The Green Fund exclusive interview with Paul Benhaim, Elixinol CEO
Elixinol Global Limited (ASX:EXL) is a vertically-integrated medicinal cannabis company that is involved in almost every level of cannabis production, from cultivation to formulation, packing, and distribution.
The company houses a diverse portfolio of medical cannabis and hemp-based businesses and has several plays operating in the hemp-derived CBD market, the hemp food market, and the pharmaceutical grade medical cannabis market.
Elixinol Global first listed on the ASX in January 2018 and performed strongly in the latter half of 2018. Although the share price remained relatively stable for an initial nine-month period last year—sitting at 1.520 in early September—by March 2019 the cannabis stock managed to more than double its' value, jumping to 3.450 a share.
In an interview with the Green Fund, the company's CEO, Paul Benhaim, described the FY2018 period as an "exciting" time for Elixinol.
"We're very pleased with our revenue growth of 121 percent for FY2018 across all of our global businesses," he said.
"Our robust balance sheet shows that the group is capable of leveraging our decades of experience to confidently execute on strategic growth plans. We have $42.7 million in the bank today, and have grown to $37.1 million revenue up from $16.8 million."
While Elixinol Global underwent significant expansion in 2018, thanks to strong revenue growth from its' various product lines, the company still managed to close the year with a robust profit margin.
Elixinol's private label growth was far larger than expected which likely impacted the company's overall group level profit margin. Direct-to-consumer sales managed to offer an approximately 80 percent gross margin, while wholesale and private label varied between 40-60 percent. Bulk sales accounted for much less, only managing to achieve a 20-30 percent gross margin level.
In response to this, the company has said that it will be investing heavily in its branded product lines—which are Elixinol's highest product margin side—along with its' direct-to-consumer and wholesale space.
"We should see massive revenue growth from these big box consumers, but it really depends on the deals that we strike, and how that will affect our gross margins," Benhaim said.
"We can't currently confirm what that will look like when that happens, but we'll find out as we move ahead. What we can say though is that our business is not so focused on profit margins right now, it is a bit of a land-grab."
The spike in share value that occurred during the latter half of 2018 was primarily driven by significant revenue growth from Elixinol Global's various product lines.
Elixinol—which is the company's Colorado-based hemp-derived CBD supplement business—managed to pull in $32 million of revenue last year. The company has 45 different products that it sells through Elixinol Global's direct-to-consumer and wholesale channels, which respectively experienced 112% and 119% growth during the 2018-2019 period.
Elixinol's private label and bulk selling distribution lines also experienced strong growth in 2018. Private label sales grew by a staggering 359%, thanks to organic growth driven by its' distribution partners, while its' bulk sales of raw ingredients experienced a 57% boost.
The strong growth in private label sales was primarily the result of a long-term partnership with a highly successful veterinary product company. The company is one of the biggest brands in the US pet care market, and Benhaim believes that Elixinol likely supplies about 5% of the market space as a result.
However, the company's CEO has predicted that future growth may come from big box stores.
"Where I really think the growth will come will be in the brick and mortar stores"
– Paul Benhaim, Elixinol CEO
"Right now our wholesale lines are spread through a number of different channels. We sell to doctors, naturopaths, physiotherapists, all the way down to yoga mums, vegans and paleo's, which has spread our risk and given us a strong foundation for growth."
"However, I really believe that future growth will be in big box stores. We've had a number of conservations with those outlets over the last months, which have really intensified since the passing of the farm bill last year."
"So instead of being under the guise of the DEA, it's now under the guise of the FDA. Now the FDA is much more amenable and communicative than the DEA was, but they still need to communicate clearly about what we can and cannot sell."
Benhaim believes that once the FDA clarifies its' stance, then Elixinol will be able to move forward with some of the new products it has been developing. More importantly, however, it will also give big-box distributors such as Walgreens, CVS, Target the confidence to proceed with future partnership deals.
"We are capable of supplying such large customers because we have a strong supply chain, a new production facility that's just been commissioned which will more than double our current capacity, and land next to it with advanced plans to grow even more," he said.
"Our wholesale channel has the potential for even ten times the growth in that space alone, so that really will be a catalyst for Elixinol's future growth."
Elixinol Global's play in the hemp foods market is being made by one of its' Australian subsidiaries, Hemp Foods Australia. While the company is currently much smaller than Elixinol's hemp-derived CBD business, Hemp Foods Australia still experienced 51 percent revenue growth over the last year.
Hemp Foods Australia expects much of its' future growth to be driven by branded and up-valued products, such as its' snack bars and SATIVA skincare range.
The company is predicting that it will see strong returns this year on several new products that it has been developing as part of its' plant-based protein products line.
According to Hemp Foods, the company's hemp-based burger products will be marketed as "plant-based protein products" rather than "hemp burgers", to capitalise on the on-market natural eating trend.
However, while the company is doing well, international expansion is still off the cards for now. Hemp Foods Australia has said that it intends to focus primarily on local growth before it considers taking the company's products abroad.
"The focus is absolutely on Australia to start with. Australia is going to be our testing ground for all of the finished products that we produced under the Hemp Foods Australia brand," CEO Paul Benhaim said.
"Should we find one that is extremely successful that we have interest in from the US—or in our other markets, such as Europe and Japan—then it's quite possible that we will place those products for sale in those countries."
"If we do that, it's quite likely we'll look at contract manufacturing those products in those countries using our formulations, and being sold under our brand."
