Medical Marijuana Sector - Dundee Portal

Transcription

Medical Marijuana Sector
July 20, 2016
Growth At A Recreational Price (GARP)
We are resuming coverage of the medical marijuana sector. We have a
preference for larger licensed producers (LPs) with access to capital, low unit
costs, strong revenue growth, expansion capability, and brand recognition.
Resuming Coverage Of The Medical Marijuana (MMJ) Sector
•
We are resuming coverage on five Health Canada LPs: Aphria Inc. (APH-T,
BUY, $2.75 price target), Canopy Growth Corp. (CGC-T, BUY, $4.50 price
target), Mettrum Health Corp. (MT-T, BUY, $3.00 price target), OrganiGram
Holdings Inc. (OGI-T, BUY, $1.75 price target), and initiating coverage on
Supreme Pharmaceuticals Inc. (SL-C, BUY, $0.50 price target).
•
Regulatory risk has kept some investors on the sidelines but we are
confident LPs will have a role in the supply chain once the market opens up.
Details from the government on a regulatory framework will determine what
extent LPs will be involved in the distribution and retail, if at all.
•
A rising tide lifts all boats… as the Canadian government moves towards the
creation of a legal framework we would expect to see a lower risk premium
reflected in the stock prices of all entrants.
•
In the near term investors should focus on improving fundamentals
including QoQ revenue growth, gross margin expansion, EBITDA and
operating cash flow generation. Though there is inconsistency in reporting,
valuation methods include EV/EBITDA and EV/LSC (licensed sales capacity).
•
There are 27 enterprises, aka 'licensed producers' (LPs), operating under the
Marijuana for Medical Purposes Regulations (MMPR), of which 10 are
publicly listed. The medical LPs represent the best way to play the Canadian
marijuana space because commercial scale, regulated production will be
needed for the industry to grow to the point where both medical and
recreational markets coexist and flourish.
•
Health Canada estimates the MMJ market in Canada can grow from 40,000
patients in 2014 to 450,000 patients by 2024 with $1.3B in annual sales; we
believe these estimates are conservative and don't encompass the whole
picture. We estimate the Canadian MMJ space approaches $3.0B in annual
sales in 2024 alongside a recreational market of $3.0B - $5.0B that same
year, for a combined total of nearly $8.0B in retail sales, with further upside
coming from increased tourism and international expansion or trade.
Industry Catalysts On The Path To Legalization
•
August 24, 2016: Deadline for Health Canada to amend the MMPR
•
November 2016: Task Force update
•
Spring 2017: Liberals table legislation for marijuana legalization
Daniel Pearlstein / (647)-253-1160
[email protected] •
H1/2018: Implementation of marijuana legalization (Dundee Estimate)
Please see Disclosures and Disclaimers at the end of this report.
A division of Dundee Securities Ltd.
Dundee Capital Markets is a registered trademark of Dundee Corporation, used under license.
July 20, 2016
Contents
Medical Marijuana Sector .................................................................................................................................................................1
EXECUTIVE SUMMARY - CONFIDENT IN LP PARTICIPATION ...................................................................................................3
Industry Catalysts On The Path To Legalization.…………………..………………………………………………………….…...............4
What Is The Valuation Of The Group?................…………………..……………………………………………………………................7
Company Investment Overview ........................................................................................................................................................9
Aphria Inc. (APH) ............................................................................................................................................................................10
Canopy Growth Corp (CGC). ..........................................................................................................................................................18
Mettrum Health Corp. (MT) .............................................................................................................................................................27
Organigram Holdings Inc. (OGI) .....................................................................................................................................................35
Supreme Pharmaceuticals Inc. (SL) ...............................................................................................................................................43
MEDICAL MARIJUANA SECTOR OVERVIEW AND BACKGROUND ..........................................................................................52
What's Happened Up Until This Point?...........................................................................................................................................52
MMPR Was Created To Address Safety And Security Concerns With The MMAR .......................................................................53
We Expect Home Grow In Revision To MMPR (August 2016) With Little Impact To LPs ..............................................................54
The MMPR Is Becoming An International Standard For MMJ Regulation ......................................................................................55
PATIENT ENROLLMENT IS ON PACE TO FAR EXCEED HEALTH CANADA'S ESTIMATE ......................................................57
MORE EXPANSIONS & MORE LICENSES ...................................................................................................................................59
WHEN WILL REC START? WE ESTIMATE H1/18 (ONE YEAR BEFORE NEXT FED ELECTION) ............................................60
What Are The Implications Of A Rec Marijuana Market In Canada? ..............................................................................................61
HOW BIG COULD A MED + REC MARKET BE IN CANADA? WE SAY ~$8b PER YEAR ..........................................................62
Our Estimates Compare Favourably With Projections For The US ...................................................................................... 66
DISTRIBUTION AND ROLLOUT: FEDERALLY LEGAL, PROVINCIALLY DISTRIBUTED ...........................................................67
Pharmacies / Big Retail - Likely Medical And Later Recreational ......................................................................................... 67
LCBO / Provincial Distributors - Likely Recreational .......................................................................................................................68
Dispensaries - Might Have A Play In Rec, But Not All Will Make It Through ..................................................................................69
HOW DO LPS FIT INTO THESE DISTRIBUTION METHODS?.....................................................................................................69
How Does It Shake Out? ................................................................................................................................................................70
WHAT IF LEGALIZATION DOESN'T HAPPEN? ............................................................................................................................71
Dundee LP Tracker .........................................................................................................................................................................72
DUNDEE CAPITAL MARKETS Page | 2
July 20, 2016
EXECUTIVE SUMMARY - CONFIDENT IN LP PARTICIPATION
We are initiating coverage on five companies within the medical marijuana sector, all of which are Health Canada licensed
producers (LPs).
•
Aphria Inc. (APH - T, BUY, $2.75 price target) - Aphria is a low-cost greenhouse producer, with fully-funded plans in place
to dramatically expand capacity under the leadership of a management team with extensive consumer products and
nutraceuticals experience in a high growth setting.
•
Canopy Growth Corp. (CGC - T, BUY, $4.50 price target) - Canopy is the current market share leader holding 20% of
patients registered and four of the 33 granted licenses, and at $285 MM has ~2.3x the market cap of its next closest peer.
Its multi-brand platform provides diversification into both the medical and rec markets, and the company has already
made more steps into international markets than most of its peers combined.
•
Mettrum Health Corp. (MT - T, BUY, $3.00 price target) - Mettrum is a multi-facility producer that takes a physicianfocused approach using 'pharma-like' reps to sell its product. It has a simplified offering versus peers and promotes
education to accelerate adoption and acquire patients. To cement its medical orientation, Mettrum is one of the bigger
sponsors of academic research.
•
OrganiGram Holdings Inc. (OGI - T, BUY, $1.75 price target) - OrganiGram is one the few certified organic producers with
a brand that translates well to either the medical or recreational market. Its early approach to targeting the military
veteran patient community has resulted in the development of a loyal and high-consuming patient base.
•
Supreme Pharmaceuticals Inc. (SL - C, BUY, $0.50 price target) - Supreme is cultivating in one of the largest greenhouse
facilities that we know of, pioneering a wholesale B2B approach supplying other LPs, and intends to implement a cobranding strategy that could build brand value ahead of a potential recreational market.
What are key drivers for stock price returns? Legalization!
•
The biggest driver is the Liberal government is expected to table legislation outlining marijuana legalization in Canada
in spring 2017. Greater visibility towards the LPs' role in the supply chain would be viewed favourably; in our view stocks
should react positively and investors in public LPs would benefit.
•
In the near term investors should focus on improving fundamentals including QoQ revenue growth, gross margin
expansion, EBITDA and operating cash flow generation.
•
Upside could potentially be rate-limited by the need for fresh capital to fund capacity expansion as the addressable
market increases. We model a number of financings for expansion capital over the next five years.
•
Longer term, the involvement of larger better capitalized firms in the tobacco, consumer products, and/or retail sectors is
possible once the federal and provincial retail frameworks are established. This could lead to one or more monetization
events for LPs in the future as larger firms may choose to acquire their way into the market.
What is a licensed producer (LP)?
•
An LP is licensed by Health Canada under the Marijuana for Medical Purposes Regulations (MMPR) to grow, produce,
distribute and sell medical cannabis (aka "flower" or "bud") and cannabis oil extracts (aka "oils" or "extracts").
•
Health Canada has granted 33 bud licenses tied to facilities held by 27 enterprises (10 of which are public). Of those 33
licensed entities, 22 also hold oil licenses.
•
LPs sell by mail directly to patients who obtain a prescription from a physician. Prices range from $5-$12/gram and Health
Canada has no influence on pricing.
•
In the current environment, we believe LPs should track towards COGS/gram of ~$2/gram, gross margins of ~70%, and
EBITDA margins ~30%.
July 20, 2016
Industry Catalysts On The Path To Legalization
•
August 24, 2016: Deadline for Health Canada to amend the MMPR
•
November 2016: Task Force update
•
Spring 2017: Liberals table legislation for marijuana legalization
•
H1/2018: Implementation of marijuana legalization (Dundee Estimate)
Figure 1 - Dundee Estimated Timeline To Legalization
Task
Force
Update
Nov 2016
Liberals Table
Legislation vof
of
Spring 2017
Potential
Start of Rec
Federal
Election
H1 2018
Oct 2019
Jul-1
6
Aug
-1 6
Sep
-1
Oct- 6
1
Nov 6
-1
Dec 6
-16
Jan1
Feb 7
-17
Mar
-1
Apr 7
-17
May
Jun- 17
17
Jul-1
7
Aug
-1 7
Sep
-1
Oct- 7
1
Nov 7
-17
Dec
-1
Jan- 7
1
Feb 8
-18
Mar
-1
Apr 8
-18
May
Jun- 18
18
Jul-1
8
Aug
-1 8
Sep
-1
Oct- 8
1
Nov 8
-18
Dec
-1
Jan- 8
1
Feb 9
-19
Mar
-1
Apr 9
-19
May
Jun- 19
19
Jul-1
9
Aug
-1 9
Sep
-1
Oct- 9
19
HC
Amends
MMPR
Aug 2016
We expect
material stock
volatility around
this event
Source: Dundee Capital Markets
•
The Liberals have emphasized their desire to legalize, regulate, and restrict access to marijuana, and we believe
the move towards legalization is likely to start with government-vetted LPs as suppliers. The government launched a
Task Force on June 30, 2016 that will inform the creation of a new marijuana legalization and regulation system. The well
rounded team is chaired by former deputy prime minister Anne McLellan, and the government liaison is former Toronto
police chief Bill Blair.
•
The Task Force will report back with an update in November 2016. Until then, it will be consulting with provincial and
municipal governments, key experts in relevant fields, and will allow feedback from the public. The full Discussion Paper
by the Task Force can be found here. We highlight a notable comment in the paper: "a new regulatory framework for
legal marijuana could contain features designed to ensure good manufacturing practices in a safe and secure
environment… the MMPR contain these features and could serve as a reference point for consideration of the nature
and extent of the safeguards required in the legal marijuana regime."
July 20, 2016
How is enrollment progressing? On pace to surpass Health Canada's estimate this summer.
•
Patient acquisition and retention are important as LPs establish reputations and brand loyalty in the medical program.
MMPR patient enrollment has been increasing by 5,000 new patients per month in Q2/16, to reach ~75,000 patients.
•
We assume the long term penetration rate of medical patients in Canada reaches 2% of the total population by 2024, or
~800,000 patients, which is comparable to penetration of existing medical programs in Colorado, Oregon, Washington,
and California, aged approximately the same as Canada's.
Figure 2 - Patient Enrollment Should Soon Exceed Health Canada's Estimates, And We Estimate Will Reach 2% of Pop.
80,000
80,000
75,000
75,000
70,000
70,000
65,000
55,000
55,000
50,000
50,000
50,954
45,000
45,000
40,000
40,000
40,000
35,000
35,000
30,000
30,000
25,000
25,000
20,000
20,000
15,000
15,000
10,000
10,000
5,000
5,000
0
Medical Marijuana Patients (#)
60,000
600,000
700,000
MMPR enrollment will surpass
HC's 2014 estimates in mid-2016
... if it hasn't already
600,000
500,000
500,000
400,000
400,000
300,000
300,000
200,000
200,000
100,000
100,000
-
2014
0
Health Canada Projection (medical only)
800,000
700,000
65,000
64,907
60,000
800,000
2015
2016
2017
MMAR & Home Grow
MMPR Enrollment (historical)
2018
2019
2020
2021
2022
2023
2024
DUNDEE ESTIMATES (medical only)
Source: Health Canada, Dundee Capital Markets Estimates
How much capacity is needed? Lots more.
•
Inventories have been increasing in lock-step with patient enrollment, and large expansion plans are on the way.
Health Canada data shows steady increases in the amount of dried marijuana produced and sold, and much more rapid
increases in inventory with a relatively lower number of licenses. But much more capacity will be needed according to our
market estimates. We estimate there is currently ~85,000 kg of licensed capacity, and another ~50,000 kg of built unlicensed capacity, for a total of ~135,000 kg, which is roughly 25% of what we estimate the market will demand.
11,000
35
30
9,000
Dried Marijauna (kg)
8,000
25
7,000
20
6,000
5,000
15
4,000
10
3,000
2,000
5
1,000
0
0
Q2/14
Q3/14
Licences Granted
Q4/14
Q1/15
Amount sold (kg)
Q2/15
Q3/15
Amount produced (kg)
Q4/15
Q1/16
Inventory at Q-end (kg)
Dried Flower Licenses Granted (#)
10,000
Capacity: licensed, built, or needed (kg)
Figure 3 - LP Inventory Is Increasing, But Much More Capacity Will Be Needed
600,000
600,000
550,000
550,000
500,000
450,000
400,000
350,000
Our market estimates imply over 550,000 kg of
dried flower MJ would be demanded in 2024...
500,000
300%(!) more than the ~135,000 kg of supply
currently built under today's LPs
400,000
450,000
350,000
300,000
300,000
250,000
250,000
200,000
200,000
150,000
150,000
100,000
100,000
50,000
50,000
-
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Capacity Licensed by Health Canada (kg)
Unlicensed Built Capacity Under Current LPs
DUNDEE ESTIMATES (medical only, flower only)
DUNDEE ESTIMATES (rec only, flower only)
Source: Health Canada, Dundee Capital Markets
How big can the market get? We say $8.0B at retail.
•
We estimate the Canadian MMJ space reaches $3.0B in annual sales in 2024 with an even larger recreational market of
$3.0B - $5.0B that same year, for a combined total of $6.0B - $8.0B, with further upside coming from increased tourism
and international expansion or trade. Our estimates are discussed further below and on page 62.
July 20, 2016
Figure 4 - We Estimate $3.0B Medical and $3.0B - $5.0B Recreational, Compared To HC's $1.3B Medical
$10,000
60%
Revenue from
medical flower AND
extracts could exceed
$3 billion in 2024
70%
Revenue from recreational
AND medical, flower AND
extracts, could near $8 billion
in 2024
60%
50%
$7,000
40%
$2,500
$2,000
30%
$1,500
20%
Revenue ($MM)
Revenue ($MM)
$3,000
$8,000
50%
Extract Only Patients (%)
$3,500
$9,000
$1,000
10%
$6,000
40%
$5,000
30%
$4,000
$3,000
20%
We expect
legalization
in H1/18
$2,000
$1,000
Rec Sales as a % of Total Sales
$4,000
10%
$500
$0
$0
0%
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
0%
2014
2015
2016
2024
2017
2018
2019
2020
2021
2022
2023
2024
Health Canada Projection (medical only, flower only)
DUNDEE ESTIMATES (medical only, flower & extracts)
DUNDEE ESTIMATES (medical & recreational, flower & extracts)
Source: Dundee Capital Markets Estimates
We believe marijuana is likely to become 'federally legal, provincially distributed' giving provinces the jurisdiction to
decide their preferred distribution methods; however the government still needs to provide a framework for distribution
and retail. We believe retail distribution is complex and more likely to fall on the shoulders of established channels;
options include pharmacies, grocers and/or general merchants, liquor stores, and dispensaries.
•
Figure 5 - Our Med and Rec Sales Estimates Stack Up To Alcohol and Tobacco, But Are Contingent On Adequate Distribution
Others
10,000
CGC
CGC
9,000
Others
Revenue ($MM)
8,000
CGC
7,000
MEDICAL
6,000
Others
MT
MT
OGI
APH
OGI
APH
OGI
5,000
2016
2020
MT
APH
2024
4,000
3,000
RECREATIONAL
2,000
1,000
0
Cigarettes
& Tobacco
Beer
Wine
Spirits
Cigarettes & Tobacco, Alcoholic Beverage
Sales (2014)
MMJ
(2024)
Rec MJ
(2024)
Total MJ MJ Black
(2024)
Market
(2016)
DUNDEE ESTIMATES
Bubble size is approximate market size in C$MM
Source: StatsCan, Canopy Growth Corp., Dundee Capital Markets Estimates
How many people would participate? We estimate 4,500,000 Canadians, or 15% of the adult population.
•
59% of Canadians surveyed support new laws that would legalize, tax and regulate recreational marijuana (Forum
Research survey, via CBC, Nov 2015)
•
That same survey found that 30% of Canadians would consume marijuana if legal, and that 20% had done so in the past
year
•
12.2% of Canadians aged 15 or older used marijuana in the previous year (Statistics Canada, 2012)
•
During the first year of legalization in Colorado, approximately 9% of residents consumed recreational marijuana at least
once per month (Colorado Department of Revenue, via theCannabist, Dec 2014)
•
StatsCan also revealed that 3.2% of Canadians aged 15 and older consumed marijuana more than once per week in the
previous year, and 1.8% aged 15 and older consumed daily
July 20, 2016
What is the valuation of the group? We include recreational sales and look to FY2021E for EV/EBITDA.
•
The MMPR is only two years old, but in the early stages we have focused on improving fundamentals including QoQ
revenue growth, gross margin expansion, EBITDA and operating cash flow generation. Though there is varying
consistency in operational reporting, we expect increased transparency from producers and clarity on evolving regulations
to help shape more uniform metrics over time.
•
Industry participants are currently competing for a growing patient pool, protected by the barriers offered by the current
licensing regime. We compare the Canadian MMJ LPs to other regulated industries such as pharma & biotech, tobacco
& brewers, and telecom that offer high margins, restricted distribution, and attractive consumption usage patterns.
Figure 6 below compares today's nascent MMJ industry with much more mature sectors on the S&P500 that trade
between 8.0x - 12.0x forward EBITDA and 2.0x - 6.0x forward sales.
Figure 6 - Our Valuations Include Recreational Sales Highlighting the Growth Opportunity in the Space
18.0x
Distillers
16.0x
Biotech
14.0x
2017 EV/EBITDA
12.0x
Cons Discretionary
10.0x
Brewers
8.0x
Pharma
Tobacco
TSX
Agriculture
6.0x
Telecom Services
4.0x
MMJ
2.0x
[F2021 DCM Est.]
