Ovation Science Inc. (CSE:OVAT) develops industry-leading transdermal and topical cannabis products using a licensing/royalty business model
SmallCapPower | January 15, 2019: Ovation Science Inc. (CSE:OVAT) is a skincare research and development company that provides pharmaceutical-grade topical cannabis products for the medical and recreational global market. Through its patented Invisicare® technology, Ovation develops industry-leading transdermal and topical cannabis products using a licensing/royalty business model.
On Thursday, December 20, 2018, U.S. President Donald Trump signed the U.S. Farm Bill into law. The passing of the Farm Bill has ended a five-decade-long ban on industrial hemp (defined as cannabis with less than 0.3% THC), allowing nationwide legal hemp production in all 50 states. With the elimination of barriers to national distribution, we believe Ovation Science has positioned itself for significant revenue growth.
Potential to tap into the US$29.5B beauty + skin care market, the US$15.0B pet medicine market, and the US$13.5B pain/opioids market. The Company has developed a full CBD health and beauty line (25 products), including five anti-aging and moisturizing products. Ovation is also examining the animal health market with CBD/THC products for inflammation, skin irritation and dry skin. Geographically, the Company is exploring European opportunities and is preparing for Canadian expansion following the anticipated legalization of edibles, extracts, and topicals on, or before, October 17, 2019.
The Company’s Proprietary Invisicare® Technology has a 4-10 times higher transdermal absorption rate of CBD/THC compared with other products. With this technology, Ovation requires 4-10 times less CBD compared with conventional products. As a result, we believe that Invisicare® has the potential to be of superior quality with competitive pricing but also higher repeat customers due to its higher CBD levels delivering on its efficacy promises.
A cost-effective royalty revenue strategy minimizes costs and allows the Company to scale distribution quickly. By developing and licensing skincare formulations to global cannabis producers, Ovation earns income through multiple revenue streams, including development fees, license fees, and royalties based on the value of the products sold. Additionally, Ovation earns revenue from the sale of its patented Invisicare® technology. By utilizing the production and marketing capabilities of its licensees, Ovation’s business model drives significantly lower COGS, leading to high returns. Lastly, due to its low cost of implementation, the model is highly scalable, which allows Ovation to penetrate new target markets (Countries) with low capital costs.
Undervalued to peers. We believe the market has overlooked Ovation’s revenue potential. Based on management’s conservative estimate of $5.2M in revenue for 2020, it implies an EV/sales multiple of 1.2x. This multiple is a significant discount to its junior cannabis peers, which trade at an average of 2.8x. We believe this gap should close over time once one or two positive quarters have been released, and/or when additional licensing/royalty contracts are announced.
De-scheduling hemp from the definition of a Schedule I substance will have the effect of classifying it as an agricultural commodity, permitting distribution among all 50 states. Being classified as an industry also allows access to federally back farm-support programs, such as crop insurance, federal water access, and low-interest loans. Importantly, this should allow companies to deduct business expenses against their taxes (IRS Section 280E), which should significantly increase the bottom line of most companies that carry hemp products. The Farm Bill also lifts restrictions on banking, advertising, and marketing. Hemp/CBD companies will also be able to accept other forms of payment other than cash, including debit and credit cards.
According to the Brightfield Group, the CBD market has the potential to reach $22 billion in annual revenues by 2022.
Main catalysts driving the 146% compound annual growth rate (CAGR) include the opening of many exciting business opportunities for hemp. Hemp has the potential to disrupt skincare & beauty, cosmetics, pet care, sport, CPG food & beverage markets. Likewise, CBD can be used as a natural alternative to pharmaceutical drug categories such as: pain/opioids, sleep aid, anxiety, and depression. Additionally, the passing of the Farm Bill opens the possibility to mass retail market hemp at outlets such as Wal-Mart, Costco, Target, Kroger, and Whole Foods. As well, potential CPG beauty companies such as Estée Lauder, NIVEA, L’Oréal Paris, and Neutrogena could enter the space, in addition to CPG Food & Beverage companies such as Coca-Cola, Pepsi, and Procter & Gamble.
Specifically, Ovation has the opportunity to gain market share from the beauty & skincare, pet medicine, and pain/opioid markets.
Cannabis is becoming the hot new ingredient in skin and beauty care due primarily to a wide variety of health benefits, including CBDs anti-inflammatory and anti-aging/antioxidant properties. As such, using topicals such as Ovation’s US licensee’s BASKiN products, can reduce puffiness, swelling, and even soreness. Studies have also shown that CBD can fight acne and give your skin a more youthful appearance.
Anti-inflammatory properties: According to researchers from Bonn University and ETH Zurich, cannabis has been found to have strong anti-inflammatory properties. Inflammation is the cause of many skin problems, including rheumatoid arthritis, acne, rosacea, psoriasis, dermatitis, and eczema. Many studies suggest that cannabis may have the potential target many of these indications.
