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3 Canadian Cannabis Extraction Leaders To Have On Your Radar

Jul 6, 2020 • 7:26 AM EDT
7 MIN READ  •  By Michael Berger
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One of the most exciting trends in the Canadian cannabis market is related to the development and sale of 2.0 products. These products include cannabis infused products (edibles and drinkables), vape pens, concentrates, salves, and more. Cannabis 2.0 products tend to have higher profit margins and a longer shelf life making them a key part of LP’s product mix.

During the last year, we have noticed a substantial increase in the total amount of extraction and processing capacity in Canada. Many of these operators operate out of smaller facilities and there are only a few large-scale extractors in the Canadian cannabis market.

Over the next year, we expect to see increasing demand for cannabis 2.0 products and expect these extraction focused businesses to benefit from this. Today, we have highlighted 3 companies that are highly focused on the Canadian cannabis extraction market and believe that they are opportunities to be aware of.

MediPharm Labs:  A Global Growth Story to be Aware of

MediPharm Labs Corp. (LABS.TO) (MEDIF) has been a leader in the Canadian cannabis oil market and is an opportunity to be aware of in the extraction vertical. A few weeks ago, the company reported first quarter financial results and the market responded negatively to it.

We believe that the recent pullback is an overreaction and wanted to issue an update on the opportunity following the decline. During the first quarter, MediPharm recorded a decrease in revenue when compared to the same period last year. The decline was due to a reduction in volume and average selling price of bulk concentrates sold, which was partially offset by growing sales of consumer-packaged goods to provincial distributors throughout Canada.

MediPharm has taken steps to lower the expenses that are associated with the procurement of inventory and this is expected to have a positive impact on margins. On the business-to-business (B2B) side of the operation, the entire Canadian market recorded a decline and this is primarily due to an oversupply in the Canadian bulk crude resin and distillate markets, a slow expansion of retail channels in Canada, slow commercialization of new and specialized 2.0 businesses and operational challenges from B2B customers that are seeking to convert bulk concentrates into consumer packaged goods.

The future of MediPharm is bright and there were a number of positive developments announced in the financial results. One of the most exciting aspects of the story is related to the launch of three new SKUs of consumer-packaged cannabis-based goods across five provinces. When compared to the prior quarter, MediPharm recorded a 13% increase in the amount of sales of finished formulated products.

Going forward, the proportion of sales of finished formulated products is expected to increase due to an expansion of MediPharm’s domestic and international sales team and the launch of eight additional SKUs in the current quarter. In the current quarter, the company has already shipped more than double the amount of finished formulated products than it did in the entire first quarter.

Another exciting aspect of the MediPharm story is related to the accomplishments it has had on the international side of the industry. We are bullish on the international cannabis oil market and expect this vertical to support the growth of the business on a going forward basis.

During the first quarter, MediPharm Labs Australia secured a white label supply agreement with Compass Clinics Australia Pty Ltd. In the current quarter, the company has secured white label supply agreements with Burleigh Heads Cannabis Pty Ltd. (Australia), Helius Therapeutics Limited (New Zealand), Cannasouth Plant Research New Zealand Limited (New Zealand), and Therismos Limited (UK).

In the current quarter, MediPharm is expected to start selling GMP-certified formulated products and plans to ramp this up in the third quarter and beyond. This comes after the company’s Australian facility was certified by the Therapeutic Goods Administration (TGA) as meeting the Good Manufacturing Practice (GMP) standard and secured a license to manufacture therapeutic goods. In late 2019, MediPharm’s Canadian facility was TGA GMP certified in and it has created a global supply chain that is qualified to serve emerging international medical markets.

MediPharm is capitalizing on a multi-national growth strategy to further develop a diversified international customer portfolio that has multiple product streams that are allowed to be sold in legal cannabis markets all over the world. The granting of the GMP certification on the two facilities represents a major milestone and will allow the business to further evolve and become less reliant on the Canadian market.

Neptune: Pivots into New Verticals to Support Growth

Neptune Wellness Solutions Inc. (NEPT.TO) (NEPT) is also considered to be an early mover on the Canadian cannabis oil market and is an opportunity that we continue to monitor. The last few months have been significant for the business as it has expanded into verticals that are levered to COVID-19.

From hand sanitizer to touchless thermometers, the Canadian company has expanded into new verticals and the market has responded positively to the developments. Neptune has rallied more than 200% off its March lows and we will monitor how the story continues to evolve on the cannabis side of the business.

Earlier this week, Neptune was granted a sales license by Health Canada to sell edibles, vapes, extracts, and topicals in provinces across the country. The granting of the license represents a major milestone and will expand Neptune’s cannabis operations to include proprietary branded products. The license also enhances the capabilities of the company’s white label offerings and we will monitor how this benefits the growth of the business.

In addition to the sales license, Neptune’s cold storage and additional operating capacity are operational, and we expect this to support growth on a going forward basis. The enlarged cold storage and approved space in the facility will significantly improve Neptune’s logistic capabilities and provides incremental solutions for the company’s clients.

Neptune has been highly focused on the development of its own brands and plans to announce new branded products in the near future. Going forward, the company plans to further enhance production capabilities to expand its branded and white label product solutions as well as product forms to capture incremental value in the Canadian cannabis market.

Although 2020 has been a challenging year for the cannabis industry, Neptune has found ways to create new revenue streams for the business. These additional revenue streams seem to be significant for the business and we will monitor how the story continues to evolve in the back half of the year.

Heritage Cannabis Holdings: Under Pressure and Trending Lower

Heritage Cannabis Holdings Corp. (CANN.CN) (HERTF) represents a less advanced play on the Canadian cannabis extraction market and is an opportunity that we have been following from the sidelines. During the last year, the company has recorded several significant developments and will monitor how the business is able to evolve in the back half of the year.

During the last quarter, Heritage has been negatively impacted by the spread of COVID as it recognized a decrease in orders for existing contract manufacturing services. The spread of the virus has also delayed the signing of new agreements and we will monitor how the company is able to bounce back from this.

A positive development for the business was the granting a sales license from Health Candada for Voyage and industrial hemp licenses for both CannaCure and Voyage. In the near future, Heritage plans to launch its own branded products and the management team seems to be confident that the launch, as well as additional potential contract manufacturing agreements, will lead to significantly improved revenue numbers in the future.

In late June, Heritage reported second quarter financial results and the numbers were less than impressive. The recent trend for Heritage’s stock has been flat and to the downside and we will monitor how the business continues to perform. We are taking a more cautious approach with Heritage and expect the business to report substantial developments in the near future. If the developments are positive or negative is to be determined and we will keep an eye on the opportunity.

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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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