0.0x
0.0x
1.0x
2.0x
3.0x
4.0x
2017 EV/Sales
5.0x
6.0x
7.0x
*Bubble size is current average market cap
*MMJ is current average market cap x 10
Source: FactSet, Dundee Capital Markets
•
The most commonly used methodologies used for valuing the MMJ space are EV/LSC (licensed sales capacity) and
EV/EBITDA (one year forward). However, we have taken a slightly different approach to the latter. Firstly, we include in
our models medical market sales, but also recreational bud + extracted products we refer to as 'units'. Secondly, since
the LPs and sector as a whole are not nearly as mature as the comparable sectors mentioned, for our valuation year we
look five years down the line to FY2021. At this point, in our view, the recreational regime would be in place for three
years, and it is a more relevant time period to value the industry's potential.
•
We believe that over time the sector will grow into similar valuations as the comparable sectors because in our view,
legalization is highly probable, the LPs will play a role in supply, and the cost of capital will come down as the industry is
legitimized. We use a forward EV/EBITDA multiple on FY2021E ranging from 4.0x - 8.0x, a discount to the 8.0x - 12.0x
long term averages for comparable industries, reflecting growth prospects and capital needs for individual firms.
•
By extension, this approach of putting lower multiples on more "steady state" forecasts results in higher multiples on near
term forecasts, reflective of the emerging profitability of the group.
•
We place a higher multiple on players that have the potential to control market share or distribution points, have
higher capacity, lower cost of acquiring customers, and better capital efficiency. With the exception of a few players, we
believe most of today's LPs could be consolidated or end up as value-added manufacturing specialists with some brand
recognition while the distribution is left to more established channels.
July 20, 2016
What are risks to our thesis? Regulatory risks are at the top of that list.
•
Distribution framework - high risk - Details from the federal government on a regulatory framework will determine what
extent the LPs will be involved in the distribution and retail, if at all. Greater inclusion would be viewed favourably, but we
are confident LPs will have a role in the supply chain once the market opens up, given the current licensing regime is
viewed positively by the government. Sales to the legal market are in our estimates so a delay or exclusion could
negatively impact our estimates.
•
MMPR-related regulatory changes - medium risk - The chances of abolishment of the MMPR and elimination of the role
of LPs both seem unlikely in our view. LPs have followed stringent guidelines for production and record keeping, and
Health Canada has sometimes consulted with companies in the space for recommendations of how to make
improvements. Commercial scale regulated production will be needed for the industry to grow. A modification to the
MMPR is expected in August, retroactive to the R. v. Allard decision on February 24, 2016, that will likely introduce some
form of 'home grow'. We believe any revenue opportunity lost due to personal production will be marginal at most,
similar to individuals who choose to brew their own beer or wine.
•
Timing and licensing - medium risk - Health Canada grants one year production licenses on an individual basis for specific
kg quantities, that can be further expanded 'off cycle' at the request of the LP, should it display the demand that would
necessitate an increase. The licenses are renewed annually. The inspection and feedback period can last several months,
and it's even conceivable a license is never issued, or revoked if the LP encounters product quality or liability issues.
Health Canada has shown it will work with the LPs including regular inspections and conversations with the LP industry
association. This could also lead to M&A activity for more licenses and applicants.
•
More licenses - low risk - We believe another ~10 licenses may be granted to applicants within the next year, but we
don't see this as a large threat to those already licensed due to the strong first mover advantages in patient recruitment,
physician relationships, and production experience. We believe that some of the next in line will apply to be licensed for
only part, not all, of the value chain unlike like their vertically integrated incumbents; we see some of the smaller LPs
already starting this, and believe that this would be a sign of the industry advancing.
•
The black market - low risk - At a conference Dundee hosted in May 2016, Bill Blair, the Liason to the Liberal
Government's Task Force for the legalization of marijuana, said he believes the black market for marijuana in Canada is
$7-10B each year, which costs the government $2.3B to enforce. The black market will continue to cap the revenue
opportunity for the legitimate business community unless regulated regimes are set up for proper methods of distribution
and retail, the protection of patients' rights, investment in scientific evidence, research and education, maintaining the
health and safety of Canadians, restricting access to children, and promoting appropriate methods of consumption.
Simply put, we believe the legitimate market needs to evolve to the point where the pricing and range of product
offerings are comparable to the black market.
•
Capital needs risk - low risk - We model a number of financings for expansion capital over the next five years as the need
for fresh capital to fund capacity expansion increases with the addressable market size. Adequate supply must meet
increased demand in order to avoid patients and consumers from going back to the black market.
•
Product quality - low risk - The MMPR outlines strict rules for quality assessment and control, cleanliness, manufacturing,
and pesticide use. A product recall may occur but the industry hasn’t had a public recall by Health Canada in months, and
tests are routinely required. Poor product quality may cause patients to leave for other LPs or go to the black market.
•
Pricing and cost - low risk - Pricing in the industry has remained relatively consistent (~$7.00 - $7.50/g) and Health Canada
has no control over how an LP prices product. Compassionate pricing by LPs has been viewed favourably by eligible
patients. We believe LPs can track towards ~70% gross margins on production and ~20% - 30% EBITDA margins.
July 20, 2016
COMPANY INVESTMENT OVERVIEW
Figure 7 - Medical Marijuana Sector Valuation Snapshot
Aphria
Inc.
Canopy
Growth Corp.
Mettrum
Health Corp.
Organigram
Holdings Inc.
Supreme
Pharma Inc.
Coverage
Average
LP
TSXV:APH
$1.93
BUY
Speculative
$2.75
42%
LP
TSXV:CGC
$2.74
BUY
Speculative
$4.50
64%
LP
TSXV:MT
$2.31
BUY
Speculative
$3.00
30%
LP
TSXV:OGI
$1.16
BUY
Speculative
$1.75
51%
LP
CSE:SL
$0.40
BUY
Speculative
$0.50
25%
42%
C$MM
6.0x
$46
7.5x
$82
5.0x
$32
5.0x
$33
4.5x
$26
C$MM
2.5x
$185
3.3x
$318
2.7x
$167
2.4x
$171
1.9x
$104
0.6x
0.8x
0.5x
0.5x
0.5x
3
2
3
2
1
C$MM
C$MM
$125
$115
$284
$269
$91
$88
$77
$79
$48
$50
$125
$120
C$000's
$564
$1,513
$240
$475
$22
$563
kg
2,600
6,700
3,500
600
expansion
soon
100
cultivation
only
$44
$40
$25
$132
$496
F2016 EV/EBITDA
F2017E EV/EBITDA
F2018E EV/EBITDA
-40.2x
21.7x
43.5x
176.8x
20.2x
--9.6x
116.8x
20.4x
9.2x
--7.9x
80.2x
79.1x
13.7x
F2016 EV/Sales
F2017 EV/Sales
F2018 EV/Sales
13.7x
5.2x
2.9x
18.3x
6.7x
3.9x
11.5x
3.5x
2.0x
12.2x
3.8x
1.8x
-4.7x
1.8x
13.9x
4.8x
2.5x
365%
365%
482%
593%
168%
*2017E-2018E
394%
May
March
March
August
June
Metric
Overview
Ticker
Share Price
Rating
Risk
Target
Return to Target
Target Multiple
F2021E EBITDA
Currently Trading At
F2021E Sales
Currently Trading At
Consensus Analysts w/ DCM
Market Capitalization
Enterprise Value
Daily Volume
Licensed Sales Capacity (LSC)
Valuation (fiscal years, DCM est.)
EV/LSC
$/g
F2016E-F2018E Sales Growth
%
Year end
2.6x
$189
0.6x
Figure 8 - MMJ Sector Comp Table
Ticker
Rating Target
All in CAD$
Aphria
Aurora Cannabis
Canopy Growth
Emerald Health
Mettrum Health
MMJ Phytotech
OrganiGram
PharmaCan Capital
Supreme Pharma
THC BioMed
APH-T
ACB-C
CGC-T
EMH-T
MT-T
MMJ-AU
OGI-T
MJN-T
SL-C
THC-C
B
$2.75
B
$4.50
B
$3.00
B
$1.75
B
$0.50
Last
$/sh
S/O
MM
$1.93
$0.44
$2.74
$0.19
$2.31
$0.26
$1.16
$0.28
$0.40
$0.11
65.0
135.0
103.8
54.2
39.5
141.1
66.3
42.6
119.7
95.7
FD S/O Mkt. Cap Cash Debt EV LSC EV/LSC
MM
MM$
MM$ MM$ MM$ kg
$/g
92.0
168.0
113.4
58.2
43.4
164.3
79.9
60.0
159.0
114.8
$125
$59
$284
$10
$91
$36
$77
$12
$48
$10
$10.0
$0.5
$20.0
$1.0
$7.1
$1.9
$5.0
$1.0
$2.8
$1.0
Average (n = 10)
$75
5.0
Median
¹ Estimates are Dundee's; adjusted for calendar year-ends
² Attributable based on equity ownership of LP's
LSC = Licensed Sales Capacity; B = Buy; N = Neutral; R = Restricted; UR = Under Review
EV/EBITDA
EV/Sales
Performance
CY2016 CY2017 CY2016 CY2017 1mo 3mo 6mo
$0.0 $115 2,600
$9.4 $68 1,000
$4.3 $269 6,700
$0.0 $9
-$3.4 $88 3,500
$0.5 $35
-$7.4 $79 600
$1.6 $12 977²
$4.0 $50
-$0.8 $10
--
44
68
40
-25
-132
13
---
57.0x
-NM
-NM
-77.5x
-NM
--
25.5x
-23.8x
-10.1x
-14.5x
-8.5x
--
6.6x
-8.2x
-3.5x
-9.1x
-NM
--
3.3x
-4.4x
-2.0x
-3.1x
-1.8x
--
32%
-13%
3%
0%
28%
30%
12%
33%
14%
-10%
3.1
54
42
67.2x
67.2x
16.5x
14.5x
6.9x
7.4x
2.9x
3.1x
13% 13% 12%
13% 12% 2%
$74 2,563
$59 1,800
26%
-24%
12%
21%
61%
12%
10%
2%
17%
-10%
56%
-10%
1%
0%
34%
4%
37%
-7%
-3%
7%
Aphria Inc.
July 20, 2016
(APH-T: C$1.93)
BUY, Speculative Risk
Dundee target: C$2.75
Daniel Pearlstein / (647) 253-1160
[email protected]
Low Cost Greenhouse Primed For Expansion
APH-T
New
Last
Rating:
BUY
BUY

$2.00
Target:
$2.75
Risk:
Speculative
Speculative
Projected Return:
42%
F2021 EBITDA (MM$)
$46
EV/EBITDA
2.5x
Company Data
$1.93
Price (03/10/16):
$1.99
$0.79
52-Week Range (H-L):
$125.5
Market Capitalization (MM$):
$115.5
Enterprise Value (MM$):
$65.0
Shares Outstanding - Basic (MM):
$92.0
Shares Outstanding - Diluted (MM):
371.0
Avg Daily Volume (3 Mos) (000s):
$10.00
Cash (MM$):*
$0.00
Debt (MM$):
$15.87
Working Capital (MM$):
May
Fiscal Year End
We are resuming coverage of Aphria Inc. with a BUY rating, and introducing a
price target of C$2.75, based on 6.0x FY2021 estimated EBITDA, implying a 42%
return from yesterday's close of $1.93. The 6.0x multiple is in the middle of our
peer group range of 4.0x - 8.0x, due to Aphria's low-cost structure and expansion
capability.
Aphria is a low-cost greenhouse producer, with fully-funded plans in place to
dramatically expand capacity under leadership of a management team with
extensive consumer products and nutraceuticals experience in a high growth
setting.
Investment Overview
•
Only 100% greenhouse public LP with potential for industry leading costs
per gram. Aphria is one of only a handful of greenhouse-only LP's benefitting
from a track record of low-cost commercial-scale greenhouse growing, and
has focused on establishing and maintaining one of the lowest cost
productions in the MMPR along with a strong standard of pharmaceuticallike approach to agri-business. In FQ4 Aphria reported cash-cost/g of $1.15,
or more relevant to our estimates, "all-in" COGS/g of $2.07 recording an
adjusted gross margin of 74.5% which sets a benchmark for where the
industry should be tracking towards in our view.
•
Near term doubling of production capacity is fully funded, massive
expansion plans in place beyond that. Aphria's current production capacity
on hand is 2,600 kg per year growing in 43,000 sq ft. With proceeds from a
recent financing management expects to add another ~3,000 kg of capacity
for a total of ~5,500 - 6,000 kg per year growing in 100,000 sq ft. The
expansion has commenced and is expected to be completed by mid-2017.
The company also acquired numerous greenhouses and land right beside
(non-arm's length) to expand to up to 1,000,000 sq ft of growing space.
•
Track record of commercial-scale greenhouse growing. Co-founders bring
decades of commercial-scale greenhouse growing, agriculture and industrial
experience. Aphria's infrastructure provides savings on hydro and labour,
economies of scale for raw materials, and tissue culture expertise.
•
Management has strong ties to the pharmacy industry, could be
advantageous if that distribution channel opens up. When Jamieson was
under current Aphria CEO Vic Neufeld's leadership, increased its market
share to 27% from 7% and sales to $250 MM from $20 MM until the
company's acquisition in early 2014. With expertise in processing, marketing,
and distribution, he is well connected in the healthcare industry which may
prove to be beneficial when new distribution methods are allowed for MMJ.
* Dundee Estimate
2015A 2016E
Forecasts (May YE)
7.50
8.12
Price per gram ($/g)
COGS ($/g)
3.18
2.85
Revenue (MM$)
0.6
8.4
EBITDA (MM$)
(1.7)
(0.9)
EPS ($/sh)
-0.14 -0.03
OP CF (MM$)
(5.4)
(1.1)
CF/share ($/sh)
-0.10 -0.02
Capex (MM$)
(2.4)
(5.0)
FCF (MM$)
(7.8)
(6.1)
All Figures in C$ Unless Otherwise Noted
Source: FactSet, Company Reports, DCM
2017E
7.50
2.00
22.2
2.9
0.02
0.5
0.01
(9.0)
(8.5)
APH-T: Price/Volume Chart
Source: Factset
Company Description
Aphria Inc. is a medical marijuana company
based in Leamington, Ontario. Aphria is one of
a handful of greenhouse-only LPs and is one of
the lowest cost producers in the MMPR.
July 20, 2016
KEY CATALYSTS FOR APH:
MMPR update (Industry Catalyst) - August 2016 - A modification to the MMPR is expected
in August, retroactive to the R. v. Allard decision on February 24, 2016, that will likely
introduce some form of 'home grow'. We believe any revenue opportunity lost due to
personal production will be marginal at most.
Task Force update (Industry Catalyst) - November 2016 - The government launched a Task
Force on June 30, 2016 that will inform the creation of a new marijuana legalization and
regulation system. The Task Force will report back with an update in November 2016 and we
believe LPs will be a starting point for production in a more open system.
Acceleration of oils - H2/16 - Aphria received its oils cultivation license in August 2015. The
receipt of the oils sales license would be an important milestone in broadening the
company's product offering. Large volume, low cost greenhouses are perfect for large scale
oil production, in our view.
Capacity expansion - Mid-2017 - Aphria's current production capacity on hand is 2,600 kg
per year growing in 43,000 sq ft. With proceeds from a recent financing management
expects to add another ~3,000 kg of capacity for a total of ~5,500 - 6,000 kg per year
growing in 100,000 sq ft. The expansion has commenced and is expected to be completed by
mid-2017.
COMPANY OVERVIEW
Aphria is one of only a handful of greenhouse-only LPs. It was the 14th company licensed by
Health Canada. Aphria has its facility located in Leamington, Ontario, benefits from a track
record of low-cost commercial-scale greenhouse growing, and has strong ties to the
community through its management team. The company has focused on establishing and
maintaining one of the lowest cost productions in the MMPR, and a strong standard of
pharmaceutical-like approach to agri-business. The company recently acquired CannWay
Pharmaceuticals, a company with significant market share in the veterans' patient market,
which Aphria stands to benefit from higher-than-average consumption from this patient
population. Aphria is the 2nd largest public LP by market capitalization and 2nd largest by
enterprise value. The company went public through an RTO with Black Sparrow Capital Corp.
and was first publicly listed in December 2014.
Figure 1 - Aphria Brand
Source: Company presentation
Wholesale Strategy: Aphria was the first LP to publicly announce a wholesale sales program
to other LPs. Though it isn't a large portion of its revenue, wholesaling can provide good
margins to sell plants at all different stages of the plant's life including cuttings/clones,
genetics, and mature plants. LPs with crop failures, increased demand, or insufficient
capacity have reached out to Aphria for this offering.
July 20, 2016
Two pronged patient acquisition strategy, tapped into the veteran market. The company
recently acquired CannWay Pharmaceuticals, a company with significant market share in the
military veterans patient market. The purchase of CannWay should benefit Aphria's revenue
since veterans generally purchase much higher than average daily amounts. The acquisition
brought an established patient base to Aphria with potential for increased growth through
direct distribution across Canada. The company has also developed research funding
partnerships with clinics and healthcare organizations.
Figure 2 - APH Share Price Performance with Key Events Annotated
1.80
Price (CAD)
Volume (Thousands)
Announces 3yr
research study
1.60
Announces $10MM
equity financing
Veteran patients
partnership
2,500
Reports industry's first
EBITDA+ Q
2,000
1.40
Build out for R&D and
oils
Lists on TSXV
Acquires CannWay
1,500
1.20
1.00
1,000
Acquires CF
Greenhouses
0.80
0.60
Announces capex
expansion
License amendment
increase
First product
shipment
Amends
license for
wholesale
Completes first
wholesale sale
500
Liberals win majority in
Fed election
0.40
0
Jan'15
Volume
Jul'15
Apr'15
Aphria Inc
Oct'15
Jan'16
Apr'16
Jul'16
Source: FactSet Prices
VALUATION & FORECASTS
We rate APH as a Buy, Speculative Risk, with a $2.75 target price. We base our valuation on
a 6.0x EV/EBITDA multiple on our $46 MM FY2021E EBITDA. Our model only considers
flower and oil sales from its existing facility and expansion, as well as sales to the
recreational legalization market. On valuation the company trades in-line on an EV/LSC at
$44/g (peers at $42/g) but a premium would be justified for its low cost operation, massive
expansion capability, and management’s connections to the pharmacy industry which might
be a distributor of MMJ down the line.
Patient enrollment reaching ~7,500 by Q1/17E. With the completion of Phase I construction
we model Aphria adding ~1000 patients per quarter to reach 7,500 patients by Q1/17, and
then ~1,500 patients per quarter after Phase II is completed. The completed expansions
should allow the company to accelerate registration through 2017.
