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Why business is booming for cannabis extraction companies, despite the supply shortages

• Although licensed producers are getting into extraction, observers predict it won’t be enough to meet future demand for cannabis in oil-form
• In the most recent round of cannabis earnings, a little-known company called MediPharm Labs Corp. posted revenue of $10.2 million for the quarter ending Dec. 31, 2018, a figure that placed it comfortably amongst the Top 10 for Canadian cannabis companies.

Vanmala Subramaniam

In the most recent round of cannabis earnings, a little-known company called MediPharm Labs Corp. posted revenue of $10.2 million for the quarter ending Dec. 31, 2018, a figure that placed it comfortably amongst the Top 10 for Canadian cannabis companies.

For a company that does not grow cannabis, MediPharm’s financial performance caught the attention of investors: Within days, its stock soared 30 per cent, and has since maintained that upward trajectory.

Instead of growing, Barrie, Ont.-based MediPharm is one of just a handful in Canada involved primarily in the business of extracting oils from the marijuana plant and turning them into products like gel capsules, or the high-potency concentrates that are expected to become legal later this year.

Although some of the biggest licensed producers such as Canopy Growth Corp., Tilray Inc. and Aurora Cannabis Inc. are either constructing or have constructed their own extraction facilities, industry observers predict that infrastructure simply won’t suffice to meet future demand for cannabis in oil-form.

As such, they predict, companies focusing solely on cannabis extraction will start comprising an increasingly important subsection of the overall industry.

“Cannabis extraction is a huge growth opportunity in Canada. The reason I say that, is because if you look to the U.S., it was not uncommon to see 75 per cent of the market consuming cannabis flower years ago but as product offerings became more differentiated, we saw the market for flower drop to around 40 per cent, and the market for oils surge to over 60 per cent,” said Beau Whitney, a senior economist at the cannabis research firm New Frontier Data who was previously involved in the cannabis extraction business.

Olivier Dufourmantelle, the chief operating officer of Canopy Rivers Corp. — the venture capital arm of Canopy Growth — believes that as the cannabis industry matures over time, it will become increasingly fragmented, with specialists handling each part of the supply chain like any other industry.

“Cannabis extraction companies are analogous to corn syrup extractors, for example. They don’t grow corn, but they buy it, extract the syrup and then sell it to a bottling company like Coke,” said Dufourmantelle.

Indeed, MediPharm has over 20 supply, purchase or sales agreements with a number of licensed producers — they function as the middle-man of sorts in the cannabis supply chain, purchasing dried cannabis, extracting the oil-like substance containing THC or CBD from the plant, and selling it back to the same producers, or to other producers that have requested cannabis extract.

In late March, the company became the first in the country to receive a Health Canada licence exclusively for cannabis oil production which allows it to focus on extracting cannabis concentrates.

“We have reduced the scale-up risk by dealing with many major players because we know it has been difficult for some to scale up, so if we don’t get flower on time from one, we have others to go to,” explained MediPharm chief executive Pat McCutcheon.

MediPharm’s main competitors are Kelowna, B.C.-based Valens Groworks Corp. and Quebec-based Neptune Wellness Solutions. In early April, GMP Securities analyst Martin Landry initiated coverage on all three companies, placing a buy rating on all and substantially increasing their respective target prices.

“The extraction industry is poised to experience rapid growth with the arrival of vape pens, beverages and edibles this fall. Value-added products derived from cannabis extracts could represent 50 per cent of the cannabis industry sales in Canada over time,” Landry wrote in a note.

Unlike extractors focused solely on cannabis however, Neptune has a fallback — in the event demand for cannabis derivatives do not match up to forecasts and the bullish sentiment towards cannabis extractors subsides, the company is in the wellness business and owns a patent for the wildly successful Omega-3 Krill Oil supplement.

MediPharm Labs co-founders Keith Strachan, left, and Pat McCutcheon in one of the company’s extraction clean rooms at their facility in Barrie, Ont. Handout

“We have never been cultivators and we do not intend to. But we do know the wellness business well, and to us, cannabis is a global consumer products phenomenon that does not happen so often. We thought, we got to get in there,” said Neptune’s chief executive Jim Hamilton, whose company was founded in 1998 but only entered the cannabis space three years ago.

