Combined Aleafia Health Inc. (TSXV:ALEF) and Emblem Corp. (TSXV:EMC) entity is expected to be a R&D, extraction, formulation, distribution, and retail powerhouse
SmallCapPower | February 28, 2019: Aleafia Health Inc. (TSXV:ALEF) Emblem merger to create one of the largest medical cannabis companies. With a total production goal of 140,000 kg, the combined entity has potential to be in the same league as the other major Canadian LPs. The combined Company’s planned, and fully-funded production capacity would be comparable to the 150,000 kg planned and funded capacity of Aurora Cannabis Inc. (TSX:ACB, $9.88 | N/R), Hexo Corp. (TSX:HEXO, $7.38 | N/R) at 108,000 kg, and Organigram Holdings Inc. (TSXV:OGI, $8.34 | N/R) at 89,000 kg. With the expanded production capacity, the combined entity expects cost synergies. Once the merger is completed, the Company plans to focus on high-margin products such as oils, sprays, sustained release tables, and CBD-infused wellness products.
Combined Alefia/Emblem entity to be a R&D, extraction, formulation, distribution, and retail powerhouse. Emblem’s high-quality medical formulation includes metered dose sprays and exclusive Canadian rights to sustained oral release tablets. Additionally, Aleafia would have access to Emblem’s testing and R&D, including sleep studies, CPG product formulations with high-margin products such as beverages, edibles, vapes, topicals, and concentrates. This coupled with Canada’s largest cannabis clinic network, supply agreements with Shoppers Drug Mart, JV in Germany, and Aleafia’s supply agreements with Ontario, BC, Alberta, Saskatchewan and retail partnerships, would give it the ability to scale to the level of other Licensed Producers. The combination of Canabo (Aleafia) and GrowWise (Emblem) Health medical cannabis clinics creates the largest clinic network with 40 locations and 60,000 individual patients.
Transaction Summary. Aleafia Health is planning on acquiring all outstanding Emblem shares in an all-stock deal. Each Emblem share will be exchanged for 0.8377 Aleafia shares, representing a 27.0% premium to Emblem’s closing price on the day of the transaction (December 19, 2018). Pro Forma ownership will be 59% Aleafia and 41% Emblem as at the arrangement date. A special meeting of Emblem shareholders will occur on March 6, 2019 and closing of the transaction is expected following receipt of all required regulatory approvals.
Aleafia Health Company Highlights
98,000 kg capacity to come online in 2019 and two years of supply deals. During Q3, the Company secured a Health Canada Sales License and, in addition, began retrofitting its 160,000 sq. ft. greenhouse with an automated container bench system, contributing to decreased operating expenses and allowing for perpetual year-round harvests. The facility is expected to receive Health Canada approval by early March, with production scheduled to begin in early April. Aleafia also signed a supply agreement with CannTrust (TSX:TRST, $12.05 | N/R) to provide up to 15,000 kg of dried flower in 2019. In our discussion with management, the supply deal with CannTrust was sold at a wholesale fair market value and management is targeting cash costs of less than $1/gram.
$10M investment from Serruya Private Equity positions ALEF for sustained growth. The private equity shop purchased 5M common shares of Aleafia Health at $2.00/share. Aleafia and Serruya plan to launch a national adult-use retail network. Under the agreement, both companies have plans to produce, label, and distribute these THC/CBC brands through Serruya partnerships with International Franchise Inc, Second Cup Coffee, and Yogen Fruz, which combined have over 4,500 quick-service restaurant locations. Serruya was an early adopter in the cannabis industry with start-up investments in Aphria Inc (TSX:APHA, $13.37 | N/R) and Liberty Health Sciences (CSE:LHS, $1.08 | N/R). After the close of the financing, Aleafia has $27M in cash on its balance sheet.
First medical cannabis company with significant investments in cannabis research. On January 25, 2019, Aleafia Health announced results of a peer-reviewed journal titled, Reduction of Benzodiazepine Use in Patients Prescribed Medical Cannabis, featuring a cohort of 146 patients from its Cannabo medical clinic. The study found that 45% of patients regularly consuming benzodiazepines had stopped taking the medication within approximately six months of beginning medical cannabis. In our view, this is a positive development that further legitimizes the use of cannabis as alternative medicine.