Sales price of $7.50/g for dried bud, $15.00/ for oil. For bud sold we assume a price of
$7.50/g, in line with the average price in the space of approximately $7.00/g. Aphria's
average price per gram over the last four quarters has been ~$8.00/g. We model oil sales
starting in late summer, produced from trim product from plants grown. We assume that
only 50% of the excess non-flower plant material is used for extract production, a 10% w/w
yield, for final product that is sold at $20.00/g with a 50% gross margin. We estimate
recreational sales at $7.50/g and extracted product at $15.00/unit.
July 20, 2016
Strong revenue growth expected to accompany facility expansion. We model Aphria's
revenue experiencing >30% QoQ growth due to the acceleration of patient acquisitions that
was temporarily slowed to slow delay in the approval from Health Canada, as well as due to
the receipt of the oils sales license. We will also watch for Aphria's high value veteran
patients' to benefit our consumption rate estimates which we currently model at 1.0g/day.
One of the lowest COGS/g in the sector. In FQ4 Aphria reported cash-cost/g of $1.15, or
more relevant to our estimates, "all-in" COGS/g of $2.07 recording an adjusted gross margin
of 74.5% which sets a benchmark for where the industry should be tracking towards in our
view. We model COGS decreasing to $2.00/g (excluding biological assets) through midcalendar 2017E as the company expects to grow more volume over the platform.
FACILITY AND ASSET DESCRIPTION - APHRIA'S FACILITY
Figure 3 - APH Facility and Asset Description
Aphria
Current Facility Status
Location
Leamington, ON
Facility Type
Greenhouse
Built Flowering Square
Footage
44,000 sq ft
Capacity Utilization
100%
Dried Cannabis License:
2,600 kg
Implied Annual Patient
Capacity @ 1.0g/p/d:
4,749
Oils License:
Production only
Security level:
Level 8 vault
Facility Ownership:
Wholly owned
At Maximum Capacity
Dried Cannabis Capacity 50,000 kg
91,324
Near Term Expansion Plans
Another 100k sq ft (Spring 2017)
Another 640k sq ft (2018+)
Source: Company Reports, Dundee Capital Markets
APHRIA - Low cost producer with massive expansion capability
Background - Aphria was formed in 2012, when co-founders Cole Cacciavillani and John
Cervini began pursuing a business plan under MMPR. The co-founders and master grower
gained MMJ experience under the old MMAR regulations before the MMPR came into
effect. The company applied for a license in August 2013, and received a license to cultivate
in August 2014. Aphria's facility was started from within CF Greenhouses, a commercial scale
agriculture and industrial business owned by Aphria's co-founder Cole Cacciavillani, which
provided savings on hydro and labour, economies of scale for raw materials, and tissue
culture expertise. As of July 2016 Aphria officially now owns CF Greenhouses acquiring
360,000 sq ft of production space located on 36 acres of land for $6.1 MM ($3.25 MM in
cash, and a $2.85 MM VTB mortgage). As part of the agreement, Aphria acquired vacant
land allowing it to build an additional 640,000 sq ft of growing space.
July 20, 2016
Branding - Aphria was the 6th public LP which heightened exposure as it positioned itself
behind its management team's track record. CEO Vic Neufeld brings credibility and strong
ties to the pharmaceutical industry as the former CEO of Jamieson Labs, while co-founders
Cacciavillani and Cervini bring decades of commercial-scale greenhouse growing. As one of a
handful of the greenhouse-only growers, early on Aphria showed that consistent product
could be grown in a greenhouse and has been a model for low cost operations. The
company has also tapped into the veteran market registering over 400 veteran patients that
purchase MMJ for treating PTSD, chronic pain, insomnia, sleep disorder, anxiety and
depression.
Facility - The now wholly-owned greenhouse facility located in Leamington currently
operates in 44,000 sq ft of 360,000 sq ft of built greenhouse, which is still just a fraction of
the area that it could grow on once building another 640,000 sq ft with the recent CF facility
and land purchase. Being situated in Leamington provides clear cost advantages, including
benefiting from one of the warmest climates in Canada and a higher than average number
of hours of annual sunshine, using a majority of natural sunlight resulting in meaningful
energy savings. The 'greenhouse capital of the world' also provides availability of a high
caliber of agricultural labour and close proximity of supplies.
Growing - The greenhouse controls for light and air conditions with cooling and blinds. The
currently utilized area comprised of 6 'houses', 2 for cuttings and mothers, and 4 for
flowering. The company grows in a rock wool medium and has a surplus of cuttings on hand
selecting only the best of breed to proceed onto vegetation; it also has been successful
wholesaling to other LPs. Trimming and processing both occur in the same facility.
Figure 4 - APH Facility Overhead View (currently licensed area = yellow box)
Source: CF Greenhouses
PRODUCT OFFERING - Focused and Consistent Growing
Aphria has 18 strains but may only be growing 12 at a time with most of those available in its
store. Aphria's early strains were named after lakes or outdoor features. The company offers
a number of mid-higher THC concentration strains, and some CBD strains, generally all
priced at $7.20/g. Each month the company offers a 'strain of the month' priced at $5.99/g.
The company will soon join a number of peers when it receives its oils sales license, which
allows the company to be able to supply oils, complementing its existing product line.
July 20, 2016
BALANCE SHEET AND TARGET DERIVATION
Management and insiders own nearly 30% of APH. As of Feb 29, 2016 Aphria reported $12.0
MM cash and no debt. Subsequent to the quarter, the company closed the acquisition of CF
greenhouses for $6.1 MM ($3.25 MM in cash and $2.85 in a vendor take back mortgage).
As for most LPs, we generally model $10 MM needed for a 10,000 kg capacity expansion. We
model Aphria raising $45 MM over the next five years to expand capacity of its entire
greenhouse. We model all future financings at the current share price.
Figure 5 - APH Target
TSXV:APH
EBITDA ($MM)
2021E
$46
Target Multiple
EV ($MM)
6.0x
$277
+ cash ($MM)
+ cash from warrants ($MM)
- debt ($MM)
$14.0
$33.5
-$3.0
Equity value ($MM)
$322
Current S/O (MM)
Warrants
Options
65.0
23.3
3.7
FD S/O (MM)
+ financing(s) @ current SP
Target S/O (MM)
92.0
23.3
115.3
Target Price
Current price
Return to target
$2.75
1.93
42%
RISKS
Along with the risks outlined in the sector overview above, Aphria's main risk will be
execution as our estimates are largely contingent on the management team building and
growing to much larger scale. We believe management's ties to the pharmacy industry
should pay dividends as the industry expands and Aphria provides a wider array of products
to the market.
July 20, 2016
Management
Vic Neufeld, President & CEO - Mr. Neufeld is the former CEO of Jamieson Laboratories, Canada’s largest manufacturer and
distributor of natural vitamins, minerals, concentrated food supplements, herbs and botanical medicines. He also brings 15
years' experience as a chartered accountant and partner with Ernst & Young before leading Jamieson for 21 years. The top five
leading nutrition brands each had 7% market share respectively when he began his career with Jamieson in 1993. Under Mr.
Neufeld’s leadership increased its market share to 27%, leading the company to over $250 MM in revenue from $20 MM,
while expanding the company’s distribution network to over 40 countries.
Carl Merton, CFO - Mr. Merton has over 20 years of financial and business experience, having spent almost 12 years combined
with Ernst & Young LLP and KPMG LLP prior to serving as VP, Special Projects at Atlas Tube Canada ULC and CFO of Reko
International Group Inc.
Gary Leong, Chief Scientific Officer - Mr. Leong has a personal background in quality assurance, quality control, quality system
audits, international and domestic regulatory affairs and product research and development. He is currently the President of
Neautrical Solutions Inc. located in Surrey, British Columbia. Prior to that, he was the CSO at Jamieson Laboratories after
beginning at Jamieson as the VP of Scientific and Technical Affairs in 2000. He has also held the position of Quality Control
Manager at Boehringer Ingelheim Consumer Products.
Cole Cacciavillani, Co-Founder & Chief Operating Officer - Mr. Cacciavillani is an industrial engineer with 35 years of
experience in the agricultural and greenhouse industry. He has accumulated expertise gained over generations of how to best
utilize nature’s light and organic properties combined with proprietary growing techniques and technologies produces a
superior, safe and cost effective product. He sits on a number of charitable and associative boards including Chairman of the
Board for Leamington Memorial District Hospital as well as serving on the Hospital’s Foundation Board.
John Cervini, Co-Founder & Chief Agronomist Officer - Mr. Cervini comes from fourth-generation growers in southwestern
Ontario with hydroponic agricultural experience. Mr. Cervini, with his father and brother, quadrupled the farming operation
and established Lakeside Produce, one of North America’s leading sales and marketing companies selling fresh produce from
Canada to multinational retailers throughout North America. As part of the Ontario Greenhouse Vegetable Growers
Association, he has sat on multiple committees in the industry as it grew from 900 acres to over 2,500 today.
Board of Directors
Dennis Staudt - Mr. Staudt has over 35 years’ experience providing business advice to private companies in Southwestern
Ontario, having spent most of his career with PricewaterhouseCoopers LLP, including 22 years as a partner in the Audit and
Assurance Group. He spent almost two years with PwC Germany in their Duesseldorf office prior to being admitted to
partnership.
Dr. Philip Waddington - Dr. Waddington is a trained naturopathic physician and leader in the field of regulating natural health
products. Dr. Waddington served as the inaugural Director General of the Natural Health Products Directorate (NHPD) of
Health Canada from January 2000 to August 2008.
Vic Neufeld - See above.
Carl Merton - See above.
Jonathan Leong - See above.
Cole Cacciavillani - See above.
John Cervini - See above.
July 20, 2016
Aphria Inc. (APH-T)
Rating
Risk*
BUY
Speculative
Daniel Pearlstein, Research Analyst
[email protected]
VALUATION DATA
Year-end May
P/E
P/CF
EV/EBITDA
EV/Sales
FCF Yield
OPERATING STATS
Year-end May
Bud Sales (kg)
Price Per Gram ($/g)
COGS ($/g)
Oil Sales (kg)
Oil Gross Margin
FINANCIAL SUMMARY
Year-end May
Revenue (MM$)
Gross Profit (MM $)
Gross Margin
EBITDA (MM $)
EBITDA Margin
C$ Target
C$ Close
12-month return
C$2.75
C$1.93
42%
2015A
---209.4x
--
2016A
---13.7x
--
2017E
82.9x
236.4x
40.2x
5.2x
--
2018E
37.0x
124.3x
21.7x
2.9x
--
2015A
74
7.50
3.18
----
2016A
1,039
8.12
2.85
----
2017E
2,311
7.50
2.00
321
15.00
50%
2018E
3,764
7.50
2.00
735
15.00
50%
2015A
0.6
0.1
21%
(1.7)
--
2016A
8.4
5.2
61%
(0.9)
--
2017E
22.2
15.1
68%
2.9
13%
2018E
39.3
26.2
67%
5.3
14%
Target Price
C$2.75
Upside
42%
APHRIA VALUATION (C$)
6.5x EV/EBITDA Multiple on F2021
Target Price Sensitivity
F2021E EV/EBITDA
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
8.5x
$25.0
$1.25
$1.50
$1.50
$1.75
$1.75
$2.00
$2.00
$2.00
$2.25
$35.0
$1.75
$2.00
$2.00
$2.25
$2.25
$2.50
$2.75
$2.75
$3.00
F2021 EBITDA (C$MM)
$46.0
$2.25
$2.50
$2.50
$2.75
$3.00
$3.25
$3.50
$3.50
$3.75
$55.0
$2.50
$2.75
$3.00
$3.25
$3.50
$3.75
$4.00
$4.25
$4.50
$65.0
$3.00
$3.25
$3.50
$3.75
$4.00
$4.25
$4.50
$5.00
$5.25
Revenue ($MM) and Margin (%) Projections
80%
70%
$400
60%
50%
$300
40%
$200
30%
20%
$100
10%
$0
0%
2015A
2016A
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Medical bud ($MM)
Medical oil ($MM)
Rec bud ($MM)
Rec extract ($MM)
Gross margin (%)
EBITDA margin (%)
2024E
Margin (%)
Revenue ($MM)
$500
Shares O/S (MM)
Fully Diluted Shares (MM)
Basic Mkt. Capitalization ($MM)
Enterprise Value ($MM)
BALANCE SHEET (C$ MM)
Year-end May
Assets:
Cash & ST Investments
Other Current Assets
Current Assets
PP & E
Other non-current Assets
Total Assets
Liabilities:
Current Liabilities
Long-term Debt
Other non-current Liabilities
Total Liabilities
Capital Stock
Retained Earnings
Total Shareholder Equity
INCOME STATEMENT (C$ MM)
Year-end May
Total Revenue
COGS
Gross Profit
G&A
Sales & Marketing
Depreciation
EBITDA
EBIT
Interest Expense/Income
EBT
Taxes
Other
Net Income (Reported)
EPS (Reported) $/sh
Average Shares (MM)
CASH FLOW STATEMENT (C$MM)
Year-end May
Depreciation
Working Capital Changes
Other
Operating Cash Flow
Operating Cash Flow/sh ($/sh)
Capital Expenditures
Other
Investing Cash Flow
Common Share Dividends
Equity financing & W/O Exercise
Debt Issue
Debt Repayment
Other
Financing Cash Flow
Net Change in Cash
Cash Balance
Free Cash Flow
65.0
92.0
C$ 125.5
C$ 115.5
2015A
2016A
2017E
Q3/16
7.1
3.9
10.9
3.6
0.3
14.9
11.3
4.8
16.1
8.0
4.6
28.7
14.4
8.7
23.1
16.5
12.2
51.9
12.1
5.4
17.5
7.2
4.6
29.3
0.9
0.0
0.0
0.9
22.1
-8.7
13.3
0.9
0.0
0.0
0.9
37.4
-9.5
27.9
2.9
2.9
2.9
8.6
51.3
-8.1
43.2
1.6
0.0
0.0
1.6
37.3
-9.6
27.7
2015A
0.6
0.4
0.1
2.1
0.7
0.1
(1.7)
(3.0)
0.0
-3.0
0.0
-4.6
-7.6
-0.14
52.4
2016A
8.4
3.3
5.2
2.7
3.4
0.3
(0.9)
(1.7)
0.0
-1.7
0.0
0.1
-1.6
-0.03
62.2
2017E
22.2
7.0
15.1
6.0
6.3
0.5
2.9
2.0
0.0
2.0
0.5
-1.0
1.4
0.02
62.2
2018E
39.3
13.0
26.2
10.0
10.9
0.5
5.3
4.4
0.0
4.4
1.2
-2.3
3.2
0.05
62.2
2015A
(7.6)
0.4
(2.0)
3.8
(5.4)
-0.10
(2.4)
(0.6)
(3.0)
0.0
17.3
0.0
(0.1)
(1.9)
15.4
6.9
7.1
(7.8)
2016A
(0.8)
0.7
(1.5)
0.5
(1.1)
-0.02
(5.0)
(0.1)
(5.0)
0.0
10.4
0.0
0.0
0.0
10.4
4.2
11.3
(6.1)
2017E
1.4
0.5
(1.8)
0.4
0.5
0.01
(9.0)
(4.8)
(13.8)
0.0
15.0
0.0
0.0
1.4
16.4
3.1
14.4
(8.5)
2018E
3.2
0.5
(3.2)
0.4
1.0
0.02
(10.0)
0.0
(10.0)
0.0
15.0
0.0
0.0
(1.5)
13.5
4.5
18.8
(9.0)
Source: Company Reports, FactSet, Dundee Capital Markets
Canopy Growth Corp.
July 20, 2016
(CGC-T: C$2.74)
[email protected]
Market Leader Expanding Globally
CGC-T
New
Last
Rating:
BUY
BUY

3.20
Target:
$4.50
Risk:
Speculative
Speculative
Projected Return:
64%
F2021 EBITDA (MM$)
$82
-EV/EBITDA
3.3x
-Company Data
$2.74
Price (07/19/16):
$3.69
$1.15
$284.5
$268.8
103.8
113.4
346.0
$20.00
Cash (MM$):*
$4.30
Debt (MM$):
$37.65
March
Fiscal Year End
We are resuming coverage of Canopy Growth Corp. with a BUY rating, and
introducing a price target of C$4.50, based on 7.5x FY2021 estimated EBITDA,
implying a 64% return from yesterday's close of $2.74. The 7.5x is at the high end
of our peer group range of 4.0x - 8.0x, due to Canopy's market leadership.
Canopy is the current market share leader holding 20% of patients registered
and four of the 33 granted licenses, and at $280 MM has ~2.5x the market cap
of its next closest peer. Its multi-brand platform provides diversification into
both the medical and rec markets, and the company has already made more
steps into international markets than most of its peers combined.
Investment Overview
•
Market share leader with ~20% of registered patients. Canopy is the largest
company in the space with the largest combined licensed sales capacity (LSC)
and ~20% of all registered patients (16,000 of 75,000). CGC's long-term
strategy is pay up for market share now for early dominance in the future
recreational market. We are fine with Canopy playing the long game as we
believe commercial scale, regulated, supply will be needed for the industry to
grow and transition to a market with both medical and recreational markets.
•
Diversification advantage from two distinct brands (Tweed & Bedrocan)
and four licensed facilities while most LPs are only working out of one. The
flagship facility is Tweed's indoor facility in Smiths Falls, ON (former Hershey
factory); Tweed Farms is a massive greenhouse in Niagara-on-the-Lake, ON,
and Bedrocan has two facilities in the Greater Toronto Area, ON (a large
purpose-built indoor facility and smaller facility licensed for importing from
Bedrocan's partner in the Netherlands).
•
Brand expansion from going global while other players are still focusing on
local. Canopy has already made moves beyond Canada's borders as
evidenced by the investment in an applicant in the Australian MMJ program
in May and the announcement to start a Bedrocan Brazil in June. On top of
that, many forget that Bedrocan, held under the Canopy brand, was
exporting from the Netherlands to 7 different European countries even
before coming to Canada.
•
Upside potential from further acquisitions as Canopy is a consolidator
looking for bargains. Access to capital, a healthy balance sheet, and a track
record of transactions (Tweed Farms, Bedrocan, MedCannAccess, AusCann,
Entourage Phytolab aka Bedrocan Brazil) makes Canopy the first call for LPs
or applicants looking to be acquired. We believe management can choose to
be patient and wait for the right opportunity to geographically diversify the
platform with an acquisition of another license/applicant with large
expansion capabilities. We do not model any acquisitions in our estimates.
