WeedMD Inc. (TSXV:WMD) has a first-mover advantage in expanding its supply agreements with long-term care providers
SmallCapPower | July 10, 2019: WeedMD Inc. (TSXV:WMD) (OTCQX:WDDMF) is a Canadian federally-licensed producer and distributor of cannabis and cannabis extracts for medical and recreational markets. The Company currently owns and operates two licensed facilities: 1) in Aylmer, Ontario, a 26,000 sq. ft. facility and; 2) a 158-acre property located in Strathroy, Ontario, which also includes a 616,000 sq. ft. greenhouse facility. In total, WeedMD has 136,000 sq. ft. of licensed production space with 150,000 kg of fully-funded capacity. The Company is expecting to expand its footprint to more than 550,000 sq. ft. of indoor and greenhouse production space by the end of 2019. The Company also received approval on May 31, 2019, for 27 acres (1.1M sq. ft) of outdoor cultivation space.
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Investment Thesis
On June 17, WeedMD completed planting of more than 20,000 fully-rooted cannabis plants at its 27-acre outdoor cultivation space in Strathroy. The Company is expecting to complete the harvest by Fall 2019. This will provide WeedMD with sufficient access to one of the least expensive methods of cultivating cannabis (International Cannabis Corp., 2018).
Figure 1: Strathroy’s Outdoor Grow Operation
Source: Ubika Research
WeedMD has converted its 26,000 sq. ft. Aylmer facility into a large-scale cannabis extraction and processing operation that is expected to process over 200,000 kg of biomass annually. This should help to streamline the Company’s operations and increase its ability to put forward market-ready products. WeedMD’s experience and expanded extraction facility will help aid the Company in processing product for the growing demands expected to occur in Canada with the legalization of edibles in October 2019. The Company already has experience in oil extraction, as it has been doing in-house extraction since 2017.
Figure 2: Strathroy Indoor Facility
Source: Ubika Research
WeedMD also has a first-mover advantage in expanding its supply agreements with long-term care providers. By 2030, Canada’s senior population will be over 9.5 million, making up more than 23% of Canada’s population (Government of Canada, 2014). This has the potential to be an extremely lucrative market, as aging demographics become more supportive of medical cannabis.
Valuation
Trades at a discount compared with its peers. WeedMD trades at a 1.5x 2020E EV/Revenue and 4.2x 2020E, EV/EBITDA multiples, compared with Canadian majors, which trade at a consensus average of 9.6x and 30.8x multiples, respectively. Additionally, WeedMD has one of the lowest EV/fully-funded production capacities at 1.3x, compared with 17.1x the average of its peer group. We believe that this valuation gap should close once the Company successfully finishes its outdoor grow, brings its extraction facility on line, and ramps up production going into 2020.
Figure 3: EV/ Fully-Funded Capacity of Major Canadian Cannabis Companies
Figure 4: Overview of WeedMD’s Operations
Figure 5: Indoor Facility Layout at Strathroy
Source: (Investor Deck, 2019)
Current Developments
On May 27, 2019, WeedMD announced it secured Health Canada approval for new packaging lines at its fully-licensed Aylmer, Ontario facility. The license amendment will allow for the addition of a processing area with a semi-automated packaging line. The processing room and packaging lines are installed and currently in the testing and calibration phase. It is expected it will be operational by Q3/19. This addition is predicted to lower production costs and increase the Company’s speed to market.
On April 1, 2019, the Company entered into a $39M debt facility with BMO to acquire the 98-acre licensed Strathroy property. The credit facility will allow BMO to provide WeedMD with secured debt financing at a rate of interest that is predicted to average in the low-to-high 5% per annum over a three-year term. The credit facility is comprised of a $33.1 million term loan, a $3 million equipment term loan and a $3M revolving credit facility, maturing in 2022. The Strathroy purchase included a 610,000 sq.ft licensed greenhouse, more than 100,000 sq.ft of ancillary structures, 50 acres of land, and infrastructure and equipment. The purchase cost was $22.6M, of which $17.6M was paid in cash, and $5M was covered with stock.
On January 11, 2019, WeedMD, along with Pita Pit, announced its national launch of retail service provider Pioneer Cannabis Corp. Pioneer will offer retailers a range of services, which include identifying locations, providing assistance with licensing and security process, point of sales and payment systems and marketing services among others.
Distribution Channels
WeedMD utilizes a multi-channeled distribution strategy that involves medical, recreational and international initiatives. Within Canada, WeedMD has supply agreements with six provinces that include: 1) British Columbia; 2) Alberta; 3) Saskatchewan; 4) Manitoba; 5) Ontario; and 6) Nova Scotia.
Medical
Supplies directly to medical patients and utilizes its agreement with Shoppers Drug Mart, one of Canada’s largest retail pharmacy chains, to reach its customers. With this agreement, customers will be able to purchase WeedMD’s cannabis products from Shoppers online store. Currently, WeedMD is the only licensed cultivator to establish multiple preferred supplier agreements with long-term care providers. The Company currently represents more than 3,500 patients in a market that is made up of more than 400,000 patients.
Recreational
WeedMD has agreements with six different provincial distribution agencies in Nova Scotia, Ontario, Manitoba, Saskatchewan, Alberta and British Columbia.
International
The Company announced in September 2018, that it had completed an export of cannabis genetics to Australia’s Medifarm, which is a private licensed producer based in Queensland. Additionally, the Company announced its expansion into Israel with its partnership with Technion-Israel Institute of Technology in February 2018. Lastly, WeedMD delivered its second international shipment to PharmoCann, a private pharma-agricultural medical cannabis producer that is under the control of Israel’s Ministry of Health, following the quarter end of September 30, 2018.
Product Development
Vapes and Other Concentrates
- Currently in development with a planned release in Q4/19.
- Revive Therapeutics and WeedMD signed a medical cannabis and R&D supply and collaboration agreement on June 13, 2018. One of their objectives is to develop an alternative delivery system to smoking or vaporization.
Beverages
- On March 8, 2018, WeedMD and Phivida Holdings Inc. entered a Joint Venture (JV) for cannabis-infused beverages.
- The JV will focus on manufacturing, marketing and distribution of cannabinoid-infused beverages.
- The brand name will be under CanBev.
Edibles
- Currently developing partnerships for 2020 product expansion.
Topicals
- Currently in the process of development for release in Q4/19.
Gel Capsules and other Medical Products
- Gel Capsules, along with other products, are in the pipeline to be released in Q2/19.
- Current medical products include dried cannabis and cannabis oil.
Recent Press Releases
On June 18, 2019, WeedMD announced that it was chosen as the first licensed producer to be involved in the Shoppers Drug Mart and TruTrace Technologies medical cannabis verification pilot project. The project’s goal is to test and verify the origin, authenticity and quality assurance of cannabis products.
On June 5, 2019, WeedMD launched its Color™ Cannabis product line, which will offer a variety of strains in varying formats. It is expected to be in stores mid-June 2019.
Figure 6: Color™ Product Line
Source: (Investor Deck, 2019)
On May 31, 2019, WeedMD reported its Q1/19 financial results, which showed net revenue of $3.3 million, up 23% from the previous quarter.
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