The Burning Issue of ODC Approval
Elixinol Global's pharmaceutical grade medicinal cannabis company—formerly known as Elixinol Pty Ltd—is the NSW-based Nunyara Pharma.
Nunyara is currently developing a state-of-the-art growing facility in Northern NSW and has been left waiting for cannabis license approvals from the Office of Drug Control (ODC) for more than a year.
Once the licenses have been granted the company will begin using its high-tech greenhouses to produce the raw materials needed to manufacture its pre-existing CBD formulations. This will make Nunyara one of the few Australian companies that is capable of cultivating, manufacturing and distributing high-quality cannabis products to the Australian market.
"We've had plans for some time now to create a cultivation and manufacturing facility for high-grade medical cannabis in Australia"
– Paul Benhaim, Elixinol CEO
"Now, high-grade medical cannabis in Australia includes CBD and THC, because the government doesn't differentiate them yet. I think they might wake up to the reality one day, but for the time being, we're incorporating both of those under the Nunyara name."
"We have applied for our licenses with the Office of Drug Control, more than one year ago, when the Office stated that they would give us our licenses within twenty days. But we are very hopeful that our licenses will be granted in the not-too-distant future, and have shown this by buying land that is perfectly suited to the medical cannabis division, and the needs of the Australia market."
Like Hemp Foods Australia, Nunyara's commercial focus will also be settled squarely on Australia for the time being.
While Nunyara is not opposed to the future exportation of its' product line, Benhaim confirmed that its' current focus is on fine-tuning the ideal method to bring the company's cannabis products to market, as delays from the ODC are preventing it from commencing cultivation activities.
Although Elixinol Global's Colorado-based CBD supplement division has been performing strongly, the company maintains that its' main focus is still on the Australian market.
According to CEO Paul Benhaim, they are maintaining a watchful eye on the Australian legislative space now that the government has begun to recognise the numerous issues with the laws surrounding access to medicinal cannabis.
"How the Australian government responds to that will be very clear in deciding where exactly the focus of the market is. And we'll watch that very closely, of course, to make decisions as we move forward around that space," he said.
"I am confident that if the government can see the billions of dollars lost so far—and if it doesn't want to lose out on a future potentially trillion dollar industry—then it will need to step up and allow some more commerce and trade, rather than what it's promoted so far, which is mainly the importation of products being sold to Australian consumers and patients in need."
"In fact, the legal CBD market in Australia is only worth thousands of dollars, while the Australian illegal CBD market is worth tens of millions of dollars, if not hundreds of millions. The TGA and the Australian government is very aware of this, yet they continue to do nothing about it."
In the meantime, Elixinol Global has also been busy establishing new subsidiary entities overseas. A number of branded Elixinol products are already sold in Tokyo airports and subway stations, which lead the company to invest $2 million in Elixinol Japan at the end of last year, increasing its' stake from 10 to 50.5 percent.
The investment was made as an acknowledgment of the Japanese subsidiary's extensive brand-building efforts, which have seen products from Elixinol and Hemp Foods Global distributed into high-end supermarket chains and department stores, along with promotional advertisements placed in Vogue and Elle Japan.
Elixinol Global also expects to begin a hard push into the European market over the coming year, which they predict could become their second biggest commercial space after the US.
"We now have wholly-owned subsidiaries in Europe," Benhaim said.
"We hired a total of 13 marketing staff over there, and we look forward to actually opening the gates for them this month."
"In early March we will start seeing revenue contributions for 2019 from Europe. Our Europe team has also been in conversation with a number of national distribution chains, and soon we'll hopefully start seeing the results from that, so it's a very exciting time ahead for Elixinol Europe."
Rather than setting up full production facilities somewhere in the EU, Elixinol Global have instead chosen to partner with several contract manufacturers that the company trusts with formulating its' proprietary technology and formulations.
Product packaging will be split between a number of different supply chain entities, which will spread risk and ensure that Elixinol Europe has the capacity to expand significantly. This is important, as Elixinol Global is confident that the EU legal cannabis space could become a huge market going forward.
It's a view that's shared by the market research and business management firm, Prohibition Partners, who recently published research showing that the European cannabis market could be worth as much as $196 billion by 2028.
"I think if you really take a long-term view of Europe, then based on the legislative environment I see the EU as potentially having a greater market size than the US," Benhaim said.
"That's a pretty bold statement, but it's why we're investing in Europe. We're not taking that lightly. It's going to slowly ramp up this year, and I think we'll start to see the result by the beginning of next year. Once we know which direction we're heading there, then we'll make decisions about how much more we invest in that part of the world."
"My view is that people are now realising the hemp-derived CBD market has significantly larger potential than the medical and recreational markets. This is where Elixinol is at the forefront of the global industry, and that is why we're investing heavily into our brand, to take our high-quality performance-based formulations out to the world."
While Elixinol Global has been performing strongly on all fronts for the last year, a key factor to its success in 2019 will be how long the ODC takes to approve the company's manufacturing licenses.
Nunyara can only move into production once the licenses are granted, so it seems likely that the company's year-end profits will be heavily dictated by the eventual timing of the government's decision.
However, even if ODC continues to drag its' feet, Elixinol Global is still set to see significant profit growth thanks to its' branded product lines. The company's ongoing commercialisation in new international markets will ensure a steady stream of revenue, and its upcoming partnership with big-box retailers may even end up making the Elixinol into a household name.
The company has a formidable management team with 30 years of industry experience, a forward-thinking CEO, and plans for rapid expansion. And with its' upcoming rollout into the European market, it seems likely the cannabis stock will continue to experience strong growth in 2019.
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