Top 3 Cannabis Extraction Stocks for 2020

To kick off the new year we're taking a look at our favourite extraction stocks for 2020.

While the global cannabis sector was worth approximately $9 billion in 2016, its value is predicted to grow to $75.6 billion by 2025, making it one of the fastest growing industries on the planet.

However, there is a particular area of the cannabis industry, known as the Extraction Market, that's expanding at an even faster rate. In fact, a study conducted by Grand View Research found that the total size of the Extraction Industry was already $5.3 billion in 2018, and it has only continued to grow since then.

Researchers from the same study also predicted that the extraction sector would exhibit CAGR of 22.1% until 2025—potentially growing to $23.7 billion in value—while identifying the increasing mainstream acceptance of cannabis-based medicine as a key factor driving future growth.

Though this is unsurprising, as an increasing number of pharmaceutical companies operating in the cannabis space have begun turning to CBD extraction—as opposed to traditional dried flower—as a means of harvesting the raw materials needed to manufacture their products.  

The vast majority of this burgeoning Cannabis 2.0 market will be cannabis extract-based products…which we estimate at C$1.6 billion alone. Yet there is significant opportunity elsewhere, including cannabis-infused beverages (C$529 million), topicals (C$174 million), concentrates (C$140 million), tinctures (C$116 million), and capsules (C$114 million).

Deloitte Nurturing New Growth Report

Similarly, the oils segment of the market is also expected to grow at over 40% per year for the next eight years. And it's easy to see why, as mature recreationally-recreationally-legal US States—like Colorado and Washington—have watched cannabis extracts take over up to 50% of the market share.

Pot stocks that specialize in cannabis extraction have also proven exceedingly popular with investors, as they are considered to be a more stable investment option when compared to traditional cannabis companies.

The reason for this is that extraction companies typically enter into multi-year agreements—which come with predefined minimum biomass amounts and delivery time frames—allowing them to enjoy a significantly more predictable yearly cash flow. This allows extraction-service providers to reduce investor risk and decrease overall market volatility, while also offering much higher price points and margins than the companies that work directly with cannabis plant itself.

But, while this may sound exciting from an investment perspective, it's important to remember that cannabis extraction is a extremely complicated endeavour—both in equipment and process—making it highly difficult to effectively manage at scale.

Luckily, we've identified several cannabis extraction companies that we believe have a real shot at conquering the market in 2020, starting with MediPharm Labs.


 

Disclaimer: Past performance is not an indicator of future performance.

MediPharm Labs

MediPharm Labs (TSX:LABS) is a Canadian Licensed Producer that was founded in 2015 and is focused on the extraction of purified pharma-grade cannabis oil and concentrates, which are then used for the development of extracts and other cannabis-derived products.

The company operates out of a wholly-owned 70,000 square foot Ontario facility, which is ISO rated clean and European Good Manufacturing Practice (GMP) standards certified. MediPharm also employs Vitalys Extraction machinery and technology to supplement the company's patented methodology, which is used across its state-of-the-art cannabis extraction, fractionation and distillation equipment.

In January 2019 we identified MediPharm as a sector leader—and likely one of the top performers for 2019—and since then it hasn't disappointed.

Results from the third quarter marked our fourth consecutive quarter of positive Adjusted EBITDA and revenue growth. During the quarter our team has made great strides towards European GMP and Australian compliance of our facilities and continued to build out our capabilities and capacity across our global platforms in Canada and Australia. These investments will prepare us for a very exciting future as the market and world leader in extraction and white label production.

MediPharm Labs CEO, Patrick McCutcheon

The company is currently the largest extraction provider on the market based on sales and boasts an impressive annual extraction capacity of 300,000 kg per year, which is expected to increase to 500,000 kg once its new customised, large-scale extraction line is fully established.

Aside from the production of standardised, pharmaceutical-grade, cannabis oils and concentrates, another key focus for the company is the development of its White Label Production business.

Instead of focusing on standard extraction processing, MediPharm's White Label division operates under a similar model to pharmaceutical contract-manufacturing. This means that the company handles the research, formation, production, and packaging of products for 3rd party customers—as well as providing extraction services—offering a substantial new revenue stream.

Ace Valley Cannabis have already contracted the company for its White Label services, which will see MediPharm supply high-quality cannabis extracts, along with handling the filling and distribution duties for a new line of custom-formulated vape pens, with a minimum order quantity of 2 million units.

The company also has a wholly-owned Australian subsidiary known as MediPharm Labs Australia, which has made several impressive stride of its own in 2019.

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In May 2019 the company was awarded a cannabis manufacturing licence from the Office of Drug Control (ODC), which firmly established MediPharm Labs Australia as an early mover in the Australian cannabis industry.

The company is also in the process of constructing a 10,000 sq. ft. purpose-built manufacturing facility southeast of Melbourne, which will house supercritical CO2 extraction technology—with an annual processing capacity of 75,000 kg—along with state-of-the-art secondary processing equipment for the production of purified and high-concentrate cannabis distillates.

Once fully operational, the company expects to use its Australian operations as a foothold in Asia-Pacific Region, while also providing MediPharm with a newly strengthened global supply chain platform.

MediPharm also recently released promising results that showed a profitable third quarter for 2019, recording a 38% increase over the Q2 period which reflects the company's growing market share. Gross profit was $14.8 million during this period—representing a 30% increase over Q2 2019—while the gross margin was 34%.

MediPharm Labs balance sheet and financial capacity to support further growth also remained strong during 2019, with positive working capital of $87 million, an unused credit facility and cash and equivalents of $42.1 million as of 30 September 30.


Disclaimer: Past performance is not an indicator of future performance.

