Founded in 2015, MediPharm Labs is a B2B Canadian Licensed Producer extracting purified pharma-grade cannabis oil and concentrates for the development of extracts and other cannabis-derived products.
The company, the first to receive a license from the ACMPR to produce oils (without first having to receive a cultivation license), is considered a sector-leader and is likely to be one of the top performers in 2019, as it operates in the fastest growing segment of the market – cannabis-derived CBD oils and extracts.
MediPharm Labs is following the global trend in the medical cannabis industry which sees sales moving away from dry flower due to the long-term effects it can have on an individual's health when smoked.
In 2018, oil sales in the Canadian Medicinal Market increased by 92%, whereas flower sales only increased by 18% over the same time period. In mature US markets such as Oregon, Washington and California, oils and extract make up over 50% of the revenue across the cannabis industry.
The niche cannabis oil market is a high margin, high growth segment of the cannabis industry and given the fact that MediPharm Labs cannot actually cultivate (as it does not have the license to do so) it is not restricted by growing seasons, and with the right supply, has the ability to generate revenue all year round.
The company operates off its wholly owned 70,000 square foot facility in Barrie, Ontario. The current facility (10,000 square foot) is ISO rated cleans and, importantly, is European GMP standards certified. Critical to MediPharm's next stage evolution of becoming a white-label solution provider to the recreational and medicinal cannabis markets.
The facility's processing capacity was recently upgraded to 150,000 kilograms of dry cannabis flower or trim, per annum. Phase II of their expansion – due to be completed in Q2 of this year – would bring that capacity to a whopping 250,000 kilograms of dry cannabis flower or trim.
Utilising Vitalys Extraction machinery and technology, MediPhram Labs apply their patented methodology across state-of-the-art cannabis extraction, fractionation and distillation equipment.
The company's primary focus is the production of standardised, pharmaceutical-grade, cannabis oils and concentrates. As MediPharm Labs do not have a cultivation license, and hence have no capacity to grow, they are reliant on securing agreements with cultivators to ensure a sustainable supply of material inventory (dry flower and trim).
In this regard, they have secured a number of long term agreements (3 years or more) with top Canadian LP's such as Supreme, Indiva and Emerald Health.
In addition to the above supply and processing agreements, in November 2018, they secured a processing contract with Canopy Growth. Under the 18-month agreement, MediPharm will supply up to 900kg of cannabis extract for sale to Canopy Growth and its subsidiaries. Canopy Growth has committed to purchasing a minimum of 450kg with an option to purchase an additional 450kg.
MediPharm Labs were also one of 32 Licensed Producers to be given a supply agreement for Ontario. That's a supply agreement for the most in-demand products from the largest retail market in Canada.
MediPharm Labs was granted its sales license in November 2018, and currently boasts the highest extraction revenue run rate of over $10 million per month. In addition, their "second-stage" revenue stream will really kick in, come October 2019.
In October 2019, Canada is set for its "real legalisation" which is the legalisation of edibles and extracts. Currently, Canada's recreational market can only consume flower and low-potency oils.
MediPharm Lab's second revenue stream will be its White Label Production. This differs to their standard extraction processing, in that their white label products is a classic reproduction of the pharmaceutical contract-manufacturing model.
Here, MediPharm Labs would handle the research, formation, production, and packaging of products for its 3rd party customers. We see massive upside in this area, as companies struggle to keep up with the demand from the recreational market in Canada post-October.
A Global Outlook
But it's not just about Canada. MediPharm Labs has expanded to Australia through its 80% ownership of MediPharm Labs Australia. The Australian entity is alate stage applicant for its manufacturing license, which it expects to receive in Q3 2019.
The 10,000 square foot facility, due to be built about an hour outside of Melbourne in Victoria, would act. Primarily as an export production facility for the International market, until such time as the Australian market grows.
And it's certainly due for significant growth. In 2018 the medicinal market was valued at $18 million and this is set to explode to just over $1 billion by 2024! Never mind the fact that Australia is positioning itself as the premium product supplier to the Asian markets. This is a strong and forward-thinking move by MediPharm and one we approve of.
MediPharm Labs uses international pharmaceutical standards for their cannabis products. The company's two founders have backgrounds in healthcare and pharmaceuticals and are respected for strictly adhering to pharmaceutical standards, for creating replicable manufacturing processes, and for maintaining critical environments.
Their management team is certainly one of their strengths. Lead by Pat McCutcheon, their CEO, with 15 years experience in the sales side of the pharmaceuticals industry, and complemented by both David Mayers (the COO) with 28 years in Pharma, and Dr. Chris Talpas – their director of quality Control) with over 24 years experience in biopharmaceuticals and a global expert on the field of chromatography.
It is Dr. Talpas that plays one of the most crucial roles in the company's development of additional specialised intellectual property, focused on downstream proprietary fractionation, isolation, and chromatography.
MediPharm Labs reported subdued 2018 Q3 results that reflected a high capital expenditure and expansion drive in the financial year. The business is poised to continue this expansion drive in-line with their mission of maintaining their sector leadership status. We expect, however, that the Q4 results will be bolstered by the $10 million worth of shipments reported in December 2018.
We expect this trajectory to continue coupled with a significant improvement in revenue due to lucrative sales contracts. Fuelled by the projected growth of the cannabis oil extraction sector, and significant barriers to entry in this niche market, we estimate that a price per share valuation within the range of $2.90 and $3.10 represents fair value and a solid growth outlook.
The Bottom Line
Significant sales contracts which were signed in Q4 2018, are set to result in a material revenue realisation in the fiscal year 2018. And with their extraction capacity increase, due in Q2 2019, we expect performance and revenue to continue to increase through Q3 and Q4 in 2019.
And we're not the only ones who think so.
MediPharm Lab's recent fundraising round was completely oversubscribed. Set to raise $15 million, they ended up getting over $22m. With a healthy looking Balance Sheet, and with propriety technology in market, MediPharm Labs are a hot player in a very hot space.
The 2018 Q4 projections point to a profitable fiscal year. The company has a significant wholesale transaction for cannabis oil with Canopy Growth, once-off sales to other clients, and multi-year processing contracts with 6 of the established Canadian LP's.
With consistent investments in advanced extraction technology and expertise coupled with a focus on attaining economies of scale, we believe they have created a strong competitive advantage, which is further leveraged by their first-mover advantage.
We believe these advantages will result in material revenue growth and profitability in 2019. MediPharm Labs is a sector leader and is projected to be a top performer in the 2019 fiscal year.
The firm produces purified cannabis concentrates, using state-of-the-art technology, advanced proprietary methodologies and purpose-built facilities to deliver pure, safe and easily-dosable cannabis concentrates.
The company is set to more than double its production capacity in 2019 following up on a 50% increase to 150 000kgs in 2018. And with the company already setting its sights on the international market, they are perfectly positioned to ride the biggest green rush wave of them all…the extracts and oils market.