Proprietary cannabis dataset and education platform. In Q3/18, Aleafia Health generated $600K in research revenue due primarily to other licensed producers subscribing to the Company’s proprietary dataset. On February 4, 2019, the Company announced it had appointed Dr. Graham Merry as Chief Data Officer. Dr. Merry graduated from The Royal Medical College in London, UK and has over 30 years of experience in data and medicine. Aleafia tracks all patient encounters from diagnosis, treatment, and monitoring. The Company has over 10 million data points hosted on an Amazon Web Services (AWS) platform with market-leading machine learning and data visualization tools powered by Google Data Studio. On November 14, 2018, Aleafia also announced it had launched a global cannabis education platform with Brightspace, a cloud-based learning platform. Courses offered include: Cannabis 101, Cannabis in the Workplace, Patient Dosing & Titration, Referring Doctor Training, and Medical Professional Training, all of which are aimed to educate patients looking to explore cannabis-based medication.
Emblem Company Highlights
Positive Q3/18 earnings with sequential revenue growth of 50%. Emblem attained revenues of $2.3M in Q3, a 281% YoY increase. In addition, the Company recorded industry-leading revenue per gram for medical marijuana at $10.67/gram, in comparison to Canopy Growth Corp (TSX:WEED, $60.17 | N/R), which had medical revenues of $9.77/gram, and Aurora Cannabis (TSX:ACB, $9.88 | N/R) with an average combined recreational and medical revenues of $6.23/gram. Emblem also increased its patient count from ~3,000 in Q1 to ~4,800 in Q2, and ~6,000 in Q3, representing a 100% increase in patients, from the beginning of January to September 31, 2018, implying high customer retention rates as a result of EMC’s premium product offerings.
Emblem Oils Available in Shoppers Drug Mart. As of January 2019, the Company’s THC, CBC, and blended THC/CBD oils are available online through Shoppers Drug Mart with a medical cannabis prescription. EMC is one of six Canadian LPs to have a supply agreement with Shoppers Drug Mart. Emblem also announced supply agreements with the Ontario Cannabis Store (OCS), under the SYMBL brand name, as well as agreements with the Alberta Gaming, Liquor & Cannabis Commission (AGLC) to supply wholesale to Alberta; Fire & Flower, and with German pharmaceutical wholesaler Acnos Pharma GmbH through a joint venture with Emblem; and a partnership with GreenSpace Brands, a CPG company to jointly produce CBD-infused health and beauty products as regulations allow.
EMC launches joint venture (JV), Emblem Germany with Acnos Pharma GmbH. The JV, which will be owned 60% by EMC and 40% owned by Acnos, should allow Emblem to commence exporting its products to Germany, with first deliveries expected to be made in mid-2019. Under the terms of the agreement, Emblem now has a 30,000 sq. ft. product innovation centre built to certified good manufacturing processes (cGMP) standards, which is expected to come online H2/19 in Germany. The facility is expected to provide advanced extraction technology needed to meet the demands of the German medical market. According to Prohibition Partners, the German medical cannabis market is expected to be valued at €7.8B by 2028.
*Pro Forma estimates utilize Aleafia fully diluted share count of 180M + Emblem Share Consideration (123M x 0.8377) = 283M shares outstanding post merger.
Undervalued to peers. The pro-forma Company trades at a 18.8x 2019E and 8.3x 2020E, EV/EBITDA multiples, compared with Canadian majors, which trade at a consensus average of 35.4x and 23.1x multiples, respectively. We believe that this valuation gap should close upon successful execution of the Company’s acquisition with Emblem.
