Demand for this company’s purified cannabis oil and concentrate extraction services keeps rising as it signs five new processing agreements. Its goal is to become a profitable industry leader in cannabis extraction
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MEDIPHARM LABS CORP., $5.25, symbol LABS on the Toronto Venture Exchange (Shares outstanding: 113.4 million; Market cap: $595.4 million; TSI Cannabis Quality Rating (CQR): ; www.medipharmlabs.com), is a cannabis extraction company that produces purified, pharmacy-grade cannabis oil and concentrates. The company operates out of a 70,000-square-foot Barrie, Ontario, facility.
MediPharm began trading in October 2018 at $2.40 per share. Since then the company has attracted equity financing of over $25 million and the stock has moved up to today’s price.
Unlike most cannabis companies, MediPharm is not attempting to become a cannabis producer. Instead, the company has invested in state-of-the-art, supercritical carbon dioxide (CO2) extraction technology in order to specialize solely in cannabis oil extraction. That’s a higher-profit-margin, value-added segment of the cannabis industry.
When supercritical CO2 (a liquid form of the compound) passes through cannabis in an extractor, it pulls out all the cannabinoids such as THC and CBD. There is no ethanol alcohol or butane used throughout the process. The resulting CO2 oil is an extremely high-grade concentrate that should contain neither toxins nor unwanted elements. It can be vaped or otherwise vapourized and inhaled to produce a high or to deliver the desired medicinal dose.
The company currently operates five supercritical CO2 extraction lines and plans to add two more. That would bring its total annual capacity to 250,000 kilograms.
MediPharm’s facility is built to European Union certification standards and the company expects to receive certification in the second half of 2019. Once certified, MediPharm will have export access to European countries, and to other jurisdictions that rely on EU certification to ensure quality.
The company generates revenue through two primary activities: wholesale, in which MediPharm purchases cannabis and then sells extract products in various formats; and tolling services, in which the company processes cannabis on commission without taking possession of the finished product.
To date, MediPharm has signed five processing agreements, each with a three-year term. They should provide it with a stable revenue base. Its customers so far include Canopy Growth, James E. Wagner Cultivation Corporation, INDIVA Limited, Emerald Health Therapeutics, The Supreme Cannabis Company and TerrAscend.
The company has also now begun producing tincture bottles and soft gels for commercial sale by the third quarter of 2019. As regulations continue to evolve, it will also be adding other higher-margin products, including vapeables, edibles, beverages, and topical creams.
MediPharm continues construction on a cannabis-extraction facility in Australia that will act as the company’s access point for Asia-Pacific markets. The facility will have an annual extraction capacity of approximately 75,000 kilograms of dried cannabis. Because of Australia’s favourable farming conditions, the company expects to be able to produce cannabis at this facility for significantly lower costs.
In the three months ended March 31, 2019, overall revenue was $22.0 million. The company had no revenue in the year-earlier quarter, as it would extract its first cannabis oil for sale in October 2018. In the latest quarter, MediPharm lost $573,000 or $0.01 a share. The company had a cash balance of $8.4 million on March 31, 2019. It had no long-term debt.
MediPharm aims to become the industry leader in cannabis extract products by specializing solely in this area. The company has been able to achieve significant revenue very quickly and, with EU certification and with its Australian facility, it’s well positioned to pursue its strategy of specialization in the global market.
However, startups are inherently risky, especially so in a new market with an uncertain regulatory environment and low barriers to entry. If MediPharm’s niche proves to be attractive, it could attract competition from much larger cannabis industry rivals.
Meanwhile, though, demand for the company’s services continue to rise, and it could make as much as $0.06 a share this year.
As well, the gap between MediPharm’s market cap and its sales isn’t as big as it is for many of its competitors. That could also make the company a potential takeover candidate. While that alone is not reason enough to buy the stock, it adds to MediPharm’s appeal.
MediPharm Labs has a 3-Leaf Cannabis Quality Rating (CQR). The stock is a speculative buy for aggressive investors who want exposure to the marijuana industry.
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