Neptune says it has the capacity to extract 6,000 metric tons of cannabis in a year and has multi-year supply agreements with Canopy Growth, the first licensed producer to introduce extract-based CBD-heavy cannabis softgels to the adult-use market. But the company only received its license to process cannabis from Health Canada in early January, and as such, has yet to see revenue from its cannabis business.

At least on paper, Valens Groworks has a smaller processing capacity than Neptune — 240,000 kilograms a year, according to a recent press release from the company. But the company’s president of strategy and investments, Everett Knight says that efficiency in extraction is Valens’ core focus.

“First of all, we have five different kinds of extraction methods at our facility. Most people are only using CO2 as a solvent for extraction. Second of all, we’re extracting at a 90 per cent rate, which means that 90 per cent of the component we want in cannabis, THC or CBD, is being extracted, so we are getting higher yields,” Knight explained.

Last November, the company received a Health Canada licence to sell its extracted product to other licenced producers. The company has agreements with Tilray, Organigram Inc., Canopy Growth and The Green Organic Dutchman but in 2018, its revenues came only from consulting agreements and not from actual sales of cannabis extracts.

For the 2018 fiscal year ending November 30, Valens posted a loss of $15.9 million, which Knight attributes to capacity expansion: “We’re trying to expand to make sure we can make the most for our customers because what we see going into 2020 and 2021 is there are simply not enough extractors to meet the demand out there.”

New Frontier Data’s Whitney believes that companies that either do not align themselves with an extractor or have the financial capacity to vertically integrate and do the extraction themselves are at risk.

“There’s millions upon millions of (square feet of) licensed capacity to grow coming online. Prices for flower are going to decrease markedly so you need to be considering this commoditization of prices and how to diversify your business,” Whitney said.

But Dufourmantelle takes a slightly less bullish stance on the companies that currently exist in the extracting space, saying that while Canopy Rivers’ is looking to invest in extractors, it just hasn’t found the right firm.

The fact that MediPharm appears to be leading the extraction pack by miles is a point of caution for him. “I would warn investors on getting too excited about their earnings. They have the benefit of being in Ontario, and the bulk of cultivators are in Ontario. So they are in the unique position right now of being the sole provider of extraction services, and hence they have price leverage,” Dufourmantelle said.

“The question that remains to be seen is whether they can continue to sustain those numbers over time.”

• Email: [email protected] | Twitter: VanmalaS

Source: https://ottawacitizen.com/cannabis/why-business-is-booming-for-cannabis-extraction-companies-despite-the-supply-shortages/wcm/40e53f7b-f91f-428c-8cc0-2ca97bae0e8d

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Study Says Canadian Cannabis Market Could Reach $5.2B By 2024: 4 Provinces To Watch

Alex Oleinic , Benzinga Staff Writer  

• In 2018, legal cannabis spending grew by 65 percent to $569 million.
• Through legalizing adult-use cannabis, Canada created a market that covers nearly 30 million consumers.

On Oct. 17, 2018, Canada made history by becoming the first G7 country and the second country overall to legalize adult-use cannabis.

Yet the rollout of legal Canadian cannabis was fraught with shortages, a limited retail presence and poor product selection. 

In 2018, legal cannabis spending grew by 65 percent to $569 million. In the last two and a half months of 2018, adult-use sales reached $112.5 million, falling short of estimates.

Canadian spending on medical marijuana alone in 2017 grew by 84 percent to $330 million.

In a fairly short period of time, Canada has become the home to cannabis companies like Aurora Cannabis Inc. ACB 2.38%, Canopy Growth Corp CGC 2.17%, Tilray Inc. TLRY 0.56%, Cronos Group, Inc. CRON 0.8% that have risen to become the largest cannabis companies in capitalization terms. 

These firms are expanding their presence not just in Canada, but in other countries, either through exports or by establishing full-scale cultivation and distribution operations. No matter what occurs in the Canadian cannabis market, these companies have already established themselves as global leaders.

Provincial Rules, Regulations Are Key 

Through legalizing adult-use cannabis, Canada created a market that covers nearly 30 million consumers.

Shortages weren’t completely unexpected, given that the medical market had only included around 360,000 people.

The Canadian government allowed provinces to figure out how to deal with the legalization and consumption of cannabis.

Stricter rules in some provinces mean that overall cannabis spending might be affected, with more consumers continuing to access the illicit market and its lower prices.  

