interesting read for 17 bulletta From Cannacord broker earlier today. LDS mentioned as being on their watchlist for up and coming companies in 2019. Even though they are talking about things Lds has already built and they are stating it is yet to be built and a weird rev figure for just reveur for 2018 it is great to get mentioned as a company to watch for in 2019. It’s seems Iike this is a prelude to a more solid accurate report from
Cannacord yet to come out in the near future.
Cannabis
Industry Update
Cannabis Monthly, January 2019
To round out a volatile 2018, December saw continued pressure in the cannabis space with our Canaccord Genuity Cannabis Index (CCGI), down ~23% for the month. Although the sector-wide pullback continued, we note that industry valuations still finished the year up >25%, supported predominantly by significant strategic investments made by Constellation in Canopy, Altria in Cronos, as well has as the successful IPO of Tilray (which finished the year up >4x from its July deal price). Although overall valuations finished 2018 higher YoY, we note that pressure on cannabis stocks since the implementation of the Canadian recreational market in mid-October resulted in a number of Licensed Producers finishing the year with sequentially lower market caps. However, although still early, 2019 has started off to a strong start with our CCGI Index up almost 40% so far in the first two weeks of January.
2018 in review
Looking back on 2018, the industry saw no shortage of news flow. Canada became the first major nation to federally legalize an adult-use market with each province currently in the midst of rolling out its recreational platform. Canadian Licensed producers continued to progress on aggressive facility expansion plans, branched out to international markets (including Europe, Australia and LATAM) and pulled the trigger on billion-dollar+ M&A deals (most notably Aurora’s acquisition of MedReleaf). Further, we believe the growing number of LPs listing on major US exchanges and the entrance of strategic investors/partners (Constellation, Altria, Molson, InBev) helps add legitimacy to the sector as a whole while providing significant capital for continued international expansion and product developed (particularly for infused beverages).
South of the boarder, the US cannabis sector made significant regulatory progress with both California (now the largest legal cannabis market in the world) and Massachusetts kicking-off its adult use markets. The US market also saw an influx of well capitalized multi-state operators (MSOs) list in Canada in addition to increased M&A; including MedMen’s acquisition of PharmaCann and the fist public-to-public merger in the space between iAnthus and MPX Bioceutical. Although valuations of US operators are still lower than Q4/18 highs, we do not believe the recent sector wide pullback has been rooted in fundamentals. In fact, the end of 2018 saw a number of positive headlines in the space, including encouraging midterm election results (with Michigan approving recreational cannabis); the passing of the Farm Bill; indications that the STATES Act will have a majority support in the Senate; New York's Mayor calling for a legalized adult use market; and additional strategic investors entering the space.
Looking to 2019
As 2019 progresses, we still believe the Canadian sector could still see additional upside from further investments from strategic players that continue to circle the space; the issuance of additional brick-and-mortar recreational retail licenses; further clarity on purchase volumes and pricing from various provinces; the addition of new product forms by the end of year; and overall sector M&A. However, we would be more cautious once the rubber fully hits the road as 2019 progresses as we believe the first year of recreational sales in Canada could run short of some investors' expectations given limited retail infrastructure and product breadth in year one of legalization.
In the US, following a strong year of capital raises and M&A, we expect US cannabis names to begin to trade more on execution with the potential to re-rate vs. their more expensive Canadian peers as the US market continues to de-risk.
Below is our Cannabis Company Watchlist, where we highlight selected up-and-coming companies in the Canadian and US cannabis space.
Tilray Inc. (TLRY:NASDAQ| Not rated). Tilray Inc. is a B.C.-based licensed producer and the first EU GMP-certified medical cannabis producer. Tilray has already established itself in 12 countries, including Canada, Australia and New Zealand, and more recently in Latin America. Its operations in Chile will allow for the company to import, produce and distribute Tilray-branded medical cannabis in Chile as the company plans to leverage this asset as a hub to distribute its products throughout the region. Most recently the company announced a joint venture with AB InBev to collaborate on the development of non-alcohol THC and CBD beverages.
Harvest Health & Recreation Inc. (HARV:CSE| Not rated). Arizona-based Harvest is a vertically integrated multi-state cannabis operator. The firm currently holds medical cannabis licenses in 10 states including Arizona, California and Pennsylvania, as well as pending licenses in Massachusetts and Arkansas. Within the next 18 months, Harvest plans to cultivate more than 720,000 sq. ft of indoor, outdoor and greenhouse cannabis. In addition, Harvest recently completed a couple of acquisitions, including San Felasco Nurseries Inc., a medical license holder in Florida, and CBx Enterprises, a leader in cannabis product development, for which it now holds exclusive national rights to the company’s intellectual property.
Lifestyle Delivery Systems Inc. (LDS:CSE | Not rated). Lifestyle Delivery Systems Inc. is a technology company whose core product is CannaStrips which are infused oral film strips (similar to breath strips) that provide a new way to accurately meter dosage and assure purity of product. Earlier this year the company launched its second product line Rveur, a luxury brand of cannabis products for the California market which has generated over $2M in revenue in 2018. LDS is part of a vertically integrated operation where the company licenses its various technology to cultivation and extraction partners such as Core Isogenics. In addition, as part of a JV with NHMC Inc., LDS has agreed to design and retrofit a 20,000 sq. ft facility located in the City of Adelanto, California which will house a nursery, cultivation, extraction, distillation, strip coating, and packaging line.
Capcium Inc. (Private| Not rated). Capcium Inc. is a privately owned Montreal-based softgel contract manufacturing company (CMO). Capcium produces high-precision dosage controlled softgels and is able to deliver high-volume production capacity. Traditional pharma companies use CMOs to produce their softgels because the manufacturing process can be complex and maintaining high production integrity is a challenge. Capcium plans to leverage its extensive softgel encapsulation experience to dominate the cannabis softgel manufacturing market. In June, Aurora invested $10M and took a 19.99% ownership interest in Capcium. The proceeds of this investment have been used to begin construction of a new facility in Pointe Claire, Quebec, which will meet FDA, Health Canada and EMEA standards. During construction Capcium offers on-site expertise and manufacturing capabilities as the company continues to grow its cannabis customer base with long-term commercial production agreements from top LPs.
WeedMD Inc. (WMD:TSX | Not rated). WeedMD Inc. is a licensed producer under the ACMPR and currently operates a 26,000 sq. ft. indoor facility in Aylmer, Ontario and a 395,000 sq. ft. greenhouse in Strathroy, Ontario. In addition to the company’s existing distribution agreements with Shoppers Drug Mart, and the provinces of Alberta, British Columbia, Ontario and Nova Scotia, WeedMD signed a multi-year supply agreement with Lifford Cannabis Solutions, a subsidiary of Lifford Wine & Spirits, for the distribution of its products in the BC and Alberta. Lifford Wine & Spirits is one of the top suppliers of premium wine to LCBO, and therefore is adept in navigating the rigours of negotiations with provincial distributors. WeedMD views this arrangement as a premium opportunity to continue growing its brand awareness and sees the involvement of Lifford as instrumental in its plans to increase shelf space for its products. In the company’s view, the ultimate effect of this agreement is that Lifford is able to add value and increase exposure for its operations in Western Canada