* Dundee Estimate
2015A 2016A
Forecasts (Mar YE)
7.41
7.35
COGS ($/g)
-2.87
Revenue (MM$)
4.4
14.7
EBITDA (MM$)
(3.6)
6.2
EPS ($/sh)
-0.23 -0.02
OP CF (MM$)
(10.9) (12.4)
CF/share ($/sh)
-0.34 -0.16
Capex (MM$)
0.0
(10.7)
FCF (MM$)
(26.3) (25.6)
2017E
6.84
2.25
40.1
1.5
-0.03
7.2
0.07
(17.5)
(10.3)
CGC-T: Price/Volume Chart
Canopy Growth Corporation (CGC-CA)
Volume (Millions)
Price (CAD)
Volume
Canopy Growth Corporation
4
3.5
3
2.5
2
4
1.5
1
0
Oct-14
Apr-15
Oct-15
Apr-16
Source: Factset
Company Description
Canopy, formerly Tweed Marijuana Inc., is a
medical marijuana company based in Smiths
Falls, ON. It is Canada's first multi-licensed LP.
Tweed acquired Bedrocan, another LP, in June
2015 and the combined company now holds
four licenses in four separate facilities.
July 20, 2016
KEY CATALYSTS FOR CGC:
TSX uplisting - September 2016 - Canopy received conditional approval from the TSX in June
2016 to graduate to the TSX from the TSXV, which is expected to occur on or before
September 1, 2016. The uplisting would bring added credibility and attention to the stock to
a broader base of investors.
Tweed Farms license expansion - H2/16 - Tweed Farms could become the lowest cost
source of Canadian MMJ supply because of the larger volumes produced over the same
fixed costs. The facility recently received a full bud sales license in March and we expect
Canopy will seek to expand Tweed Farms' LSC after initial production.
Acceleration of oils - Q4/16 - In June 2016 Canopy partnered with Advanced Extraction
Systems Inc. to build a custom made CO2 supercritical fluid extraction system for the
purpose of producing high-quality extracts on an industrial scale. We expect some of
Canopy's large inventory on hand to be produced into oils in preparation for increased
demand from patients as physicians gain more education on the alternative delivery form.
COMPANY OVERVIEW
Canopy, formerly known as Tweed Marijuana Inc., is Canada's first multi-licensed LP.
Canopy owns both the Tweed (formerly TSXV:TWD) and Bedrocan (formerly TSXV:BED)
brands across four licensed facilities. The company has approximately 20% market share
having registered 16,000 patients out of the 75,000 enrolled in the MMPR program.
Canopy was first publicly listed in April 2014 as Tweed Marijuana Inc. (TSXV:TWD) and still
is the largest LP measured by both market capitalization and enterprise value. It later
changed the company name to Canopy Growth Corp. after the acquisition of Bedrocan
Cannabis Corp., which was one of the next largest LPs at the time. Canopy owns 4 of the 33
dried cannabis licenses, both indoor and greenhouse, and its current EV is ~2.3x larger than
its next closest peer.
Figure 1 - Canopy Brands
July 20, 2016
Going global while others are still figuring out local. Canopy has already made moves
beyond Canada's borders as evidenced by the investment in an applicant in the Australian
MMJ program in May and the announcement to start a Bedrocan Brazil in June. On top of
that, many forget that Bedrocan, held under the Canopy brand, was exporting from the
Netherlands to 7 different European countries even before coming to Canada. Canopy hopes
to leverage its expertise, financial strength and business model in legal marijuana markets
around the world, having received inquiries for strategic opportunities from third-parties in
a number of countries including Australia, Brazil, Chile, Germany, Serbia, and South Africa.
Strategic opportunities may include providing advisory services, exporting medical cannabis,
and ownership of cannabis cultivation and sales operations.
Patient initiatives keep Canopy near the top of the pack. Canopy has sponsored a number
of research projects and physician related events including creating its own medical advisory
board comprised of physicians specializing in chronic pain, family medicine, palliative care,
and pharmaceutical development which gain feedback from key opinion leaders. Bedrocan
has a patient advisory board to draw similar kinds of insight from those using its products.
Other efforts include: Tweed's Canobo research partnership, the Canadian AIDS Society
webinar series, continuing education credits for physicians, and the country's first cannabis
registry in Quebec in collaboration with Dr. Mark Ware (who also sits on the Liberal's Task
Force), and a national campaign to raise awareness of impairment in collaboration with the
Canadian Drug Policy Coalition (CDPC) and Mothers Against Drunk Driving (MADD Canada).
Figure 2 - CGC Share Price Performance with Key Events Annotated
4.50
4.00
Price (CAD)
Announces
$15MM equity
financing
Volume (Thousands)
Chuck Rifici
steps down as
CEO
Tweed Farms
cultivation license
3.50
Liberals win
majority in Fed
election
Tweed Farms license
renewal
Smiths Falls
license
renewal
Announces
$20MM equity
financing
3.00
Bedrocan launches
compassionate
pricing
Announces $10MM equity
financing
Receives
conditional
approval to list on
TSX
TWD renamed
to CGC
TWD announces BED
acquisition
12,000
10,000
8,000
6,000
2.50
TWD lists on TSXV
1.50
1.00
Apr'14
Acquires Park Lane (Tweed
Farms)
Jul'14
Volume
4,000
Tweed partners with Snoop
Dogg
2.00
Chairman Bruce Linton
becomes CEO
Oct'14
Jan'15
BED acquisition closes
Apr'15
Jul'15
Announces $12.5MM equity
financing
Oct'15
Jan'16
Tweed partners
with AusCann
Launches
Bedrocan
Brazil
2,000
0
Apr'16
Jul'16
Canopy Growth Corporation
We rate CGC as a Buy, Speculative Risk, with a $4.50 target price. We base our valuation on
a 7.5x EV/EBITDA multiple to our $82 MM FY2021E EBITDA. Our model considers flower and
oil sales from the three existing facilities and recreational legalization, but does not include
further M&A. On valuation the company trades in-line on EV/LSC at $40/g (peers at $42/g)
despite our belief that Canopy deserves a premium multiple to peers for its multiple
facilities, market share leading patient count, and international initiatives.
July 20, 2016
Patient enrollment reaching over 22,000 by Q1/17E. At the end of June 2016, Canopy
reported it had enrolled 16,000 patients, up from 11,000 three months earlier. With the
ramp up at Tweed Farms expected in H2/16, we model the Canopy platform amassing a
total of ~25,000 patients by calendar Q1/17 improving its market share from ~20% now.
Sales price mixed between Tweed / Tweed Farms and Bedrocan. For bud sold from Tweed
we assume a price of $7.50/g, while we use Bedrocan's recently announced $5.00/g
compassionate pricing. The average price in the space is approximately $7.00/g. Tweed and
Tweed Farms have higher priced products but strains priced ~$6.00/g decrease its average
realized price. We estimate rec sales at $7.50/g and extracted product at $15.00/unit.
COGS/g showing improvement on multiple platforms. We model an increased use of
Tweed Farms as that facility ramps up over the next year, resulting in a reduction in
Canopy's overall COGS. We model the greenhouse reach sub-$2.00/g of sales from Tweed
Farms, while management at Bedrocan estimates $1.50-$2.00/g is achievable given BV's
track record. We estimate approximately 50% of product sold is from indoor facilities
(Smiths Falls, Bedrocan) and the other 50% from greenhouse (Tweed Farms). We model an
effective gross margin of 70% for next year.
Revenue growth expected to continue as Canopy continues to attract patients. Canopy
recently reported $5.0 MM in revenue last quarter, and revenue has grown at an average
QoQ rate of 42% for the last four quarters. We believe this strong trend continues and we
model dried bud sales using our patient growth assumptions at a consumption rate of
1g/day. We model oil sales produced from trim product from plants grown. We assume that
only 50% of the excess non-flower plant material is used for extract production, a 10% w/w
yield, for final product that is sold at $15.00/g with a 50% gross margin.
FACILITY AND ASSET DESCRIPTION - TWEED, TWEED FARMS, BEDROCAN
Figure 3 - CGC Facility and Asset Description
Tweed
Tweed Farms
Bedrocan
Total
Location
Smiths Falls, ON
Niagara-on-the-Lake, ON
Greater Toronto Area, ON
Facility Type
Indoor
Greenhouse
Indoor
Footage
24,000 sq ft
320,000 sq ft
28,000 sq ft
12 / 30 rooms
100,000 / 320,000 sq ft
34 / 34 rooms
3,500 kg
1,200 kg
2,240 kg
6,940 kg
Capacity @ 1g/p/d:
9,589
3,288
6,137
19,014
Oils License:
Production and Sale
N/A
Production and Sale
Security level:
Level 9 vault
Level 10 vault
Facility Ownership:
indirectly owned by B. Linton and
Wholly owned
C. Rifici; 20 yr lease
Leased from M. Goldman; 10
yr lease
11,000 kg
15,000 kg
4,000 kg
30,000 kg
41,096
10,959
82,192
Grow in the whole Farm
N/A
At Maximum Capacity
Dried Cannabis Capacity
30,137
Capacity @ 1g/p/d:
Another 6 rooms
372,000 sq ft
Level 9 vault
July 20, 2016
TWEED - The Seed Before The Canopy Sprouted
Background - Tweed was formed in early 2010, submitted its license application for the
flagship Smiths Falls facility (former Hershey Chocolate factory) in September 2013, received
a license to cultivate in November 2013, and subsequently a license to sell in January 2014.
Tweed was the fifth company to receive a license from HC. The company was also the first
publicly listed LP after it went public via an RTO with LW Capital Pool Inc. listing on April 4,
2014. It made its first shipment of products to customers in May 2014.
Branding - Tweed has established arguably the most recognizable brand in the Canadian
MMJ industry. Being the first public company drew a hoard of media attention and raised
awareness which was advantageous since MMJ companies are not allowed to advertise for
the drug. The company’s network of Tweed 'Main Street' community engagement centres in
Southern Ontario, acquired from MedCannAccess in September 2015, provide information
to those interested in MMJ. In February 2016 Tweed announced a partnership with famed
rapper and cannabis connoisseur Snoop Dogg for curated content and branding strategies
exclusively in Canada. The company's forward thinking marketing strategies aim to position
Tweed as top-of-mind for medical patients and future rec users.
Facility - The 470,000 sq ft facility contains offices, call centre, vault, bottling and
distribution, and oil processing. It consists of eight buildings of manufacturing and
distribution space, while operations are currently licensed for 180,000 sq ft. An R&D lab
helps with quality control checking levels of nutrients, total THC, CBD, time to harvest, etc.
Growing - Tweed is currently growing in 12 of a potential 30 in the existing licensed space.
Each room is ~2,000 sq ft, and harvests five times per year with 50-70kg harvests. Tweed
uses tables for growing with standard high pressure sodium lights, peat pucks peat as the
growing medium, and on premise nutrient generation.
TWEED FARMS - Large Greenhouse Ready For Expansion
Background - Tweed Farms, formerly known as Prime1 Construction Services (Park Lane),
was still an applicant when it was acquired by Tweed Marijuana Inc. in June 2014. The
350,000 sq. ft. greenhouse was acquired for $3.6 MM cash and 519,031 shares related to
milestones. The facility received a license to cultivate only two months later, which shows
that Health Canada may expedite the licensing process if an applicant tags along with an LP.
In December 2014, the first product grown in the greenhouse was shipped to customers as a
finished product from Tweed. Security for the entire facility is operational and the facility
will soon receive a full license to sell at the Farm. Prior to receiving its own amended license
in March 2016, Tweed Farms need to transfer all products cultivated there to the Smiths
Falls facility for final processing and sale.
Facility - Tweed Farms' 350,000 sq. ft. greenhouse utilizes water recirculation technology,
CO2 capture strategies and essentially no artificial lights or curtains. The Farm represents a
high volume low cost product for dried flower and extracted oils. Though the growing
environment may be variable with seasonality using natural sunlight, its volume and cost
advantages will likely prove advantageous in the long run.
Growing - Tweed Farms is currently operating in 100,000 sq. ft. licensed to grow 11,500
plants at any one time.
July 20, 2016
BEDROCAN - Long Dutch Track Record Of Standardized Production
Background - Bedrocan Canada was a fully licensed and publicly listed LP (formerly
TSXV:BED) when it was acquired in August 2015 by Tweed in exchange for 0.4650 common
shares of TWD for each BED share held. The company issued a total of 35.2 MM shares upon
closing. Bedrocan originally went public via RTO with POCML 2 in August 2014.
The company was formed in February 2012 to enter into an exclusive licensing arrangement
for an indefinite term to be the Canadian licensee of Bedrocan BV (the only Dutch
government-contracted licensed producer for 15 years) and apply to be an LP. Bedrocan
submitted its import and sales application in mid-2013 and received a license in December
2013. Bedrocan began selling its products in the Canadian market in February 2014. A
second license application for its purpose-built domestic production facility was submitted
and subsequently approved in early 2015. In March 2016 Bedrocan was licensed to sell
cannabis oil extracts, and the first oil products were sold through both the Tweed and
Bedrocan stores in June 2016. Canopy intends for Bedrocan to remain solely focused on the
medical market even if a legalized recreational market is eventually legislated in Canada.
Branding - BV’s products have been sold in pharmacies in the Netherlands on prescription
since 2003, and have been covered by health insurance there since 2011. Product from
Bedrocan BV has been supplied to patients in multiple countries including Germany, Italy,
Finland, Norway, Switzerland and the Czech Republic. BV also has a rich history of partnering
for research purposes offering research-grade cannabis and placebo to academia,
government and industry. Bedrocan pays an annual license fee to BV ranging from 2.5% 7.5% based on its net sales of domestically produced MMJ, with no revenue-related
milestone obligations. In addition, the license agreement also includes a right of first
negotiation mechanism to acquire the rights to commercialize the Bedrocan BV IP in the
United States.
Facility - The purpose-built fully licensed 52,000 sq ft facility is growing based on the design
and track record of Dutch partner Bedrocan BV. The facility is currently licensed for 2,000 kg
or 50% of the full run rate capacity, and we anticipate it applies for the full year 4,000 kg
license for its next renewal.
Growing - The room and grow configurations are identical to its Dutch partner but since it
was more recently built, some features of this facility are even more advanced than the
Dutch facility. Climate controlled compartments and streamlined harvest strategies yield a
fresh crop harvested grown from rock wool every week.
PRODUCT OFFERING - One of the most diverse offerings in the sector
Combined, the two platforms have over 25 strains to offer. Bedrocan's proprietary genetics
come from its Dutch partner with pharmaceutical-like names, while Tweed/Tweed Farms
offer a wide variety of products with their own branded strain names ranging in price and
THC/CBD content. Like most LPs, Tweed provides 'street' names as a reference point.
Bedrocan sells all its strains at $5.00/g while Tweed sells $6-$12/g. Growth time, strain yield,
and market comparatives can determine a product’s price. Tweed does not offer volume
discounts but does offer compassionate pricing to eligible low-income patients (20%
discount). Products can be purchased in 5g and 10g increments.
Tweed began selling cannabis oils made with GMO-free, organic sunflower oil in February
2016 by providing oils made from popular strains of Argyle, Princeton and Highlands. The
product line is sold in 100ml bottles equivalent to 10.0g of the same starting product dried
flower. Bedrocan oils should be introduced shortly.
July 20, 2016
Management and insiders own approximately 15% of CGC. As of June 30, 2016 Canopy
reported $15.4 MM cash and $4.3 MM in debt. Subsequent to the quarter, Canopy closed an
$11.5 MM bought deal priced at $2.30.
model Canopy raising $75 MM over the next five years to expand capacity of its entire
platform and even beyond that. We model all future financings at the current share price.
We believe Canopy can become a market leader controlling more than 30% of the medical
market and more than 15% of the recreational market.
Figure 4 - CGC Target
TSXV:CGC
EBITDA ($MM)
2021E
$82
Target Multiple
EV ($MM)
7.5x
$612
+ cash ($MM)
- debt ($MM)
$20.0
$5.3
-$4.0
Equity value ($MM)
$633
Current S/O (MM)
Warrants
Options
103.8
1.1
8.4
FD S/O (MM)
Target S/O (MM)
113.4
28.4
141.9
Target Price
Current price
Return to target
$4.50
2.74
64%
RISKS
Along with the risks outlined in the sector overview above, Canopy risks also include
execution, capital raising, M&A, and product line expansion. We believe the company will be
a market leader in both the medical and recreational markets, and scaling to accommodate
the demand will be pertinent for this forward-thinking management team.
July 20, 2016
Management
Bruce Linton, CEO & Chairman - In addition to his current position at Tweed, Mr. Linton is the CEO of communications
company Martello Technologies. After beginning his career at Newbridge Networks Corporation, he has since held positions
that include General Manager of Computerland.ca, President and Co-Founder of webHancer Corp, and part of the establishing
team at CrossKeys Systems Corporation. Bruce has been responsible for the acquisition and/or disposition of over $100 MM in
business assets. Bruce currently sits as Canada’s representative on the World Bank’s Water Sanitation Program.
Tim Saunders, CFO - Mr. Saunders is an experienced finance executive having worked with large international public
companies and private equity-backed start-ups, in Canada and Europe. Tim joined Canopy (known then as Tweed) in 2015
bringing executive and leadership experience from a number of sectors including telecom, mobile, manufacturing,
semiconductors, and clean tech. Tim most recently led Black Canvas Consulting with assignments to Export Development
Canada, and was previously a senior finance executive with Vodafone, Oskar Mobil, Mitel and Zarlink Semiconductor and CFO
at Plasco Energy Group.
Mark Zekulin, Managing Director & President of Tweed - Mr. Zekulin oversees Tweed’s medical and patient outreach
strategy, driving Tweed’s operations and advancing market strategy. Previously was Counsel at the Ottawa-Washington
international trade law firm of Cassidy Levy Kent. He has served as a Senior Advisor to the Honourable Dwight Duncan, the
Ontario Minister of Finance, and has worked internationally at the Business and Industry Advisory Committee to the OECD as
Acting Senior Policy Manager.
Marc Wayne, Managing Director & President of Bedrocan Canada - Mr. Wayne oversees Bedrocan Canada's operations and
is a key liaison to the Dutch partner Bedrocan BV. Mr. Wayne was formerly the Director of Business Development for the
Canadian Consortium for the Investigation of Cannabinoids (CCIC), a leading organization of scientists and healthcare
professionals established to promote evidence-based research and medical education concerning the therapeutic application
of cannabis and cannabinoid-based medicines. Prior to that, he held roles in technology companies which include that of
Managing Partner and Founder of the OAM Computer Group, and Founder and Board Member of Lasoo.com.
Board of Directors
Bruce Linton, Chairman - See above.
John Bell, Director - Mr. Bell founded Shred-Tech and grew it into a global giant in the mobile document shredding and
recycling industry. After selling Shred-Tech in 1995, he purchased Polymer Technologies and grew it from a local plastics
manufacturer to a global auto parts company before exiting in 2007. Mr. Bell also served as interim CEO and director of ATS
Automation (TSX), which operates 24 global manufacturing facilities, has 4,000 employees and $700 MM in sales during a time
of management and board renewal in 2007. Mr. Bell also sits on the Board of Strongco Corp. and DelMar Pharmaceuticals.