Anti-aging properties: Historically, hemp has been used by ancient cultures for its potential anti-aging properties. Typically, after the age of 20, our bodies reduce natural collagen production (a protein which gives firmness and elasticity) at a rate of about 1% per year. In 1998, a study released by the National Academy of Sciences indicated that hemp is a stronger antioxidant than Vitamins C and E. Antioxidants help slow the anti-aging process by reducing molecules that are called free-radicals. These are the compounds that cause the collagen to break down faster. The anti-oxidant properties thus assist our bodies in slowing down the process of collagen loss.
CBD and Sport: CBD can be used as a topical to help treat muscle stiffness and soreness and will help aid in recovery. Cannabis advocates say that this is a healthier alternative to the use of powerful opioids or other anti-inflammatories, which can lead to addiction and dependence.
Other common conditions with potential uses of Ovation’s Invisicare® technology include joint pain, inflammation, arthritis, and muscle tension or strain. According to a report by The Brightfield Group, 54% of joint pain and inflammation patients reported using hemp-derived CBD products to treat their condition. We believe that the Invisicare® topical technology has the potential to disrupt this category as the absorption rate is 4-10 times higher than the competitors tested, which should lead to higher product efficacy.
Importantly, 28% of arthritis patients and 35% of people suffering from muscle tension and strain reported using hemp-derived CBD products to treat their condition. In our opinion, Invisicare® technology has the potential to be introduced into both these categories as well.
Animal Health: Often people treat their pets like family. A survey of over 1,000 pet owners found that Americans spend on average US$126.19 every month on their pets. When pets get older, they face many of the similar degenerative diseases that human face. Ovation is planning to enter the animal health market with CBD/THC powered topical and transdermal products to help animals with pain and arthritis, inflammation, skin irritation/dry skin, and insect bites. In our opinion, this could be one of the fastest-growing market segments within the next three to five years.
Ovation’s value proposition: Industry-leading topical and transdermal technology leading to competitive pricing.
Source: Company Reports
Ovation Science is a unique play on the CBD market as it has the exclusive worldwide license to a patented technology called Invisicare®, which is a polymer-based technology covered by comprehensive patent protection in 11 countries for use in topical and transdermal cannabis and hemp seed oil formulations. It is technology that combines hydrophilic and hydrophobic polymers used to enhance these products. Hydrophilic means “water loving.” Hydrophilic polymers mix well with water. Hydrophobic means “water fearing.” Hydrophobic polymers will not mix with water. A material that is hydrophobic increases the contact area of a compound, amplifying its effect. Hydrophilic polymers help to increase a compound’s absorption rate. Combing both has the effect of increasing drug release and absorption. With this technology, 4-10 times more CBD will be delivered to and into the skin vs. other products.
Pricing of Comparable products
OVATION has the potential to out sell competitors. With the Invisicare® technology, Ovation Science delivers 4-10 times more CBD than conventional products. As a result, we believe that Invisicare will not only be of superior quality but will also have better results for the consumers that use it. These benefits, along with a pipeline of 25 products, positions Ovation as a potential leader in the topical cannabis/CBD market.
Significant sales traction with the first launch bodes well for future growth. Ovation’s US licensee is Lighthouse Strategies, LLC, a R&D, finance, real estate, and portfolio management company with more than 150,000 sq. ft. of real estate under management, in the United States. In late May 2018, Lighthouse launched its first two BASKiN products in the state of Nevada. The products are 1) CBD topical; and 2) CBD transdermal cream designed primarily for pain relief. Demand for the products has exceeded expectations, generating over US$650,000 in retail sales during its first four months and even consistently out-selling vape pen sales in Lighthouse’s Nevada dispensary. Lighthouse Strategies has an extensive distribution network in California and Nevada and has plans to penetrate an additional 11 states in 2019, with its Ovation products marketed under their brand “BASKiN.”
Launch of Ovation’s first THC product in 2019 positions the Company for major revenue growth. In Q1/2019, Ovation is scheduled to release its first THC-infused cream into the United States market under the BASKiN brand. Since July 1, 2017, recreational marijuana has been available in Nevada. This U.S. market has been well regulated, and prices and demand have remained consistently high. Currently, Nevada has 55M annual visitors and the average consumer spends US$68 per transaction, with high THC products having generated a large amount of demand for most cannabis dispensaries. To illustrate the growth potential, Forbes magazine reported that the legal cannabis trade in the U.S. was $8.5 billion in 2017, accounting for 90% of the worldwide cannabis market. By 2022 it is estimated that the U.S. market will hit $23.5 billion (73% worldwide), while Canada will reach $5.5 billion, or 17%, of the worldwide market. As a result, the launch of Lighthouse’s first THC product should bode extremely well in a market that has limited topical options, and that means increased royalties for Ovation.
Q1/2019 – Launch of BASKiN THC Product in the U.S.
Q2-Q3/2019 – Expansion to additional 11 states for BASKiN product line
Q4/2019 – Tentative legalization date of topical products in Canada
Q1-Q4 – Additional international license agreements signed
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