Opportunity to disrupt five different pharmaceutical/CPG categories. With Aleafia’s commitment to clinical studies, coupled with its proprietary data and 60,000+ patients, the Company has the opportunity to disrupt many industries. This includes the US$29.5B beauty and skincare market with typical household names such as Estée Lauder, NIVEA, L’Oréal Paris, and Neutrogena. Furthermore, it has the potential to disrupt the US$28.6B sleep aid market where brands such as Ambiem® (Lorex), Dalmane® (Valeant) are at risk of being replaced by medical cannabis, along with the US$15.2B anxiety and depression market with brands such as Xanax® (Pfizer), Prozac® (Eli Lilly), and Wellbutrin® (Valeant) being replaced by cannabis. Also, medical cannabis can be used as a natural alternative to Oxycontin (Purdue Pharma), which is part of the US$15.2B opioids market, and the US$3.0B eating disorder market.
Aleafia Health – Company Description
Aleafia Health is a vertically-integrated, national cannabis health and wellness company with major medical clinic, cannabis cultivation, education, and R&D operations. The Company operates 22 medical cannabis clinics staffed by physicians and nurse practitioners, with over 50,000 patients. Additionally, Aleafia has one of the largest medical cannabis databases with over 10 million points of data and is working towards developing an Intellectual Property (IP) portfolio. Currently, Aleafia is performing a study on sleep and cannabis with Cronos Group (TSX:CRON, $28.04 | N/R). ALEF is planning on launching an eCommerce platform in H2/19, which will give the Company the ability to scale.
Aleafia Health – Overview of Operations
Currently, the Company has a 7,000 sq. ft. greenhouse in Port Perry, Ontario, yielding ~1,000kg annually. Aleafia has 30 acres of outdoor growing space that is shovel ready for April and is expected to have an annual yield of 60,000 kg. In addition, the Company expects to expand its Port Perry greenhouse by an additional 160,000 sq. ft., which has the potential to yield 27,000 kg annually. The facility is expected to be approved by Health Canada in mid-March, with production expected to ramp up by the beginning of April. Typically, 75% of the greenhouse space is used for cultivation purposes, while the remaining 25% is for trimming, curing, packing, and shipping. ALEF has also invested $150K for a 10% equity stake in an online education platform aimed at informing users on the various types of ailments for which cannabis can be used for, including: sleep aid, chronic pain, joint pain, eating disorders, and anxiety. This educational service is set to be offered as a value added for Aleafia’s patients. It can also be offered to insurance companies as a method to educate them on how to develop insurance polices regarding medical cannabis, cannabis in the workforce, and driving & cannabis.
Emblem – Company Description
Emblem is a fully-integrated cannabis company with a medical-first approach focused on product innovation. Emblem is one of the first cannabis companies under Health Canada’s new ACMPR framework to receive a license to produce medical cannabis in August 2015, and a sales license in July 2016. Additionally, Emblem has received approval from Health Canada to produce oil in April 2017. The Company is working on creating pharmaceutical-like standardized dosage forms of medical cannabis being led by John Stewart, who has over 22 years experience working at Purdue Pharma. Furthermore, the Company launched its first recreational cannabis brand called “Symbl” in 2018.
Emblem – Overview of Operations
Fully-funded 30,000 cGMP building with 5,000 sq. ft. for formulation and analytical services laboratory in Paris, Ontario. Once the merger is completed, Aleafia Health is planning on expanding the facility to meet product demands. The Company sells four different brands of oils, oil-filled cannabis capsules, and a metered dose cannabis-oil spray. Emblem is planning on launching sustained release oral tablets in 2019. The Company also signed a five-year exclusive supply agreement with Green Space Brands (TSXV:JTR) for CPG-related CBD products. The agreement includes a 4% royalty on CBD-based sales and a 7% royalty on THC-based sales. Emblem has a distribution agreement with Shoppers Drug Mart across all 10 Canadian provinces and three territories, as well as additional agreements with the Ontario Cannabis Stores (OCS), Alberta Gaming, Liquor and Cannabis Commission (AGLC), Fire and Flower, and Starbuds. Emblem also has a LOI to form a 60/40 Joint Venture (JV) with Acnos Pharma GMBH to distribute cannabis oil in Germany, with first shipments expected in H2/2019.
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