Murray Goldman, Director - Mr. Goldman is the founder and Chairman of The Goldman Group, a fully integrated real estate
development company that has developed and built in Canada, the United States and Israel for over 50 years. The company
has a history of innovative and original mixed-use developments that have established precedent-setting neighbourhoods in
the Greater Toronto Area. In 2010, Mr. Goldman received the NAIOP lifetime achievement award acknowledging his
leadership in this field. Mr. Goldman continues to serve as a director of a number of prominent organizations and is a major
investor and founder of a number of innovative medical and scientific research companies.
Barry Fishman – Director – Mr. Fishman is a recognized health care leader, advisor, and driver of profitable growth. He is the
Managing Director of Sequoia Advisers Inc., a firm that provides advice to a number of health care organizations. Until the end
of 2013, he was President & CEO of Teva Canada, a leading generic and specialty pharmaceutical company with up to $1B in
revenue and nearly 2,000 employees. Prior to Teva, he served as CEO of Taro Canada, a niche specialty pharmaceutical
company and was the Vice President of Marketing at Eli Lilly Canada. Mr. Fishman started his career at Deloitte in Costa Mesa
California, and obtained his Certified Public Accounting (CPA) designation.
Chris Schnarr, Director - Mr. Schnarr is the CFO at Delivra Inc., a company involved in the development and sale of
transdermal products and technologies for the topical delivery of pharmaceutical and natural molecules. Mr. Schnarr has 25
years of experience across a variety of executive positions in technology (hardware, software, and services), communications,
agriculture, food processing and food ingredients, financial services, health care, and sustainability industries.
July 20, 2016
Canopy Growth Corp. (CGC-T)
Rating
Risk*
BUY
Speculative
[email protected]
VALUATION DATA
Year-end March
P/E
P/CF
EV/EBITDA
EV/Sales
FCF Yield
OPERATING STATS
Year-end March
Total Bud Sales (kg)
Tweed
Bedrocan
COGS ($/g)
Total Oil Sales (kg)
Oil Gross Margin
FINANCIAL SUMMARY
Year-end March
Revenue (MM$)
Gross Profit (MM$)
Gross Margin
EBITDA (MM $)
EBITDA Margin
C$ Target
C$ Close
12-month return
$4.50
$2.74
64%
2015A
---61.3x
--
2016A
--43.5x
18.3x
--
2017E
-39.1x
176.8x
6.7x
--
2018E
60.3x
-20.2x
3.9x
--
2015A
592
324
269
7.41
-----
2016A
2,032
1,469
563
7.35
2.87
31
15.00
50%
2017E
4,303
3,173
1,130
6.84
2.25
717
15.00
50%
2018E
7,220
5,796
1,424
7.01
2.10
1,203
15.00
50%
2015A
4.4
4.8
110%
(3.6)
--
2016A
14.7
21.0
143%
6.2
42%
2017E
40.1
25.0
62%
1.5
4%
2018E
68.5
44.2
65%
13.3
19%
Target Price
C$4.50
Upside
64%
CANOPY VALUATION (C$)
F2021E EV/EBITDA
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
8.5x
$60.0
$2.00
$2.25
$2.50
$2.75
$3.00
$3.00
$3.25
$3.50
$3.75
$70.0
$2.25
$2.50
$2.75
$3.00
$3.25
$3.50
$3.75
$4.00
$4.25
F2021 EBITDA (C$MM)
$82.0
$2.75
$3.00
$3.25
$3.50
$4.00
$4.25
$4.50
$4.75
$5.00
$90.0
$3.00
$3.25
$3.75
$4.00
$4.25
$4.50
$5.00
$5.25
$5.50
$100.0
$3.25
$3.75
$4.00
$4.50
$4.75
$5.00
$5.50
$5.75
$6.25
70%
60%
50%
40%
30%
20%
10%
0%
2015A
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
Medical bud ($MM)
Medical oil ($MM)
Rec bud ($MM)
Rec extract ($MM)
Gross margin (%)
EBITDA margin (%)
Margin (%)
Revenue ($MM)
$800
$700
$600
$500
$400
$300
$200
$100
$0
Shares O/S (MM)
Year-end March
Assets:
Current Assets
PP & E
Total Assets
Liabilities:
Current Liabilities
Long-term Debt
Total Liabilities
Capital Stock
Retained Earnings
Year-end March
Total Revenue
COGS
Gross Profit
G&A
Sales & Marketing
Depreciation
EBITDA
EBIT
EBT
Taxes
Other
EPS (Reported) $/sh
Average Shares (MM)
CASH FLOW STATEMENT (C$ MM)
Year-end March
Depreciation
Other
Operating Cash Flow
Other
Investing Cash Flow
Debt Issue
Debt Repayment
Other
Financing Cash Flow
Net Change in Cash
Cash Balance
Free Cash Flow
103.8
113.4
$284.5
$268.8
2015A
2016A
2017E
Q4/16
21.4
7.9
29.4
18.4
0.0
47.8
15.4
29.4
44.8
44.6
53.9
143.4
34.6
32.5
67.1
57.4
53.9
178.5
15.4
29.4
44.8
44.6
53.9
143.4
4.5
1.7
0.2
6.4
51.7
-10.3
41.4
7.2
3.5
6.8
17.5
137.6
-13.8
123.8
11.5
3.7
11.7
27.0
169.1
-17.3
151.7
7.2
3.5
8.9
19.6
137.6
-13.8
123.8
2015A
4.4
-0.5
4.8
5.5
2.7
0.0
(3.6)
(3.6)
(0.1)
-3.6
0.0
-3.8
-7.3
-0.23
32.2
2016A
14.7
-6.3
21.0
8.2
5.7
2.3
6.2
3.9
0.1
3.8
0.1
-5.4
-1.5
-0.02
76.7
2017E
40.1
15.0
25.0
11.7
11.0
4.7
1.5
(3.1)
0.3
-3.4
0.1
-0.3
-3.6
-0.03
103.3
2018E
68.5
24.2
44.2
14.0
15.3
5.9
13.3
7.4
0.3
7.1
1.9
-3.8
5.3
0.05
115.5
2015A
(9.3)
0.6
2.9
(5.1)
(10.9)
-0.34
0.0
(15.4)
(15.4)
0.0
45.7
2.0
(0.1)
(1.9)
45.6
19.4
21.4
(26.3)
2016A
(3.5)
2.3
22.7
(33.9)
(12.4)
-0.16
(10.7)
(1.5)
(12.2)
0.0
22.4
0.0
(2.0)
(1.8)
18.6
(6.0)
15.4
(25.6)
2017E
(3.6)
4.7
6.1
0.0
7.2
0.07
(17.5)
0.0
(17.5)
0.0
31.5
0.0
0.0
(2.0)
29.5
19.2
34.6
(10.3)
2018E
5.3
5.9
(17.1)
0.0
(5.9)
-0.05
(27.5)
0.0
(27.5)
0.0
20.0
0.0
0.0
(2.0)
18.0
(15.4)
19.2
(33.4)
Mettrum Health Corp.
July 20, 2016
(MT-T: C$2.31)
[email protected]
Multiple Facilities With Physician-Centric Approach
MT-T
New
Last
Rating:
BUY
 NEUTRAL
Target:
$3.00

$1.90
Risk:
Speculative
Speculative
Projected Return:
30%
F2021 EBITDA (MM$)
32.3
EV/EBITDA
2.7x
Company Data
$2.31
Price (07/19/16):
$2.48
$1.11
$91.2
$87.6
$39.5
$43.4
140.0
$7.1
Cash (MM$):*
$3.4
Debt (MM$):
$10.10
March
Fiscal Year End
We are resuming coverage of Mettrum Health Corp. with a BUY rating, and
implying a 30% return from yesterday's close of $2.31. The 5.0x is near the middle
of our peer group range of 4.0x - 8.0x, due to Mettrum's lower margin production
and patient population.
Mettrum is a multi-facility producer that takes a physician-focused approach
using 'pharma-like' reps to sell its product. It has a simplified offering versus
peers and promotes education to accelerate adoption and acquire patients. To
cement its medical orientation, Mettrum also sponsors academic research.
Investment Overview
•
Diversification advantage from three facilities while most LPs are only
working out of one. Mettrum's flagship is a small indoor facility called
'Bennett Road North' (BRN) in Bowmanville, ON, a much larger indoor facility
down the road called 'Bennett Road South' (BRS), and Mettrum Creemore
(formerly known as Agripharm Corp.) located in Creemore, ON. The Mettrum
Creemore facility occupies ~1 acre of 80 total acres on the land package it is
licensed for. Mettrum is currently licensed to produce and sell dried cannabis
and cannabis oil from each of its three facilities which combine for ~90,000
sq ft.
•
Enrolling a healthy number of patients and preparing for more by
embarking on expansion at its large indoor facility. Mettrum has been
accelerating its patient registration totaling 12,000 registered by the end of
June 2016 compared to 7,200 at the end of March. The company closed an
$8.6 MM equity financing (at $1.50 per share) in May 2016 with proceeds
used to expand the BRS facility four-fold from 5 rooms with 2,000 kg capacity
to 20 rooms with 8,000 kg capacity.
•
Tailoring to physicians with simple yet elegant 'Mettrum Spectrum', online
physician portal, and sponsoring academic research in Canada and abroad.
Mettrum took a medical-focused approach designing a system to simplify
MMJ for physicians and patients with a colour scale based on strength and
dosage. In March 2015 it launched a physician portal which simplified
registration and facilitated physician-patient monitoring. Mettrum has been
one of a few LPs to sponsor research in Canada launching the “Mettrum
Registry Research Program”, and only one of a few to go beyond borders. In
Q2/16, it entered into a supply and services agreement with Agriculture
Victoria in Australia to ship starter material for a horticultural research trial.
Mettrum Health Corp, is a medical marijuana •
company based in Bowmanville, ON. The
company now has three licenses in three
separate facilities.
Mettrum spreads brand awareness other than just by its MMJ products.
Mettrum also sells a hemp product line called 'Mettrum Originals' which
consists of 30 products available in 2,000 stores in Canada.
* Dundee Estimate
2015A 2016A
Forecasts (March YE)
7.31
7.95
COGS ($/g)
4.21
3.28
Revenue (MM$)
3.1
7.6
EBITDA (MM$)
(5.5)
(6.7)
EPS ($/sh)
-0.27
-0.23
OP CF (MM$)
(4.2)
(8.9)
CF/share ($/sh)
-0.16
-0.26
Capex (MM$)
(9.3)
(5.9)
FCF (MM$)
(13.7) (14.8)
2017E
7.50
3.00
24.8
(0.4)
-0.05
(3.5)
-0.10
(4.5)
(8.0)
CGC-T: Price/Volume Chart
Mettrum Health Corp (MT-CA)
Volume (Millions)
Price (CAD)
Volume
Mettrum Health Corp
3
2.5
2
1.5
1
2
1
0
0.5
0
Oct-14
Apr-15
Oct-15
Apr-16
Source: Factset
Company Description
July 20, 2016
KEY CATALYSTS FOR MT:
Acceleration of oils - H2/16 - One of the first companies to receive an oils license, Mettrum
actually holds three (one for each of its facilities). Mettrum reports sales of 'cannabis
extracts' in its recent FQ4 and year-ended March 31 financials but did not yet provide
granularity on this business segment. Accessibility of oils will be important to physicians that
are open to their patients using MMJ but don't want their patients to smoke.
BRS expansion - H2/16 - Mettrum closed an $8.6 MM equity financing (at $1.50 per share)
in May 2016 with proceeds used to expand the BRS facility four-fold from 5 rooms with
2,000 kg capacity to 20 rooms with 8,000 kg capacity. We model this expansion costing $4
MM over the next few quarters.
COMPANY OVERVIEW
Mettrum Health Corp. is one of only a few multi-licensed LPs. Mettrum spreads its brand
across three licensed facilities and has approximately 15% market share having registered
12,000 patients out of the 75,000 enrolled in the MMPR program.
Mettrum's medical-focused approach was a differentiator early on and still is a positive
feature of its positioning. Mettrum took a medical-focused approach designing a system to
simplify MMJ for physicians and patients with a colour scale based on strength and dosage.
It later launched a physician portal which simplified registration and facilitated physicianpatient monitoring and interaction. Mettrum has been one of a handful of LPs to sponsor
research in Canada and only one of a few to go beyond borders. The company went public in
October 2014 and is the 3rd largest public LP by market capitalization and 3rd largest by
enterprise value. The company went public through an RTO with Cinaport Acquisition Corp.
and raised $34.5 MM in a concurrent financing.
Figure 1 - Mettrum Brands
July 20, 2016
Unique branding and hemp product lines allow for further awareness and penetration,
which could prove beneficial for when the rec market opens up. Consumers, not
necessarily patients, can already buy Mettrum's hemp product line 'Mettrum Originals'
which is available in 2,000 stores in Canada. Having a product with face time and shelf time
ahead of a recreational market may have potential recreational consumers thinking
Mettrum when that first recreational purchase is made. Mettrum took the brand further
mainstream when in May 2016 it entered into an agreement with Live Nation for a threeyear term giving Mettrum Originals the exclusive name and marketing rights for the Molson
Amphitheater lawn in Toronto.
Mettrum is well ahead of many of its peers in the oil extracts game benefitting from having
an in-house lab at BRN and ability to test its own products. The company holds three oils
licenses, one for each of its facilities. Mettrum reports sales of 'cannabis extracts' in its
financials. Its technology based patient acquisition strategy, including its web portal and
online interface, also is integrating with a couple major electronic medical record systems
which could further accelerate adoption.
Figure 2 - MT Share Price Performance with Key Events Annotated
2.60
Price (CAD)
Volume (Thousands)
Lists on TSXV
License amended to
1,200 kg
2.40
Fed election
$7MM credit facility
from Farm Credit
Launches oils product
line
1,400
2.20
1,200
Agripharm receives
extract license
2.00
1,000
1.80
800
1.60
600
Agripharm cultivation
license
1.40
1.20
1,600
BRN license renewal
400
Receives license for
BRS
License amended to
2,500 kg
Announces $5MM
equity financing
1.00
200
0
Jan'15
Volume
Apr'15
Mettrum Health Corp
Jul'15
Oct'15
Jan'16
Apr'16
Jul'16
We rate MT as a Buy, Speculative Risk, with a $3.00 target price. We base our valuation on
a 5.0x EV/EBITDA multiple to our $32 MM FY2021E EBITDA. Our model only considers flower
and oil sales from the three existing facilities and does not include further M&A or
recreational legalization. On valuation the company trades below peers on EV/LSC at $25/g
(peers at $42/g). Although it has multiple facilities and one of the higher patient counts, we
believe MT trades at a discount due to its steady burn rate and lower than average
consumption rate from its patient base.
Patient enrollment reaching over 17,000 by Q1/17E. At the end of June 2016, Mettrum
reported it had enrolled 12,000 patients, up from 7,000 three months earlier. With the ramp
July 20, 2016
up at BRS expected in 2017, we model the Mettrum amassing a total of ~17,500 patients
before product from the expansion is ready for new patients.
Sales price flat at $7.50/g for dried bud, $20.00/g for oil extracts. For bud sold from
Mettrum we assume a price of $7.50/g. The average price in the space is approximately
$7.00/g. We model a $20.00/g sales price for oils. We estimate recreational sales at $7.50/g
and extracted product at $15.00/unit.
COGS/g still has room for improvement, most recently reporting 55% adjusted gross
margin. We model spreading its costs over a greater amount of product sold across its
platform as BRS ramps up next year, resulting in a reduction in Mettrum's overall COGS. We
model the company reaching ~$2.25 COGS/g by mid-late 2017.
Revenue growth expected to continue, even with lower than average consuming patients.
Mettrum recently reported $2.5 MM in revenue last quarter, and revenue has grown at an
average QoQ rate of 32% for the last four quarters. We believe this trend continues and we
model dried bud sales using our patient growth assumptions at a consumption rate of
0.6g/day (we calculate Mettrum's patient consumption for the last four quarters averages
0.54g/day). We model oil sales produced from trim product from plants grown. We assume
that only 50% of the excess non-flower plant material is used for extract production, a 10%
w/w yield, for final product that is sold at $20.00/g with a 50% gross margin.
FACILITY AND ASSET DESCRIPTION - BRN, BRS, METTRUM CREEMORE
Figure 3 - MT Facility and Asset Description
Bennett Road North (BRS)
Bennett Road South (BRS)
Mettrum Creemore
Total
Location
Bowmanville, ON
Bowmanville, ON
Creemore, ON
Facility Type
Indoor
Indoor
Indoor
Footage
N/A
N/A
N/A
R&D facility
5 / 5 rooms
45 / 45 rooms
yes
2,000 kg
1,500 kg
3,500 kg
--
9,132
6,849
15,982
Oils License:
Production and Sale
Production and Sale
Production and Sale
Security level:
N/A
N/A
N/A
Facility Ownership:
Five year lease until July 2018
Acquired, wholly owned
Acquired, wholly owned
8,000 kg
4,000 kg
12,500 kg
36,530
18,265
57,078
Another 15 rooms
N/A
N/A
At Maximum Capacity
Dried Cannabis Capacity 500 kg
2,283
N/A
July 20, 2016
METTRUM - Started With Bennett Road North (BRN)
Background - Mettrum was incorporated in October 2012, and received a license to
cultivate in November 2013. Mettrum was the third company to receive a license from HC.
The company was the fourth publicly listed LP after it went public via an RTO with Cinaport
Acquisition Corp. listing in October 2014. It made its first shipment of products to customers
in May 2014.
Facility - Mettrum’s first facility in Bowmanville is 14,480 square feet and was originally
licensed 2,500 kg of production, which reflects the inaccuracy with licenses in the program's
early days since the facility's operating capacity is limited to 500 - 650 kg. The facility has 18
self-contained growing rooms and is leased for five years. The in-house lab testing is
performed at this facility.
Growing - Mettrum's growing methodology is fairly consistent across its platform using a
small modular room approach and growing in coco husk grow medium. Its grow cycles are
usually 12-16 weeks long.
METTRUM - Acquired Bennett Road South (BRS)
Background - Given the size and capacity constraints in BRN, Mettrum acquired BRS, which
was located nearby BRN, for $3.25 MM in April 2014. This facility has become Mettrum's
primary operating facility with headquarters, call centre, product testing, packaging and
shipping. The company submitted the license for this facility in May 2014 shortly after the
facility was acquired.
Facility - The 60,000 sq ft purpose-built facility has a 6,000 sq ft vault. MT closed an $8.6
MM equity financing (at $1.50 per share) in May 2016 with proceeds used to expand the
BRS facility four-fold from 5 rooms with 2,000 kg capacity to 20 rooms with 8,000 kg
capacity. It is currently licensed for 2,000 kg.
