit, the Canadian cannabis company announced that it would put a major focus on the cannabis oil market and formed CX Industries Inc. to do so. 

CX Industries specializes in extraction, toll processing and third-party product formulation from its fully licensed facility in Aylmer. Last year, the company announced that CX plans to process more than 50,000 kilograms of biomass per year (when it is operating at peak production). When we first learned about the launch of the division, we were favorable on the plan for the business unit to capitalize on a burgeoning market ahead of the legalization of cannabis 2.0 products in Canada. 

Last year, WeedMD issued an update on CX and reported that it is offering tolling and white labelling services to other Canadian cannabis producers and brands. Last year, two Vitalis Q90 extractors at CX Industries were installed to commercialize products and we are waiting to learn more about this division of the business. 

During the last year, WeedMD has been under considerable pressure and the market seems to have lost faith in it. The company has been negatively impacted by a change in management team, less than optimal performance by the outdoor facility, and more limited access to equity capital. We are cautiously optimistic with WeedMD and will monitor how the story evolves from here. 

Aphria and Tilray are Positioned to be a Market Leader

In late 2020, Tilray Inc. (TLRY) shocked the market when it announced a merger agreement with Aphria Inc. (APHA.TO) (APHA). The combined company would be well positioned to capitalize on the global cannabis market and will be one of the largest producers of cannabis oil. 

The combined company would be expected to take a leadership position in Canada and we are bullish on the potential synergies that could be found between the operators. Aphria has been highly focused on the Canadian and the international cannabis opportunities and we are favorable on the amount of distribution that it has in the EU.

As it relates to the cannabis derivative product market, both Aphria and Tilray represent attractive opportunities. Prior to the merger announcement, Aphria acquired Sweetwater Brewing Company and we are favorable on how the asset positions the business to capitalize on the US market. 

To make cannabis beverages, a company needs to have access to cannabis oil and we are favorable on how the combined company will be positioned to capitalize on this vertical. Going forward, we expect the combined company to start selling cannabidiol (CBD) beverages in the US and are favorable on the direction the business is heading. 

Since inception, Tilray has been highly focused on the Canadian medical cannabis market and strategic international markets. Many of the products that will be sold by the combined company will be created with cannabis oil and we will monitor how the story advances this year. 

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Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.


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