Ovation Science Inc. (CSE:OVAT) expects revenue from the four announced products in the ARLO CBD Beauty line
SmallCapPower | September 11, 2019: Ovation Science Inc. (CSE:OVAT) is a skincare research and development company that provides pharmaceutical-grade topical and transdermal cannabis products for the medical, recreational and beauty global markets. Leveraging its patented Invisicare® technology, Ovation develops industry-leading transdermal and topical cannabis products using a licensing/royalty business model along with marketing its own CBD product lines.
Passing of the U.S. Farm Bill provides Ovation with a significant market opportunity. The passing of the Farm Bill (December 2018) ended a five-decade-long ban on industrial hemp (defined as cannabis with less than 0.3% THC) and allows interstate transportation and shipment of hemp. The removal of hemp as a controlled substance in the U.S. should positively impact the public’s perception of hemp, which could increase sales of hemp products containing CBD. Additionally, with the barriers to interstate transportation eliminated, Ovation and its licensees can expand nationally.
The Company’s proprietary Invisicare® technology has a 4-10 times higher transdermal absorption rate of CBD/THC compared to other products tested. The advantages of using Invisicare® include enhanced drug delivery to the skin by allowing greater release of cannabinoids. The technology also forms a protective bond that holds ingredients on the skin better than competitor products tested, leading to less rub-off and wash-off and without the use of alcohol, parabens, waxes or other organic solvents in its formulas. As a result, we believe that Ovation’s products have the potential to be of superior quality with competitive pricing. In our view, the product’s high quality should lead to a higher proportion of repeat customers due to its higher CBD levels while delivering on its efficacy promises.
On May 21, 2019, Ovation Science Inc. (CSE:OVAT) announced plans to launch Invibe MD, a line of CBD wellness skincare products addressing topical skin issues, sore muscles, and sleep issues with the tagline “Better with CBD.” This follows an announcement made on April 16, 2019, when the Company announced its plan to launch ARLO CBD Beauty, its anti-aging skincare line infused with CBD. Both lines, Invibe MD and ARLO CBD Beauty, will be manufactured using the Company’s patented Invisicare® delivery system. The launch of its own in-house CBD lines adds a new revenue stream that is complimentary to the Company’s primary business model based on licensing and royalty revenue streams.
Ovation’s business strategy broadens its market opportunity. Ovation licenses its products made with Invisicare® to global cannabis companies in jurisdictions where CBD and or THC are legalized. Ovation already has one licensee in place, Lighthouse Strategies, which has launched four of Ovation’s products under its BASKIN brand name in the U.S. dispensary market, including the #1 topical product by number of units sold in Nevada in both May, June and continuing each month.
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 market. The Company has developed 25 products with THC and/or CBD or a combination, including a full hemp-derived CBD health and beauty line with seven anti-aging and moisturizing products and three wellness 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 in discussions with Canadian cultivators as potential licensees.
Over the next 12-month period, we believe there are three main catalysts that could drive potential upside in the Company’s share price. These include:
- Revenue from the four announced products in the ARLO CBD Beauty line, in addition to the additional three wellness products to be launched in the Invibe MD line during Q3/19.
- Ovation reporting material revenues from fees from new licensing and royalty agreements, in addition to existing revenues from its current licensing agreement.
- Anticipated legalization of topical CBD products in Canada in October 2019 and mass consumer adoption of the expected $25B+ cannabis market by 2024 (5 years) for skincare conditions.
Ovation trades at a discount to its peers. We believe the Company can reach revenue of $10.2M in F2020E and $19.5M by F2021E. This implies an EV/Sales multiple of 0.5x and 0.3x, a discount to mid cap and small cap cannabis companies, which trade at consensus average F2020E and F2021E multiples of 2.9x, 1.5x and 3.4x and 2.7x, respectively. We are forecasting F2020E, EBITDA of $4.2M, implying a 1.3x EV/EBITDA multiple, a discount to mid and small cap cannabis companies, which trade at average multiples of 10.0x and 4.3x, respectively. We believe this gap should close over time as the market realizes the strong potential of Ovation’s high-margin, multiple-revenue streams.
An estimated equity value of $25.4M. Our equity value estimate is based on a 50/50 blend of a 5.0x F2021E EBITDA and a 1.5x multiple of F2021E EV/revenue multiples and a discount rate of 20%. A multiple of 5.0x EBITDA is reasonable, as medium-cap cannabis companies are currently trading at 2021E EV/EBITDA multiples in the range of 1.4x to 12.3x. Additionally, a 1.5x revenue multiple is conservative, in our opinion, with small-to-mid-cap cannabis companies currently trading in a 2021E EV/revenue range of 0.6x to 5.5x.
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