METTRUM - Acquired Agripharm (nka Mettrum Creemore)
Background - Agripharm had submitted a license application in November 2013. Mettrum
didn't wait long after its first purchase to make its second in June 2014, acquiring Agripharm
located in Clearview, ON (~200 km from Bowmanville) for $1.2 MM in stock as well as
assuming its $3.5 MM in debt. In December 2014 the facility was licensed to grow 9,000
plants, which required product cultivated here needed to be transferred to the BRN facility
for final processing and sale. In August 2015, the facility received a full license to sell and is
now licensed for 1,500 kg.
Facility - The facility is scalable with 80 acres of zoned land to expand on. Grow is similar to
that of BRN with 45 different controlled pods that are stacked for maximizing grow space. All
rooms are purpose built and pre-fabricated. At full capacity, management believes this
facility could produce 4,000 kg annually.
PRODUCT OFFERING - Based On The Spectrum
The 'Mettrum Spectrum' uses a color and number scheme with red being the strongest
strains (high THC) and yellow being mild and high CBD; it also provides 'street names' for
reference. It has ~25 strains but offers 6-7 of them at a time. Mettrum provides some strains
below $6/g yet averages a price of just over $8.00/g in the most recent quarter (in part due
to selling higher priced oils as well).
July 20, 2016
Figure 4 - Mettrum Spectrum
Source: Company Reports
Insiders and management own approximately 20% of MT. As of March 31, 2016 Mettrum
reported $7.0 MM cash and $3.9 MM in debt. Subsequent to the quarter, Mettrum closed
an $8.6 MM bought deal priced at $1.50.
model Mettrum raising $30 MM over the next four years to expand capacity of its entire
platform as the company establishes a footing in the medical space. We model all future
financings at the current share price.
Figure 5 - MT Target
TSXV:MT
EBITDA ($MM)
2021E
$32
Target Multiple
EV ($MM)
5.0x
$162
+ cash ($MM)
- debt ($MM)
$7.0
$1.0
-$3.0
Equity value ($MM)
$166
Current S/O (MM)
Warrants
Options
FD S/O (MM)
Target S/O (MM)
39.5
1.0
2.9
43.4
13.0
56.3
Target Price
Current price
Return to target
$3.00
2.31
30%
July 20, 2016
RISKS
Along with the risks outlined in the sector overview above, a risk to Mettrum we are
currently seeing is cost control. As one of the larger LPs, Mettrum's ability to scale and hold
margins will be important to satisfying its growing demand.
Management
Michael Haines, CEO - Mr. Haines has been a director, executive officer, and entrepreneur in the interactive media industry
for over 15 years and has more than 20 years of experience in marketing and communications. He has served as an advisor
and director to companies in the interactive media industry, notably: as Chairman of the Board of Blammo Games (wholly
owned by Glu Mobile - Nasdaq: Gluu); as Executive Director of ES3, an IPTV application developer.
Peter Kampian, CFO - Mr. Kampian has over 30 years of investment and financial management and reporting experience and
over 15 years of senior executive leadership experience. His executive experience most recently includes serving as CFO of
Threshold Power Trust (2012 – 2013), EVP of Riverbank Power Corporation (2011 - 2012), EVP and CFO of Oneworld Energy
Inc. (2009 - 2011), and VP Finance of Superior Energy Management (2007 - 2009).
Trever Fencott, Chief Legal Officer - Mr. Fencott is a practicing lawyer and senior executive with 15 years of experience
operating, building and financing businesses in the technology and media sectors. Most recently, Mr. Fencott was President
and, subsequently, Executive Director of bitHeads Inc. Prior to that, Mr. Fencott was President, co-founder, and a director of
Groove Media Inc., and CEO of Bedlam Games, an interactive software business that was successfully sold in 2011.
George Scorsis, President - Mr. Scorsis has over 15 years of experience in the heavily regulated beverage industry. He joined
Red Bull in 2005 and served as President of Red Bull Canada since 2010. He was instrumental in restructuring the organization
from a geographical and operational perspective and worked closely with Health Canada on the guidelines regulating the
energy drink category. Prior to joining Red Bull, Mr. Scorsis worked with Bacardi Canada in an executive leadership capacity.
Grant Koehler, EVP Sales & Marketing - Mr. Koehler has worked in the pharmaceutical industry for more than 24 years. Prior
to joining Mettrum, he was an employee of Valeant Canada. During his 8 year tenure with Valeant, he held the position of
National Sales Manager - Pain Specialty and Region Sales Manager for Ontario. Mr. Koehler also spent 8 years with McNeil
Consumer Healthcare/Johnson & Johnson in sales and product management.
Board of Directors
Donald Wright - Mr. Wright’s career in the financial industry has spanned over 30 years. He has held a number of leadership
positions, including President of Merrill Lynch Canada (1990 to 1994), Executive Vice President, director and member of the
executive committee of Burns Fry Ltd. (1994), Chairman and Chief Executive Officer of TD Securities Inc. and Deputy Chairman
of TD Bank Financial Group (2002). Mr. Wright retired from TD Bank in November 2002. Since his retirement, he has been an
active investor in both the private and public equity sectors with an emphasis in oil and gas, resources and technology
industries.
Norman Inkster - Mr. Inkster is a recognized expert in national and international law enforcement. Mr. Inkster had a
distinguished 36-year career in the Royal Canadian Mounted Police. He rose through the ranks to become Commissioner, the
highest ranking officer. While serving as Commissioner, Mr. Inkster was also Canada’s delegate to INTERPOL. In 2003, Mr.
Inkster became a partner with Gowling, Lafleur Henderson LLP.
William Assini - Mr. Assini is a Chartered Accountant with over 25 years of management, finance and accounting experience.
He was a Partner and Senior Vice President with PricewaterhouseCoopers LLP for 17 years before becoming a Corporate
Director. He currently serves as a Director of the subsidiary companies of the Power Financial Group.
Dr. Joshua Tepper - Dr. Tepper is a family physician and the President and Chief Executive Officer of Health Quality Ontario.
Prior to joining HQO, Dr. Tepper was the inaugural Vice President of Education at Sunnybrook Health Sciences Centre.
Jack Cashman - Mr. Cashman is an executive with vast experience in the specialty healthcare, mining and technology verticals.
Mr. Cashman held the position of Non Executive Chairman of Vectura Group plc U.K., a specialty pharmaceutical company,
and he is a director of Telesat, the world’s fourth largest satellite company.
July 20, 2016
Mettrum Health Corp. (MT-T)
Rating
Risk*
BUY
Speculative
[email protected]
C$ Target
C$ Close
12-month return
C$3.00
C$2.31
30%
VALUATION DATA
Year-end March
P/E
P/CF
EV/EBITDA
EV/Sales
FCF Yield
2015A
---28.6x
--
2016A
---11.5x
--
2017E
---3.5x
--
2018E
12.9x
23.2x
9.6x
2.0x
--
OPERATING STATS
Year-end March
Bud Sales (kg)
COGS ($/g)
Oil Sales (kg)
Oil Gross Margin
2015A
418
7.31
4.21
----
2016A
909
7.95
3.28
25
15.00
50%
2017E
2,454
7.50
3.00
427
15.00
50%
2018E
4,428
7.50
2.50
738
15.00
50%
FINANCIAL SUMMARY
Year-end March
Revenue (MM$)
Gross Profit (MM $)
Gross Margin
EBITDA (MM $)
EBITDA Margin
2015A
3.1
1.3
42%
(5.5)
--
2016A
7.6
4.6
60%
(6.7)
--
2017E
24.8
14.6
59%
(0.4)
--
2018E
44.3
28.5
64%
9.1
20%
Target Price
C$3.00
Upside
30%
METTRUM VALUATION (C$)
F2021E EV/EBITDA
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
$20
$1.50
$1.75
$1.75
$2.00
$2.25
$2.50
$2.50
$2.75
$3.00
$25
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
$3.25
$3.50
$3.75
F2021 EBITDA (C$MM)
$32
$2.25
$2.75
$3.00
$3.25
$3.50
$3.75
$4.00
$4.25
$4.75
$37
$2.75
$3.00
$3.25
$3.75
$4.00
$4.25
$4.75
$5.00
$5.25
$45
$3.25
$3.75
$4.00
$4.50
$5.00
$5.25
$5.75
$6.00
$6.50
Revenue ($MM)
$350
70%
$300
60%
$250
50%
40%
$200
30%
$150
20%
$100
10%
$50
0%
$0
-10%
2015A
2016A
2017A
2018A
2019A
2020A
2021A
2022A
2023A
Medical bud ($MM)
Medical oil ($MM)
Rec bud ($MM)
Rec extract ($MM)
Gross margin (%)
EBITDA margin (%)
2024A
Shares O/S (MM)
Year-end March
Assets:
Current Assets
PP & E
Total Assets
39.5
43.4
C$ 91.2
C$ 87.6
2015A
2016A
2017E
Q4/16
21.7
2.2
23.9
14.6
0.4
38.9
7.1
6.8
13.8
20.0
1.2
35.0
6.8
12.3
19.1
23.8
1.1
44.0
7.1
6.8
13.8
20.0
1.2
35.0
2.2
0.0
2.0
4.2
42.5
-7.9
34.7
3.7
2.9
0.5
7.1
43.1
-15.2
27.9
6.6
2.9
0.4
9.9
50.9
-16.8
34.1
3.7
2.9
0.5
7.1
43.1
-15.2
27.9
Year-end March
Total Revenue
COGS
Gross Profit
G&A
Sales & Marketing
Depreciation
EBITDA
EBIT
EBT
Taxes
Other
EPS (Reported) $/sh
Average Shares (MM)
2015A
3.1
1.8
1.3
0.4
0.9
0.3
(5.5)
(5.7)
(0.3)
-5.5
0.0
-1.6
-7.0
-0.27
26.2
2016A
7.6
3.2
4.6
5.8
4.0
0.6
(6.7)
(7.2)
(0.1)
-7.1
0.0
-0.6
-7.7
-0.23
33.7
2017E
24.8
10.6
14.6
8.2
5.2
0.8
(0.4)
(1.2)
(0.1)
-1.1
0.3
-0.7
-1.6
-0.05
33.8
2018E
44.3
16.6
28.5
11.0
6.8
0.8
9.1
8.3
(0.1)
8.4
2.1
-4.3
6.1
0.18
33.8
Year-end March
Depreciation
Other
Operating Cash Flow
Other
Investing Cash Flow
Debt Issue
Debt Repayment
Other
Financing Cash Flow
Net Change in Cash
Cash Balance
Free Cash Flow
2015A
(7.0)
0.3
1.5
1.0
(4.2)
-0.16
(9.3)
(0.3)
(9.7)
0.0
32.5
0.0
0.0
(1.7)
30.8
16.9
21.7
(13.7)
2016A
(7.3)
1.2
(1.7)
(1.1)
(8.9)
-0.26
(5.9)
(1.1)
(7.0)
0.0
0.1
0.0
3.2
(0.0)
3.3
(12.7)
7.1
(14.8)
2017E
(1.6)
0.7
(2.7)
0.1
(3.5)
-0.10
(4.5)
0.0
(4.5)
0.0
8.6
0.0
0.0
(0.9)
7.7
(0.3)
6.8
(8.0)
2018E
5.7
0.7
(3.1)
0.1
3.4
0.10
(5.8)
0.0
(5.8)
0.0
15.0
0.0
0.0
(1.6)
13.4
11.0
17.8
(2.4)
Liabilities:
Current Liabilities
Long-term Debt
Total Liabilities
Capital Stock
Retained Earnings
OrganiGram Holdings Inc.
July 20, 2016
(OGI-T: C$1.16)
[email protected]
A Brand That Should Appeal In Rec
OGI-T
New
Last
Rating:
BUY
BUY

$1.00
Target:
$1.75
Risk:
Speculative
Speculative
Projected Return:
51%
F2021 EBITDA (MM$)
$33
-EV/EBITDA
2.4x
-Company Data
$1.16
Price (07/19/16):
$1.42
$0.19
$76.9
$79.3
$66.3
$79.9
357.0
$5.0
Cash (MM$):*
$7.4
Debt (MM$):
$2.84
August
Fiscal Year End
We are resuming coverage of OrganiGram Holdings Inc. with a BUY rating, and
implying a 51% return from yesterday's close of $1.16. The 5.0x is near the middle
of our peer group range of 4.0x - 8.0x, due to our more modest growth
expectations.
OrganiGram is one the few certified organic producers with a brand that
translates well to either the medical or recreational market. Its early approach
to targeting the military veteran patient community has resulted in the
development of a loyal and high-consuming patient base.
Investment Overview
•
Geographic, cost, and strategic advantages as the only public LP on the East
Coast. Operational advantage evidenced in high volume sales to local
veterans and tapping provincial labour rebates supporting already relatively
low power costs in New Brunswick. Given its location, Organigram has a
unique position to spread the brand across Canada, either as an acquirer of a
small ON- or BC-based grower (which are in higher supply) or as the target of
an LP that desires a tap into the East Coast.
•
One of only a few LPs in Canada certified as organic. The OrganiGram brand
has gained traction with patient support groups, and an organic offering
could resonate with and stand out to potential recreational users. No
synthetic nutrients, pesticides, herbicides or additives are used in its
production process. Benefits include increased terpene levels which give
marijuana pleasant tastes and smells, and may be therapeutically relevant.
•
Near term ramp up in capacity expansion should see valuation rerating.
Management expects to complete a small expansion to its facility to bring
capacity to 3,500 kg/year from 2,500 kg currently. The majority of the
proceeds from its recent $10.4 MM financing (at $1.05/sh) will be used to
expand production capacity through the build out and construction of an
extension at its main facility. OrganiGram expects this expansion could
further increase its production capacity 4-5x from its current ~2,500 kg
capacity. The existing property has potential to build out to 19,000 kg/year,
all on the same property address.
•
Evidence of operational improvement as OrganiGram is only the 2nd public
LP to record a positive EBITDA quarter. In FQ2 (ended Feb 29), OrganiGram
sold over 169 kg at an average price of $8.42/g recording $1.4 MM in
revenue (up 38% QoQ), and $72k in EBITDA without the adjustment for
biological assets. The company’s appointment of a new master grower has
helped steer the ship in the right direction, which should be accelerated with
the recent receipt of an oils license.
* Dundee Estimate
2015A 2016E
Forecasts (Aug YE)
7.50
7.50
COGS ($/g)
4.53
2.92
Revenue (MM$)
1.0
6.5
EBITDA (MM$)
(1.2)
0.7
EPS ($/sh)
-0.02 -0.01
OP CF (MM$)
(2.8)
0.6
CF/share ($/sh)
-0.05 0.01
Capex (MM$)
(7.5)
(4.7)
FCF (MM$)
(10.3) (4.1)
2017E
7.50
2.39
20.6
3.9
0.03
3.0
0.04
(6.5)
(3.5)
OGI-T: Price/Volume Chart
OrganiGram Holdings Inc (OGI-CA)
Volume (Millions)
Price (CAD)
Volume
OrganiGram Holdings Inc
2.5
2
1.5
1
0.5
4
0
0
Oct-14
Apr-15
Oct-15
Apr-16
Source: Factset
Company Description
OrganiGram Holdings Inc. is a medical
marijuana company based in Moncton, New
Brunswick. OrganiGram is one of Canada's few
organically certified LPs. It holds a license for its
facility located on 5 acres of land.
July 20, 2016
KEY CATALYSTS FOR OGI:
Capacity expansion - November 2016 & Mid-2017 - OrganiGram's current production
capacity on hand is 2,500 kg per year, which will increase to 3,500 kg with the completion of
four additional rooms, expected by November 2016. With proceeds from the recent
financing, the 2017 expansion will commence shortly and is expected to be completed by
mid-2017, adding up to an additional 10,000 kg per year.
Acceleration of oils - H2/16 - OrganiGram just received its oils sales license in June 2016,
which is an important milestone in broadening the company's product offering. Organic oils
could have a similar draw to patients as the dried bud products.
COMPANY OVERVIEW
OrganiGram is one of only a few certified organic LPs, and the only public LP on the East
Coast. It was the 14th company licensed by Health Canada. OrganiGram has its facility
located in Moncton, New Brunswick, has strong local ties through CEO Denis Arsenault, and
benefits from favourable labour and hydro costs. The company has focused on Atlantic
Canada and the veteran market, and has established and maintained strong brand
recognition since it began selling to patients. Evidence of veteran buying can be seen in the
company's high value patient base with average use of ~2g/patient, about double its peers.
OrganiGram was first publicly listed in August 2014 and is the 4th largest LP by market
capitalization and 4th largest by enterprise value. The company went public through an RTO
with Inform Exploration Corp. The company completed two concurrent financings and a
share consolidation in connection with the acquisition, and went public on August 25, 2014.
Figure 1 - OrganiGram Brand
Certified Organic by ECOCERT, stands out amongst LPs. The organic brand is one of
OrganiGram's key selling points, and has gained traction with patient groups. As one of the
only organic producers in Canada, OrganiGram uses an amended soil formulation with only
natural additives, and no synthetic nutrients, pesticides or herbicides of any kind. Although
we don't model any increase in revenue from the potential legalization, an organic offering
could resonate with and stand out to potential recreational users which would make
OrganiGram one of the few sources of supply for that new demand.
July 20, 2016
OrganiGram has a clear focus on Atlantic Canada and the veteran market. Veterans
generally purchase much higher than average daily amounts which is seen in OrganiGram's
high value patient base recording just under 2g/patient, which is more than double some of
its peers. Its patient acquisition strategy is centered on targeting particular health care
professionals through partnerships with clinics specializing in PTSD, AIDS, cancer, and
arthritis. OrganiGram distinguishes itself with its customer service and its bilingual call
centre (English and French), and saw an opportunity to target patients in Quebec (Canada's
2nd most populated province, but with only one LP). Strong local ties through CEO Denis
Arsenault has the support of the community, as well as the Province of New Brunswick
which recently announced it will award OrganiGram up to $990k in funding in the form of
wage subsidies to be paid out over the next three years as new positions are created.
Figure 2 - OGI Share Price Performance with Key Events Annotated
2.50
Price (CAD)
Volume (Thousands)
Completes first
harvest
First product
shipment
2.00
6,000
Reports industry's
second EBITDA+ Q
Announces $6.4MM in
equity and debt
Receives $2.5MM loan
from Farm Credit
financing
5,000
Announces $6MM
equity financing
1.50
4,000
Receives provincial
funding
1.00
Approval of 3 grow
rooms
Lists on
TSXV
0.50
7,000
3,000
Fed election
2,000
Organic certification
from ECOCERT
Receives oils
license
Announces $9MM
equity financing
1,000
0.00
0
Oct'14
Volume
Jan'15
Apr'15
OrganiGram Holdings Inc
Jul'15
Oct'15
Jan'16
Apr'16
Jul'16
We rate OGI as a Buy, Speculative Risk, with a $1.75 target price. We base our valuation on
a 5.0x EV/EBITDA multiple on our $33 MM FY2021E EBITDA. Our model only considers
flower and oil sales from its existing facility and expansion, and does not include recreational
legalization. On valuation the company trades at a misleading premium on EV/LSC at $132/g
(peers at $42/g) but should fall more in line with peers once OrganiGram's LSC increases
from 600 kg per year to what we believe could be 1,800 kg - 2,000 kg, which would reflect
higher value patients and the expected capacity expansion.