Valens GroWorks

Valens GroWorks (TSXV: VGW)—which recently rebranded itself as The Valens Company—is the largest third-party extraction company in Canada, boasting a titanic annual capacity of 425,000 kg of dried cannabis and hemp biomass.

The extraction powerhouse has already managed to lock down several agreements with key cannabis players like Organigram, Tilray, TGOD, Hexo, Canopy Growth, as well as a research partnership with Thermo Fisher Scientific.

And in the Q2 2019 Valens' revenue increased to $8.8 million, which represents a massive 296% increase over the first quarter of last year. Meanwhile, gross profit increased to $5.1 million—or 58.0% of revenue—during this period, which saw the company close out the quarter with $65.5 million in cash and cash equivalents, as well as a net working capital position of $76.3 million.

The future is bright. It's just the beginning for Valens, even in Canada, as most oil-based products are just being added as offerings to the legal market this fall/winter. From an operations standpoint, we have been very much a processor to date with the majority of our revenue deriving from toll processing services.

Valens GroWorks Executive VP of Strategy and Investments, Everett Knight

Valens offers proprietary services including CO2, ethanol, hydrocarbon, solvent-less and terpene extraction, analytical testing, formulation and white-label product development, making it a highly attractive choice for any cannabis company looking to develop products in the edibles or extracts space.

To complement this, the company also makes use of centrifugal partition chromatography and emulsion technology—for water solubility and homogeneity in edibles and beverages—to aid in the development of new end-user products.

According to Valens GroWorks Executive Vice President of Strategy and Investments, Everett Knight, this versatility will allow the company to take an increasingly larger bite out of the total cannabis market, as edibles and extracts continue to increase in popularity.

"Edibles proved to be the most sought-after products that will launch this fall with over 58% of surveyors saying they will, or definitely will, try edibles. We see a great market here in Canada," Knight said.

"With our new expansion here in Kelowna, we will be able to not only process and formulate but develop a plethora of products for our clients ultimately making us a one-stop collaborator to get their products to market."

"We are very excited to build out our product development/white labeling capabilities in order to service both Canadian consumers and global consumers in the near future," he said.

We believe Valens has been making all the right moves in the cannabis extraction space, which is why we listed the company as one of our top picks for cannabis stocks in 2019.


Disclaimer: Past performance is not an indicator of future performance.

Neptune Wellness Solutions

Neptune Wellness Solutions (TSE:NEPT) is an up-and-coming cannabis extraction service-provider with facilities in Canada and the US. The company is focused on the extraction, purification and formulation of cannabis products—with more than 100 clients across numerous verticals currently on the books—while also providing consumers with high-quality full and broad-spectrum industrial hemp products.

Neptune Wellness currently operates out of a 50,000-square-foot facility in Sherbooke, Quebec, and a 24,000-square-foot facility in Conover, North Carolina, which offer state-of-the-art extraction and product development services.

The CEO of Neptune, Michael Cammarata, recently confirmed that its North Carolina facility is expected to reach an annual run-rate of 1,500,000 kg in the near term, while it's combined extraction capacity—which includes its US and Canadian operations—will soon exceed 3,000,000 kg per year once the company's current expansion plans are complete. 

We have a strong opportunity in the consumer market, and in recent months I have been focused on developing our B2B and B2C strategy for the US market. According to most estimates, the US hemp-derived CBD market is expected to exceed US$20 billion at retail in the next five years. This market size is roughly three to four times larger than the expected size of the Canadian cannabis market and represents our largest opportunity today.

Neptune Wellness CEO, Michael Cammarata

While the company already has an impressive roster of clients under its belt, Neptune drew considerable attention in October 2019, when it entered into a 2-year extraction services agreement with a major US farming services provider. Under the terms of the agreement, Neptune will be provided with raw hemp biomass which it will then be tasked with processing into crude oil extracts.

This was huge news for the company, as the 2-year agreement could eventually reach a total value in excess of $20 million, ensuring that Neptune continues to enjoy steady revenue growth over the next 24 months.  

"This large contract will support our capacity expansion at our North Carolina facility and better position us to serve the growing United States market," Neptune CEO Michael Cammarata said.

"Our expansion in North Carolina is on time and on budget with extraction capacity expected to reach an annual run-rate of 1,500,000 kg of biomass by December 2019,"

"Demand for extraction and formulation services in the US is currently strong with the ongoing harvest season and our tolling and formulation pipeline to deliver high quality full and broad spectrum extracts remains robust. This announcement represents a further step towards our customer and geographic diversification strategy," he said.

The company had a strong Q2 during 2019, recording an increase in revenue of 49% when compared to the previous year, while Neptune's Adjusted EBITDA decreased by $3,353.

The quarter also saw the launch of Neptune Ventures—a technology incubator and strategic investment division—which the company expects to stimulate innovation and partnerships in the cannabis and wellness space.


Good Titrations

Cannabis extraction is clearly a booming sector and one that is likely to experience continued growth in the coming years as cannabis use—for both recreational and medicinal purposes—becomes increasingly mainstream.

And it doesn't take a rocket scientist to figure out why, as extracts offer a wide variety of dosage forms, compositions and consumption methods, while also being clean, consistent and highly potent.

These pot stocks have also proven highly popular with cannabis investors, as they allow for premium pricing and higher margins, which can provide high conviction growth in the large-scale consumer goods space. 

As a result, the Extraction Market is set to soar to new heights in 2020, with the arrival of Legalization 2.0 in Canada expected to drive significant growth. The only thing left to do now is decide how high you want to ride it.  

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Hugo Gray
Hugo Gray

Hugo Gray is a Melbourne-based journalist with a body of work that covers a diverse range of topics, including immigration law, sex technology, and now the rapidly expanding cannabis industry.

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