In a new report, Arcview Market Research and BDS Analytics project the legal cannabis market in Canada could reach $5.2 billion by 2024, with the bulk of the figure representing adult-use sales ($4.8 billion).

Arcview and BDS Analytics issued a province-by-province breakdown, to show that not only the role the population plays in the cannabis market’s size, but how regulations and the environment created by local government should also be taken into account.

Four Key Provinces

Arcview and BDS identified four main provinces that they project will dominate the market in spending in 2024: Ontario, Alberta, Quebec and British Columbia. These provinces will account for 85 percent of the market by 2024 versus around 82 percent in 2018, according to the report.

While Ontario is the largest market due to its high population and favorable business environment, Alberta is the second-largest, despite having the lowest population of the four provinces, the research firms said. 

Quebec is the second-largest province in terms of population, but ranks fourth in terms of market share. This figure is not only due to regulations, but also due to very low number of consumers.

Let’s take a closer look at how the cannabis market is projected to develop in each of these four provinces and the main factors affecting that growth. 

Ontario

Ontario is Canada’s most populous province, with 14.4 million people. At the same time, 26 percent of the population identifies themselves as cannabis consumers and 31 percent as acceptors, or people who would consider consuming in the future, according to BDS Analytics’ Consumer Insights. The Ontario cannabis market is expected to exceed $2 billion, with adult-use consumption accounting for $1.8 billion.

The province also has some of the more permissive rules regarding cannabis consumption. Smoking and vaping is allowed in public areas like parks and at designated rooms at hotels, motels and inns. Other than those provisions, public use is regulated in the same way as tobacco.

Another major factor that will help Ontario’s cannabis market growth: changes at the retail level. The government-run Ontario Cannabis Store is being replaced with private retailers, and officials have not set a cap on licenses, although they estimate between 500 and 1,000 locations will eventually open across the province.

Alberta

Alberta is Canada’s fourth-most populous province, with around 4.3 million people in 2018. Since legalization and through the end of 2018, the province registered 28 percent of the total cannabis sales in the country.

The province has a higher-than-average number of consumers (27 percent) and acceptors (32 percent), BDS and Arcview said.

In Alberta, adult-use cannabis is available to people above 18 years of age versus 19 years in Ontario and British Columbia.

The main factor helping Alberta’s cannabis market is the favorable business environment. Following legalization, regulators in Alberta quickly allowed private retailers to enter the market. Two hundred adult-use stores are expected in Alberta, compared to an average of 50 stores in other provinces.

Quebec

Quebec is expected to represent less than 14 percent of the Canadian cannabis market in 2024.

Even though it’s the second-largest province in terms of population, only 20 percent of residents are consumers and it is home to just 3 percent of registered medical patients. Quebec is reportedly considering raising the legal age of consumption fro 18 to 21. Total cannabis spending is expected to reach $704 million in 2024.

Quebec has stricter distribution regulations. Retail is conducted through Société Québécoise du cannabis, which initially opened just 12 stores and doesn’t conduct any advertising. To deal with shortages, SQDC limited the days of operation to Thursday through Saturday, although online sales remain open at all times.

British Columbia

Even though its population is much smaller than Quebec’s  —5 million vs. 8.3 million — British Columbia is projected to amass 14% of total Canadian cannabis spending in 2024, slightly more than in Quebec. Legal sales are expected to reach $722 million by 2024.

Retail sales in British Columbia are conducted both through province-run and private stores. Earlier this year, the British Columbia Liquor Distribution Branch, which is the sole wholesale distributor of non-medical cannabis, partnered with 31 large licensed producers, including Canopy Growth, which operates the largest cannabis greenhouse in the world in the province.

What To Keep In Mind

While provincial regulations may slow down cannabis market growth in Canada, it’s still poised to grow at at an impressive rate, as more products become available sometime later this year and more retailers are allowed to set up locations across provinces.

In the meantime, the legalization of adult-use cannabis in Canada and a regulatory system that gives some degree of leeway to provinces or even municipalities are providing a case study to the rest of the world to see which approaches work best at ensuring safety and quality — and which should be avoided.

Source: https://www.benzinga.com/markets/cannabis/19/04/13504767/study-says-canadian-cannabis-market-could-reach-5-2b-by-2024-4-provinces-to-watch