Patient enrollment reaching ~4,500 by Q1/17E. With the expected increase in LSC, the
completion of an additional 4 rooms in November and the expectation of a large expansion
ready by mid-2017, we model OrganiGram adding ~700 patients per quarter to reach 4,500
patients by Q1/17. The completed expansions should allow the company to accelerate
registration through 2017.
July 20, 2016
Sales price steady at $7.50/g for dried bud, $20.00/ for oil. For bud sold we assume a price
of $7.50/g, in line with the average price in the space of approximately $7.00/g. OrganiGram
sells 12 strains priced between $7.00/g and $11.00/g. Last quarter's average price was
$8.41/g. We model oil sales produced from trim product from plants grown. We assume
that only 50% of the excess non-flower plant material is used for extract production, a 10%
w/w yield, for final product that is sold at $20.00/g with a 40% gross margin. We estimate
recreational sales at $7.50/g and extracted product at $15.00/unit.
Strong revenue growth expected to accompany facility expansion. We model OrganiGram's
high value veteran patients' consumption rate at 1.5g/day as we anticipate increased
capacity will allow the company to ramp patient registration. OrganiGram recently reported
$1.4 MM in revenue last quarter, which has grown at an average QoQ rate of 45% for the
last two quarters.
COGS/g trending in the right direction. In FQ2 OrganiGram recorded gross margin of 70%
and COGS/g of $2.03, which is where the industry should be tracking towards in our view.
Excluding biological assets, the gross margin was 55% which implies a COGS/gram of $3.75.
We model COGS decreasing to $2.25/g (excluding biological assets) through mid-calendar
2017 as the company expects to grow more volume over the platform.
FACILITY AND ASSET DESCRIPTION - ORGANIGRAM'S MONCTON FACILITY
Figure 3 - OGI Facility and Asset Description
Organigram
Location
Moncton, NB
Facility Type
Indoor
Footage
30,000 sq ft
9 / 9 rooms, 11 / 11 pods
600 kg (current build 2,500 kg)
1,096 (current build 4,566)
Oils License:
Production and Sale
Security level:
Level 8 facility
Facility Ownership:
Wholly owned
At Maximum Capacity
27,397
Another 4 rooms (Nov 2016)
Another 30 rooms (Spring 2017)
July 20, 2016
ORGANIGRAM - Brand Awareness Right Out Of The Gate
Background - OrganiGram was formed in early 2013, imported ready-made grow and
vegetation rooms from the US, submitted its license application for the Moncton facility in
July 2013, received a license to sell in March 2014. OrganiGram was the 14th company to
receive a license from Health Canada.
Branding - Being one of the first three public LPs was advantageous for a company that
positioned itself differently right out of the gate for health-conscious patients. Many
patients, including those that have an affinity for OrganiGram, have weakened immune
systems and would be careful of what they ingest. The company has been a strong
proponent of vapourization, rather than smoking, as a safer way to deliver the drug.
Facility - The wholly owned 31,000 sq ft facility is located on a property that could hold
multiple production buildings all at the same address, preventing the full new application
review required by Health Canada if the company wanted to expand. The main facility holds
offices, a call centre, two vaults, and bottling / distribution. The company also owns a
building located right next door which will become the oil extraction and processing centre.
The current plans would be to connect the buildings for expansion that would add up to 30
rooms and could take the 2,500 kg capacity up to 15,000 kg. A small R&D lab functions for
internal controls.
Growing - The 31,000 sq ft facility holds 11 small pods and 9 bigger flowering rooms, grows
on stacks of three levels in its cultivation rooms, all in the same building. Modest
inconsistencies in growing seem to be behind the company with a new head grower on
board. Low cost power in Eastern Canada yields OrganiGram only paying $0.072/kWh vs.
$0.122/kWh in Ontario.
Figure 4 - OGI Facility Layout
July 20, 2016
PRODUCT OFFERING - Focused Offering From Large Genetic Bank
OrganiGram has 72 strains in its genetic bank but currently offers 12 strains. Eastern Canada
or coastal names like "Lighthouse" or "Rising Tides" are paired with 'street' names as
reference points for patients. From a pricing standpoint the company is in-line with the
industry average around ~$7.00/g. Most strains are high THC, and there are no exclusively
CBD strains, but some hybrid THC/CBD strains are offered. The company joins a select
number of peers with the recent receipt of an oils sales license, which allows the company
to be able to supply organic oils, complementing its existing product line.
Management and insiders own close to 15% of OGI. As of Feb 29, 2016 OrganiGram
reported $1.0 MM cash and $7.6 MM in debt. Subsequent to the quarter, the company
closed a $10.4 MM equity financing priced at $1.05.
model OrganiGram raising $30 MM over the next five years to grow its facility on its large
land package. We model all future financings at the current share price. We believe the
brand and a potential rec market line will be appealing to rec consumers.
Figure 5 - OGI Target
TSXV:OGI
EBITDA ($MM)
2021E
$33
Target Multiple
EV ($MM)
5.0x
$167
+ cash ($MM)
- debt ($MM)
$4.7
$11.9
-$7.0
Equity value ($MM)
$176
Current S/O (MM)
Warrants
Options
Convertible Debt
FD S/O (MM)
Target S/O (MM)
66.3
8.9
2.7
2.1
79.9
17.2
97.1
Target Price
Current price
Return to target
$1.75
1.16
51%
RISKS
Along with the risks outlined in the sector overview above, OrganiGram will need to execute
on its expansion and show that its early signs of positive EBITDA translate to long term
profitability. We see the OrganiGram brand transitioning well to the recreational market and
our estimates are contingent on the addition of extract product lines.
July 20, 2016
Management
Denis Arsenault, CEO - After graduation from the University of Moncton in 1983 with a B.Comm, Denis spent just over a year
working for Irving. Since 1985, Denis has built and sold 10 businesses in various industries and currently owns a portfolio of
commercial and multi-unit residential real estate. His vast knowledge in building successful businesses has helped him to
establish a strong management team and modern production facility that is ready to meet the challenges of this emerging
field while maximizing shareholder value.
Larry Rogers, Chief Operating Officer - Mr. Rogers was the CEO and co-founder of CLS Lexi-tech Ltd., Canada’s largest private
language service provider. He began his career in the information technology field, before going on to play a key role in the
creation and growth of Lexi-tech International Inc., first as Vice-President Operations then as President from 2001. Mr. Rogers
holds a Bachelor of Science Degree, with a major in computer science degree from the University of New Brunswick.
Ray Gracewood, Chief Commercial Officer - Mr. Gracewood has executive brand and marketing experience in Atlantic Canada
as the previous Senior Director of Sales and Marketing for Moosehead Breweries Ltd. He brings over 15 years' experience in
branding, packaging and positioning in North America, as well as in building and developing brands and segmentation
Peter R. Hanson, Chief Financial Officer (Interim) - Mr. Hanson joined OrganiGram Inc. in August 2014 and held the position of
Director of Finance & Administration prior to his recent appointment to Interim CFO. Mr. Hanson has 20 years' experience in
finance and administration primarily in the manufacturing and services sector. Mr. Hanson holds a Chartered Professional
Accountant designation and a Certified Human Resource Professional designation.
Board of Directors
Peter Amirault - Mr. Amirault is currently the President of BML Group Limited in Toronto, a holding company with interests in
real estate development and private investments. Previously, Mr. Amirault held varying executive roles including President of
Swiss Chalet North America, CEO of Creemore Springs Brewery Ltd, Senior VP of Molson Coors Canada, Managing Director of
Sleeman Brewing Ltd, along with senior roles at Nestle Canada and The Premium Beer Company of Toronto.
Dr. Kenneth Mitton - Dr. Mitton is a highly respected physician practicing in Moncton, New Brunswick. Dr. Mitton has
practiced medicine for over 29 years as a general practitioner. He also advises to a number of large corporations in New
Brunswick in respect of occupational health matters. Dr. Mitton has previously served as the Chief of Staff of the South-East
Regional Health Authority (now the Horizon Health Network).
Michel Bourque - Mr. Bourque brings more than 25 years of sales and marketing leadership experience in the pharmaceutical
industry, including the branded, generic, and branded/private label OTC sectors. He has successfully led teams in the specialty
medicine, hospital and retail key account areas driving profitable growth through strategic planning and the implementation
of innovative value-added programs.
Monique Imbeault - Mrs. Imbeault is currently CEO of General Financial Corporation Ltd., a holding company with a diverse
portfolio of investments. Prior to joining GFC, she was Counsel with McInnes Cooper. Mrs. Imbeault holds Boards seats on two
privately held companies, XL-ID Solutions Inc. and Resilia Inc. She is also Chair of the Board of the New Brunswick Health
Research Foundation and the Atlantic Institute of Neurosciences and a member of the Board of Directors of the CHU Dumont
Foundation.
Denis Arsenault - See above.
Larry Rogers - See above.
July 20, 2016
OrganiGram Holdings (OGI-T)
Rating
Risk*
BUY
Speculative
[email protected]
VALUATION DATA
Year-end August
P/E
P/CF
EV/EBITDA
EV/Sales
FCF Yield
OPERATING STATS
Year-end August
Bud Sales (kg)
COGS ($/g)
Oil Sales (kg)
Oil Gross Margin
FINANCIAL SUMMARY
Year-end August
Revenue (MM$)
Gross Profit (MM $)
Gross Margin
EBITDA (MM $)
EBITDA Margin
C$1.75
C$1.16
51%
2015A
---80.3x
--
2016E
-112.5x
116.8x
12.2x
--
2017E
42.0x
27.1x
20.4x
3.8x
--
2018E
17.2x
52.3x
9.2x
1.8x
--
2015A
119
7.50
4.53
----
2016E
845
7.50
2.92
8
20.00
40%
2017E
2,109
7.50
2.39
240
20.00
40%
2018E
4,119
7.50
2.25
548
20.00
40%
2015A
1.0
1.7
172%
(1.2)
--
2016E
6.5
4.1
63%
0.7
10%
2017E
20.6
12.7
62%
3.9
19%
2018E
45.0
21.1
47%
8.7
19%
Target Price
C$1.75
Upside
51%
ORGANIGRAM VALUATION (C$)
Method:
F2021E EV/EBITDA
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
8.0x
C$ Target
C$ Close
12-month return
$20
$1.00
$1.00
$1.25
$1.25
$1.25
$1.50
$1.50
$1.75
$1.75
$25
$1.25
$1.25
$1.50
$1.50
$1.75
$1.75
$2.00
$2.00
$2.25
F2021 EBITDA (C$MM)
$33
$1.50
$1.75
$1.75
$2.00
$2.25
$2.25
$2.50
$2.75
$2.75
$40
$1.75
$2.00
$2.25
$2.25
$2.50
$2.75
$3.00
$3.25
$3.50
$45
$2.00
$2.25
$2.50
$2.75
$3.00
$3.00
$3.25
$3.50
$3.75
Revenue ($MM)
$400
70%
$350
60%
$300
50%
$250
40%
$200
30%
$150
$100
20%
$50
10%
$0
0%
2015A
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Medical bud ($MM)
Medical oil ($MM)
Rec bud ($MM)
Rec extract ($MM)
Gross margin (%)
EBITDA margin (%)
2024E
Shares O/S (MM)
Year-end August
Assets:
Current Assets
PP & E
Total Assets
Liabilities:
Current Liabilities
Long-term Debt
Total Liabilities
Capital Stock
Retained Earnings
Year-end August
Total Revenue
COGS
Gross Profit
G&A
Sales & Marketing
Depreciation
EBITDA
EBIT
EBT
Taxes
Other
EPS (Reported) $/sh
Average Shares (MM)
Year-end August
Depreciation
Other
Operating Cash Flow
Other
Investing Cash Flow
Debt Issue
Debt Repayment
Other
Financing Cash Flow
Net Change in Cash
Cash Balance
Free Cash Flow
66.3
79.9
C$ 76.9
C$ 79.3
2015A
2016E
2017E
Q2/16
1.5
3.1
4.6
9.6
0.0
14.2
12.5
3.9
16.3
13.5
0.0
29.9
17.7
7.6
25.3
19.3
0.0
44.5
1.0
9.7
10.7
9.9
0.0
20.6
1.7
4.6
0.0
6.3
17.6
-9.7
7.9
2.2
7.2
0.0
9.3
30.6
-10.1
20.5
5.8
6.9
0.0
12.7
40.0
-8.1
31.9
2.1
7.3
0.0
9.4
21.1
-9.9
11.2
2015A
1.0
0.4
1.7
1.5
0.7
0.0
-1.2
-1.2
0.1
-1.3
0.0
0.0
-1.3
(0.02)
52.4
2016E
6.5
2.8
4.1
1.9
1.8
0.0
0.7
-0.1
0.4
-0.5
0.0
0.0
-0.5
(0.01)
57.9
2017E
20.6
7.9
12.7
5.8
3.4
0.0
3.9
3.1
0.5
2.6
0.7
0.0
1.9
0.03
69.9
2018E
45.0
24.0
21.1
8.8
4.0
0.0
8.7
7.9
0.5
7.4
2.0
0.0
5.4
0.07
80.4
2015A
(1.3)
0.4
(1.5)
(0.4)
(2.8)
-0.05
(7.5)
0.0
(7.5)
0.0
1.4
5.0
(0.2)
(0.2)
6.0
(4.3)
1.5
(10.3)
2016E
(0.4)
0.7
0.1
0.2
0.6
0.01
(4.7)
(0.0)
(4.7)
0.0
14.1
3.2
(0.3)
(2.0)
15.1
11.0
12.5
(4.1)
2017E
1.9
0.8
(0.1)
0.4
3.0
0.04
(6.5)
0.0
(6.5)
0.0
10.0
0.0
(0.3)
(1.0)
8.7
5.2
17.7
(3.5)
2018E
4.4
0.8
(3.8)
0.4
1.8
0.02
(11.5)
0.0
(11.5)
0.0
10.0
0.0
(1.3)
(1.0)
7.7
(2.0)
15.7
(9.7)
Supreme Pharmaceuticals Inc.
July 20, 2016
(SL-C: C$0.40)
[email protected]
Patience Pays Off For This Greenhouse Grower
SL-C
New
Rating:
BUY
Target:
$0.50
Risk:
Speculative
Projected Return:
25%
F2021 EBITDA (MM$)
$26
EV/EBITDA
1.9x
Company Data
Price (03/10/16):
$0.55
Cash (MM$):*
Debt (MM$):
Fiscal Year End
--$0.40
$0.10
$48.3
$49.6
$119.7
$159.0
57.0
$2.75
$4.00
-$0.85
June
* Dundee Estimate
2015A 2016E
Forecasts (May YE)
--COGS ($/g)
--Revenue (MM$)
--EBITDA (MM$)
(3.3)
(1.9)
EPS ($/sh)
-0.09 -0.04
OP CF (MM$)
(3.2)
(2.2)
CF/share ($/sh)
-0.05 -0.02
Capex (MM$)
(4.0)
(2.5)
FCF (MM$)
(7.3)
(4.7)
We are initiating coverage of Supreme Pharmaceuticals Inc. with a BUY rating,
and introducing a price target of C$0.50, based on 4.5x FY2021 estimated EBITDA,
implying a 25% return from yesterday's close of $0.40. The 4.0x is at the low end
of our peer group range of 4.0x - 8.0x, due to Supreme's higher operating risk
profile, which is at an earlier development stage versus the peer group.
Last
----
2017E
4.00
2.30
10.5
(0.0)
-0.01
0.3
0.00
(3.3)
(3.0)
Supreme is cultivating in one of the largest greenhouses faci lities that we know
of, pioneering a wholesale B2B approach supplying other LPs, and intends to
implement a co-branding strategy that could build brand value ahead of a
potential recreational market.
Investment Overview
•
Unique business model, 1st LP to focus exclusively on B2B. We believe some
of the applicants next in line will apply to be licensed for only part, not all, of
the value chain unlike their vertically integrated incumbents; we see some of
the smaller LPs already starting this, and believe that this would be a sign of
the industry advancing. Dedicated suppliers could be required for focused
retail-only producers to emerge. Supreme's wholly owned license holder,
recently rebranded as '7ACRES', may fill that niche. Some of today's LPs may
require lower cost greenhouse product to supplement higher cost indoor
product, or additional capacity to satisfy growth in demand.
•
The business model has potential to provide healthy margins in part by
avoiding the setup of patient-focused sales infrastructure. As we start to
see other LPs engage in wholesale transactions, we model 7ACRES'
exclusively B2B model yielding gross margins ~50%, similar to other whole
transactions, by bypassing some compliance, packaging, and patient service
costs. 7ACRES won't initially bring on its own patients. In May 2016 it secured
multiple supply agreements with five (5) LPs for sale of more than 250 kg of
dried marijuana and 70 kg of trim later this year, representing almost all of
management's anticipated 2016 production. Agreements will be renewable
for successive one year periods unless terminated according to terms.
•
Growing in a seven acre hybrid greenhouse, low cost high volume. The
platform combines the best practices of “indoor” cultivation with the cost
structure of a greenhouse. Its modular design allows for partitioning between
focused grows, reducing the risk of crop loss. At full capacity, management
expects one hundred 3,000 sq ft grow rooms, and to grow 50,000 kg.
•
Timing set up well for rec market, 7ACRES intends to co-brand B2B sales to
build brand value. B2B sales through multiple brands over the next two years
plan to be leveraged into initial rec sales. Branded & white label offerings
could increase penetration. If legalization doesn't occur, 7ACRES could still
function well as a wholesale supplier in a medical-only market to LPs.
SL-C: Price/Volume Chart
Supreme Pharmaceuticals Inc. (SPRWF-US)
Volume (Millions)
Price (CAD)
Volume
0.6
0.5
0.4
0.3
0.2
1
0
0
0.1
0
Oct-14
Apr-15
Oct-15
Apr-16
Source: Factset
Company Description
Supreme Pharmaceuticals Inc. is a medical
marijuana company based in Kincardine, ON.
Its wholly owned license holder is 7ACRES,
Health Canada's 30th licensed producer (LP).
July 20, 2016
KEY CATALYSTS FOR SL:
First crop deliveries to LP customers - Q4/16 - 7ACRES received its dried bud production
license in March 2016 and began planting immediately; flowering commenced four weeks
later. Although its technology is relatively up to date, the greenhouse has not grown
anything there in 20 years. The first successful crop deliveries, and subsequent (positive)
customer feedback, would be major derisking events for the business.
