Assessing MediPharm Labs’ Sales Agreement with Canopy Growth
December 12th, 2018
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According to Health Canada statistics, cannabis oils have been steadily increasing market share in Canada over the past couple of years as an alternative delivery method to smoked flower. The numbers are kind of startling. In September 2018, licensed producers sold 1,755 kilograms of dried cannabis to patients while oil sales reached 4,455 kilograms. What’s more, Health Canada plans to allow a wide variety of cannabis-derived products like edibles into the market in the fall of 2019. Edibles have been shown to be wildly popular in mature markets in the United States. Underlying these product categories is cannabis concentrate, the viscous sludge that results from extracting the active ingredients from the cannabis plant. Companies turn concentrate into more diluted oils and all kinds of other products, like gummies, beverages, and topical creams.
With market demand expected to continue its upward trajectory, MediPharm Labs (TSXV: LABS) is positioned as a concentrate and extraction expert. MediPharm is the first licensed producer in Canada to focus exclusively on oils and extracts. The company’s recent sales agreement with Canopy Growth is a prime example of MediPharm’s business model, though its magnitude may be misunderstood. Here is an attempt to sort through the deal and understand its implications.
Canopy has committed to buying 450kg of cannabis extract from MediPharm over the next 18 months, with an option to buy another 450kg. That’s it! But in a market that has been conditioned to large annual flower production numbers in the thousands of kilograms, 900kg doesn’t really sound that impressive. A more thorough understanding of concentrate and how it relates to end products is needed to properly assess the deal.
MediPharm creates concentrate by extracting the active ingredients from cannabis. The concentrate consists of about 70% active ingredients (mostly THC and CBD), meaning that 450kg of concentrate carries about 315kg of active ingredients. That concentrate is then diluted into marketable products like the oils currently available in Canada. These oils come in a variety of concentrations and mixes of active ingredients, but suffice to say that more than 450kg of oils can be made and sold from 450kg of concentrate.
What the Market Offers
Let’s spin through a few cannabis shops to get a representative idea of what’s on the market. The numbers may blur together a bit, but we will endeavor to boil it all down in the following section… On CannTrust’s shopping site, three types of oils are offered with varying mixes of THC and CBD. All contain between 1,000mg and 1,100mg of active ingredient per 40ml bottle. All retail for $90.
The Ontario Cannabis Store offers a wider variety of products. The Plain Packaging Balanced Oil contains 480mg of active per 40ml bottle, retailing for just over $110. Aurora’s Indica Drops contain about 750mg of active per 30ml bottle, retailing for about $83. Hexo’s Oil Oral Sprays contain about 375mg of active per 15ml bottle, retailing for about $84.
Canopy’s own Spectrum Cannabis offers a wide variety of products as well, including softgels. The Red No. 2 softgels contain just over 300mg of active per $45 bottle. The Blue Cannabis Oil has 1,000mg of active per 40ml bottle, retailing for $90.
Translating the MediPharm Agreement
The Canopy contract guarantees the sale of 450kg of concentrate, translating to 315kg of active ingredients at a 70% concentration. One kilogram equals 1 million milligrams (apologies for the remedial math lesson), so MediPharm is selling 315 million milligrams of active ingredient. For the CannTrust oils, even using the higher number of 1,100mg of active per bottle, 286,363 bottles could be produced from that amount of active ingredient, which would generate $25,772,670 of revenue from sales at full retail.
Canopy could conceivably produce 1.05 million bottles of the Red No. 2 softgels resulting in $47,250,000 of revenue from sales at full retail. The Blue Cannabis Oil numbers fall more in line with the CannTrust calculations, producing 315,000 bottles and generating $28,350,000 of revenue at full retail.
Hexo’s Oil Oral Sprays offer a look at a different product category. 840,000 spray bottles could be produced utilizing 315 million milligrams of active ingredient, which would result in $70,560,000 of revenue at full retail.
No details of the sale price for the MediPharm/Canopy agreement have been released, so it would be foolish to guesstimate the expected revenue from MediPharm’s end. But the contract guarantees the 450kg of concentrate and allows for another 450kg option. As you can see from the above exercise, this is not a small deal by any measure.
With demand for oils on the rise, and the promise of future higher-margin product categories that utilize concentrates as their basis (edibles, beverages, personal care products), this first-of-its-kind agreement for MediPharm Labs is just an indication of the company’s potential.
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