Ovation Science Inc. (CSE:OVAT) announced recently that it will be launching a hemp-derived, cannabidiol-infused topical skincare line called ARLO Beauty
SmallCapPower | April 29, 2019:
- On April 16, Ovation Science Inc. (CSE:OVAT) announced they will be launching their ARLO Beauty products, an anti-aging skincare line infused with CBD, manufactured with the Company’s patented Invisicare® based delivery
- Ovation’s new business model is to develop, market CBD topical and transdermal formulations using the Company’s Invisicare® based delivery This is in addition to its complimentary business model, which involves licensing its CBD and THC topical and transdermal products to global cannabis companies in jurisdictions where cannabis is legalized. According to Jefferies Financial Group, cannabidiol-infused skincare products alone are expected to gain a 15% market share of the US$167B skincare industry, growing to $25B by the year 2024.
- In conjunction with the news release, Ovation also announced the mutual termination of its licensing agreement with Canopy Growth Corporation. The conclusion of this licensing agreement allows Ovation to license its products globally. Coupled with the launch of the new ARLO Beauty line, we expect this to drive significant revenue growth for the Company.
- In our view, the Company’s stock is priced at a discount to its peers. We believe the Company can reach revenue of $9M in F2020E. This implies an EV/Sales multiple of 1.6x, a discount to junior cannabis companies with market caps between $200M and $70M, which trade at a consensus average multiple of 6.4x. We believe this gap should close over time as the market realizes the strong potential of Ovation’s high-margin, multiple revenue streams.
Ovation’s New ARLO Beauty Line
Source: Company Reports
ARLO Beauty is an anti-aging skincare line infused with CBD, which uses the Company’s patented Invisicare® based polymer technology. The first products in the line include an anti-aging Day cream, Night Cream, Eye Cream, and Hand & Body Lotion, with additional line extensions to be launched later this year. Importantly, we note that the Invisicare® based delivery technology provides many benefits to topical cannabis products, including increased moisture levels in the skin, resistance to wash-off and rub-off, and a more significant release of active ingredients. Invisicare® has over 20 years of R&D backing its efficacy and is protected by comprehensive patent protection.
Ovation’s Change of Business Strategy Broadens its Market Opportunity
Ovation now plans to expand globally. Ovation mutually agreed to terminate its Canadian licensing agreement with Canopy Growth Corporation. In turn, this eliminates restrictions that prevented Ovation from dealing with other cannabis cultivators in Canada and globally. As a result, the Company has plans to start licensing its products made with Invisicare®to Canadian-based cultivators as well as to global cannabis companies in jurisdictions with legalized CBD. Ovation already has one licensee in place, Lighthouse Strategies. Lighthouse has launched four products in the U.S. dispensary market.
New Business Stream
With the launch of the new ARLO Beauty line, Ovation has now added a fifth revenue stream to its high-margin business model. For reference, Ovation’s current business model generates revenues from:
- Licensing fees for products made with Invisicare®. Currently, Ovation has one licensee; Lighthouse Strategies, that has launched their product line called BASKiN, made up of three CBD products as well as the first THC-infused cream to be sold in the U.S. all powered by Ovation’s Invisicare technology. The Company is currently pursuing other license agreements as well.
- Ovation generates royalties from the sale of Invisicare® based polymers to
- Ovation generates royalties from products marketed by Ovation’s licensees, such as
- The Company generates development fees when Ovation develops new products for licensees. Of note, Ovation has 25 products in their pipeline.
- Ovation expects to generate significant revenue from the new ARLO Beauty line. The Company plans to launch three additional products in this line during H2/19.
Market for CBD-Infused Products in the U.S. Should Not be Overlooked
According to Jefferies Financial Group, cannabidiol-infused products are expected to gain a 15% market share of the US$167B skincare industry, growing to $25B by the year 2024. The primary catalyst driving this 45.7% increase are topicals, which have properties such as anti-aging, anti-inflammatory, and anti-itch, that aid in the treatment of many common skin disorders. On this point, cannabis advocates consider CBD-cream to be a better treatment option for aging skin, compared to prescribed anti-aging creams, such as tretinoin and retinoic acid. Tretinoin and retinoic acid can cause problems for those with allergies or hypersensitive skin.
Size of the U.S. Cannabis Market for Skin Care Conditions
Additionally, research has shown that cannabidiols have stronger antioxidant properties than Vitamin C and E. Antioxidants diminish the aging process by decreasing our body’s free radical production, which in turn helps slow down the rate at which our collagen decreases. We highlight that a 2008 study conducted by researchers at Bonn University, found that cannabis has strong anti-inflammatory properties. By counteracting free-radicals and decreasing inflammation, CBD anti-aging creams, such as Ovation Science’s ARLO Beauty line, may be able to reduce wrinkles, fine lines, dark circles, and dry skin.
Valuation – Discount to Peers
In our view, the Company’s stock is priced at a discount to its peers. We believe that with the help of this new revenue stream, the Company can reach revenue of $9M in 2020E. This implies an EV/Sales multiple of 1.6x, a discount to junior cannabis companies with market caps between $200M and $70M, which trade at consensus average multiple of 6.4x. We believe this gap should close over time as the market realizes the strong potential of Ovation’s high-margin, multiple revenue streams. Ovation’s competitive advantage is management’s combined 75+ years developing patented products in the pharmaceutical industry.
Over the next 12-month period, we believe there are numerous catalysts which can drive potential upside in the company’s share price. These include:
- Revenues from the four announced products in the ARLO Beauty line, in addition to the additional three new products.
- Ovation reporting material revenues from fees from new licensing and royalty agreements, in addition to existing revenues from its current licensing agreement.
- Legalization of topical CBD products in Canada in October 2017 and mass consumer adoption of the expected $25B+ cannabis market for skincare conditions.
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