Capacity expansion approval (Phase I) - Q4/16 or Q1/17 - 7ACRES currently operates in
40,000 sq ft of production area where management estimates ~1,200 kg of annualized
production. The company anticipates adding another 80,000 sq ft of production area,
referred to as 'Phase I', which would bring annualized capacity up to 10,000 kg. We model an
equity financing to support this capex project. Construction broke ground in May 2016,
management expects Health Canada approval in late 2016, and first crops are expected to
be ready for sale in late Q1/17 or early Q2/17. This is a key catalyst as the company intends
to roll over contracts and prepare for greater customer demand.
COMPANY OVERVIEW
Although some LPs have engaged in wholesale transactions and transfer of genetics over the
course of MMPR, 7ACRES is the only LP that plans to exclusively focus on the B2B market. It
was the 30th company licensed by Health Canada. 7ACRES' facility is located in Kincardine,
Ontario, has strong community ties and support, benefiting from growing in a low cost
greenhouse with access to power being situated in the Bruce Energy Centre. Since only
recently licensed, the company does not have a large number of institutional investors, but
support for the stock comes from the retail investor community since SL had been public
even before the nearly two year wait time as an applicant. In May 2014, SL purchased the
greenhouse for $4.5 MM ($1.0 MM in cash, $3.5 MM in a vendor mortgage). Since then, the
company has invested over $5.0 MM in capex retrofitting the currently operating 40,000 sq
ft for cannabis production. SL is the 6th largest public LP by market capitalization and 6th
largest by enterprise value.
Figure 1 - 7ACRES Brand
July 20, 2016
Figure 2 - Benefits of B2B vs. Retail LPs
Client acquisition cost
Client retention cost
Churn rate
Regulatory cost
Regulatory change risk
Incremental client revenue
Retail
High
High
Medium
High
Medium
Low
B2B
Low
Low
Low
Low
Low
High
Source: Company presentation, Dundee Capital Markets
Management plans to co-brand B2B sales to build brand value. B2B sales through multiple
brands over the next two years plan to be leveraged into initial recreational sales when it
should occur. In the case that recreational legalization does not occur, we still see a scenario
where 7ACRES could function well as a wholesale supplier in a medical only market to LPs
that encounter timing or supply issues.
Alternative business models including “room rentals” and custom contract cultivation
could be value added services to other LPs, and may attract enrollment of more patients.
While first mover larger LPs have clear advantages in patient recruitment, physician
relationships, and production experience, smaller LPs initially curtail patient enrollment for
fear of being unable to service customers. However, if these smaller players were able to
have inventory ready sooner, patients would be more incentivized to enroll in the MMPR
knowing reliable supply is available, in our view.
'White-labelled' product may allow new brands and companies to enter the market,
providing 7ACRES with broader reach. Branded & white label offerings could help increase
market penetration. Although we don't model any increase in revenue from the potential
legalization, a white labelled offering could allow more companies and brands to participate
giving potential recreational users a broader offering to choose from.
Figure 3 - SL Share Price Performance with Key Events Annotated
0.70
Price (CAD)
Volume (Thousands)
Shares for debt
transaction
0.60
Pre-license
Announces
License to cultivate
building upgrades
pre-license
inspection date
granted
1:5 share
consolidation
0.50
appointed
President
0.40
0.00
800
600
400
Partnership with
Dinafem Seeds
0.20
Moves to
CSE from
TSXV
Jul'14
Volume
Signs LOI to
acquire
greenhouse
Announces
$5MM
financing
Oct'14
Jan'15
First
genetics
sale
Secures supply
agreements
Apr'15
1,000
Liberals win
majority in Fed
election
$1.5MM conv deb
financing
0.30
0.10
Closes $3.6MM
equity financing
John Fowler
1,200
Jul'15
Oct'15
Jan'16
Apr'16
200
0
Jul'16
July 20, 2016
We rate SL as a Buy, Speculative Risk, with a $0.50 target price. We base our valuation on a
4.5x EV/EBITDA multiple on our $26 MM FY2021E EBITDA. Our model only considers flower
and trim sales from its existing infrastructure and Phase I expansion, and does not include
recreational legalization. If the first sales license is ~500 kg, at its current EV the company
would trade at an undeserved premium on EV/LSC at $100/g (peers at $42/g) but should fall
more in line with peers once Supreme becomes fully licensed.
Ramping towards sales of 2,500 kg per quarter by mid-2017E, with Phase I expansion
expected to be approved in late-2016 or early-2017. We model 7ACRES' first contracted
deliveries falling in calendar Q4/16 for sales of 225 kg of dried bud and 50 kg of trim for
revenue of ~$1.0 MM. Management anticipates first sales from the Phase I expansion to fall
in Q2/17 increasing the quarterly sales run rate nearly 10-fold. As such we model dried bud
sales of 2,250 kg and 500 kg of trim per quarter.
Sales price steady at $4.00/g for dried bud, $1.50/g for trim. For bud sold we assume a
price of $4.00/g, in line with the average wholesale price seen in the space so far. We model
trim sales produced from plants grown. The greenhouse is capable of growing very large
plants so we assume that ~60% of the excess non-flower plant material is sold to LP
customers, a 50% gross margin. We estimate recreational sales at $7.50/g and recreational
trim at $1.50/g.
Revenue largely contingent on smooth integration of Phase I expansion, and of course on
timely delivery of contracted product. 7ACRES won't initially bring on its own patients, as it
already secured multiple supply agreements with six (6) LPs for the sale of more than 250 kg
of dried marijuana and 70 kg of trim later this year. This amount represents almost all of
management's anticipated 2016 production. The agreements will be renewable for
successive one year periods unless terminated according to terms. The Phase I expansion is
key to our revenue estimates. In June 2016, the company generated its first revenue from a
sale of genetics by providing an LP with 6 strains for production and future sale to the LP's
registered clients.
COGS/g estimated at $2.50/g then decreasing to $2.25/g with Phase I coming online.
7ACRES does not have any revenue history other than the recent genetics sale, so we
initially model gross margins of 37.5%, increasing to 44%. Further decrease in COGS/g may
be achievable as other LPs are tracking towards <$2.00/g.
July 20, 2016
FACILITY AND ASSET DESCRIPTION - 7ACRES' KINCARDINE FACILITY
Figure 4 - SL Facility and Asset Description
Supreme (7ACRES)
Location
Kincardine, ON
Facility Type
Hybrid Greenhouse
Footage
16,500 sq ft
100%
Cultivation only
N/A
Oils License:
N/A
Security level:
Level 9 vault
Facility Ownership:
Wholly owned
At Maximum Capacity
N/A
Phase I (Q4/16 or Q1/17)
SUPREME (7ACRES) - Patience Pays Off
Background - 7ACRES was started in 2012, and used to be known as AMMCan (Advanced
Medical Marijuana Canada; it is listed as such on Health Canada's LP website). SL had been
public even before 7ACRES' nearly two year wait time as an applicant. Supreme
Pharmaceuticals used to be known as Supreme Resources until a name change was
proposed in January 2014 as the company explored opportunities in the medical marijuana
sector. In May 2014, SL purchased 7ACRES' greenhouse for $4.5 MM ($1.0 MM in cash +
$3.5 MM in a vendor mortgage). In July 2014, the company split the stock 1:5 to reduce the
share count. Since then, the company has invested over $5.0 MM in capex retrofitting the
currently operating 40,000 sq ft for cannabis production. 7ACRES was the 30th license
granted by Health Canada when the company received a license to cultivate in March 2016.
Branding - AMMCan was rebranded as 7ACRES in May 2016. As discussed above, branding
will be important for this company, as well as for the industry in general. Management plans
to spread the brand through a number of initiatives including co-branding B2B sales, white
label offerings, and greenhouse grown product. Alternative business models including
“room rentals” and custom contract cultivation could also be value added services with
opportunities to build brand value.
Facility - 7ACRES' hybrid greenhouse aims to combine the best practices of indoor
cultivation, such as HVAC, CO2 enrichment, direct injected fertigation and intensive
July 20, 2016
sanitation procedures with all the benefits of free, natural sunlight. The 340,000 sq ft facility
will recycle its water, has installed a new state-of-the-art composter and security, as well as
record keeping and climate control systems. Management believe that at 100% capacity
utilization, the greenhouse could produce 50,000 kg annually. Pictures of the facility can be
found on the company's website here.
Growing - Growing has started with six strains acquired from other LPs, but the company
intends to develop a number of its own strains after entering into a strategic partnership
agreement with Dinafem, a well-known manufacturer of cannabis seeds. 7ACRES may opt to
have as many as 12-16 strains in the future to grow in its sun-lit greenhouse.
Figure 5 - Arial View of SL's Hybrid Greenhouse (#'s indicate capex phases)
Management and insiders own ~12% of SL. As of Mar 31, 2016 Supreme reported $2.8 MM
cash and $4.0 MM in debt ($3.5 MM of which is a mortgage). Subsequent to the quarter, the
company closed a $3.6 MM equity deal priced at $0.40 with a full warrant exercisable at
$0.50 for three years post closing.
model Supreme raising $30 MM over the next four years to expand capacity of its entire
greenhouse. We model all future financings at the current share price.
July 20, 2016
Figure 6 - SL Target
CSE:SL
EBITDA ($MM)
2021E
$26
Target Multiple
EV ($MM)
4.5x
$117
+ cash ($MM)
- debt ($MM)
$3.3
$12.8
-$7.0
Equity value ($MM)
$126
Current S/O (MM)
Warrants
Options
Convertible Debt
FD S/O (MM)
Target S/O (MM)
119.7
28.8
7.4
3.1
159.0
89.2
248.3
Target Price
Current price
Return to target
$0.50
$0.40
25%
RISKS
Along with the risks outlined in the sector overview above, 7ACRES' growing platform and
business model are largely unproven. 7ACRES will need to execute on its expansion or risk its
wholesale market strategy falling on the shoulders of other producers. We see the brand
transitioning well to the recreational market and our estimates are contingent on a large
proportion of sales to the rec market. 7ACRES won't initially bring on its own patients. In
May 2016 it secured multiple supply agreements with five (5) LPs for sale more than 250 kg
of dried marijuana and 70 kg of trim later this year, representing almost all of management's
anticipated 2016 production. Agreements will be renewable for successive one year periods
unless terminated according to terms. Revenue estimates may miss expectations if customer
acquisition and contract roll over are less than expected.
Management
John Fowler, President and CEO - Mr. Fowler began working in the medical marijuana sector over ten years ago. He pursued a
career in law to assist medical marijuana patients with legal challenges relating to access, employment and tenancies. Mr.
Fowler assisted with R v. Mernagh at the Ontario Court of Appeal in 2013. Mr. Fowler is committed to providing Canadians
access to high-quality, low-cost medical marijuana and working with the medical community to improve physician education
and support for medical marijuana.
Nav Dhaliwal, CFO - Mr. Dhaliwal previously served as CFO at Cloud Dynamics Inc. and VP of Business Development for
Ontario region at P2 Solar. He served as a Senior Associate at Trivandrum Capital, where he focused on investment in clean
technology start-ups, and began his business career as a chartered account with KPMG.
Peter Herburger, Director of Operations - Mr. Herburger works closely with Health Canada, contractors and the local
community as Director of Operations. He brings experience managing operations and maintenance of local construction
projects, and initiated the development of the greenhouse facility in Kincardine, Ontario.
July 20, 2016
Board of Directors
Michael La Brier, Chairman - Mr. La Brier brings a wealth of experience in the real estate sector having served as President of
Canderel Stoneridge-Toronto at Canderel Management Inc. since 1996, and Principal of Canderel-Stoneridge Equity Group Inc.
He also served as Independent Trustee of Primaris Retail Real Estate Investment Trust (formerly Borealis Retail Real Estate
Investment Trust) from 2003-2007.
Scott Walters - Mr. Walters is CEO of MoreCo, and brings experience in finance and banking having worked at a number of
investment dealers and previously serving as Managing Partner of Max Capital Markets Ltd., and DeltaOne Asset
Management. He has broad experience in the Canadian and US cannabis industries having co-founded a chain of specialized
cannabis clinics in Canada.
John Fowler - See above.
Nav Dhaliwal - See above.
July 20, 2016
Supreme Pharmaceuticals Inc. (SL-CA)
Rating
Risk*
BUY
Speculative
[email protected]
VALUATION DATA
Year-end June
P/E
P/CF
EV/EBITDA
EV/Sales
FCF Yield
OPERATING STATS
Year-end June
Bud Sales (kg)
COGS ($/g)
Trim Sales (kg)
Trim Gross Margin
FINANCIAL SUMMARY
Year-end June
Revenue (MM$)
Gross Profit (MM $)
Gross Margin
EBITDA (MM $)
EBITDA Margin
C$ Target
C$ Close
12-month return
C$0.50
C$0.40
25%
2015A
------
2016E
------
2017E
-166.2x
-4.7x
--
2018E
12.7x
12.9x
7.9x
1.8x
--
2015A
0
------
2016E
0
------
2017E
2,375
4.00
2.30
633
1.50
50%
2018E
6,000
4.00
2.18
2,000
1.50
50%
2015A
---(3.3)
--
2016E
---(1.9)
--
2017E
10.5
4.5
43%
(0.0)
--
2018E
28.0
13.7
49%
6.3
23%
Target Price
C$0.50
Upside
25%
Shares O/S (MM)
Year-end June
Assets:
Current Assets
PP & E
Total Assets
Liabilities:
Current Liabilities
Long-term Debt
Total Liabilities
Capital Stock
Retained Earnings
Year-end June
Total Revenue
COGS
Gross Profit
G&A
Sales & Marketing
Depreciation
EBITDA
EBIT
EBT
Taxes
Other
EPS (Reported) $/sh
Average Shares (MM)
SUPREME VALUATION (C$)
F2021E EV/EBITDA
3.5x
4.0x
4.5x
5.0x
5.5x
6.0x
6.5x
7.0x
7.5x
$15
$0.25
$0.30
$0.30
$0.35
$0.35
$0.40
$0.45
$0.45
$0.50
$20
$0.30
$0.35
$0.40
$0.45
$0.50
$0.50
$0.55
$0.60
$0.65
F2021 EBITDA (C$MM)
$25
$0.40
$0.45
$0.50
$0.55
$0.60
$0.65
$0.70
$0.75
$0.80
$30
$0.45
$0.50
$0.60
$0.65
$0.70
$0.75
$0.80
$0.90
$0.95
$35
$0.55
$0.60
$0.65
$0.75
$0.80
$0.90
$0.95
$1.00
$1.10
Year-end June
60%
$250
50%
40%
$200
30%
$150
20%
$100
10%
$50
0%
$0
-10%
2015A
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Medical bud ($MM)
Medical trim ($MM)
Rec bud ($MM)
Rec trim ($MM)
Gross margin (%)
EBITDA margin (%)
2024E
Margin (%)
Revenue ($MM)
$300
Depreciation
Other
Operating Cash Flow
Other
Investing Cash Flow
Debt Issue
Debt Repayment
Other
Financing Cash Flow
Net Change in Cash
Cash Balance
Free Cash Flow
119.7
159.0
C$ 48.3
C$ 49.6
2015A
2016E
2017E
Q3/16
0.6
0.5
1.1
8.9
8.4
18.4
3.3
0.6
3.9
11.3
8.4
23.6
6.4
8.5
15.0
14.2
8.4
37.5
2.8
0.4
3.1
9.4
8.4
21.0
4.0
0.0
0.8
4.8
30.0
-16.4
13.6
4.3
0.0
0.5
4.8
39.2
-20.4
18.8
13.5
0.0
0.5
14.0
45.5
-22.0
23.5
4.0
0.0
0.5
4.5
35.9
-19.5
16.4
2015A
---0.3
0.6
0.0
(3.3)
(5.5)
0.0
-5.5
0.0
-0.3
-5.8
-0.09
67.6
2016E
---0.3
0.2
0.2
(1.9)
(3.7)
0.4
-4.1
0.0
0.0
-4.1
-0.04
96.1
2017E
10.5
5.9
4.5
1.1
0.6
0.4
(0.0)
(0.6)
0.4
-1.0
0.5
-1.1
-1.6
-0.01
112.8
2018E
28.0
14.3
13.7
1.8
0.8
0.4
6.3
5.7
0.4
5.3
0.9
-1.9
4.4
0.03
137.6
2015A
(5.8)
0.0
(0.4)
3.0
(3.2)
-0.05
(4.0)
(0.1)
(4.0)
0.0
5.2
0.0
0.0
1.5
6.7
(0.6)
0.6
(7.3)
2016E
(4.0)
0.2
(0.3)
1.9
(2.2)
-0.02
(2.5)
(0.0)
(2.5)
0.0
4.3
3.2
0.4
(0.4)
7.5
2.8
3.3
(4.7)
2017E
(1.6)
0.4
0.8
0.6
0.3
0.00
(3.3)
0.0
(3.3)
0.0
6.7
0.0
0.0
(0.7)
6.1
3.1
6.4
(3.0)
2018E
4.4
0.4
(1.1)
0.6
4.3
0.03
(10.0)
0.0
(10.0)
0.0
10.0
0.0
0.0
(1.5)
8.5
2.8
7.4
(5.7)
July 20, 2016
APPENDIX - MEDICAL MARIJUANA SECTOR OVERVIEW AND BACKGROUND
We estimate a $3.0B MMJ
market and a $3.0B $5.0B recreational market
Health Canada estimates the MMJ market in Canada can grow from 40,000 patients in 2014
to 450,000 patients by 2024 with $1.3B in annual sales; we believe these estimates are
conservative and don't encompass the whole picture. We estimate the Canadian MMJ
space approaches $3.0B in annual sales in 2024 alongside a recreational market of $3.0B $5.0B that same year, for a combined total of nearly $8.0B in retail sales, with further
upside coming from increased tourism and international expansion or trade.
What's happened up until this point?
It is illegal to produce or possess marijuana for recreational purposes, even in very small
quantities. It is criminalized and is still not an approved drug or medicine in Canada.
Production of dried marijuana falls under the FDA (Food and Drugs Act) and the CDSA
(Controlled Drugs and Substances Act). Canadians were first granted authorization to
possess marijuana for medical purposes in 1999 under the Marijuana Medical Access
Program (MMAP). The Marijuana Medical Access Regulations (MMAR) was established in
2001 to allow qualified patients to possess MMJ with the support of a medical practitioner,
in part due to the lack of legal sources. A number of amendments were made to the
MMAR over the next ten years altering the supply and distribution arrangements that
aimed to provide reasonable access to legal supply. A few key court cases led to the federal
government and Health Canada reconstructing the program into the Marijuana for Medical
Purposes Regulations (MMPR) which officially began on April 1, 2014.
Canada's MMJ program
technically started in
2001, but the MMPR
started April 1, 2014
Figure A1 - Evolution of MMJ Regulations and Key Events in Canada
1996
1999
2000
2001
2002
2003
2004
2005
2009
2010
2011
Apr 2014
Jun 2014
Sep 2014
Nov 2014
Feb 2015
Mar 2015
Jun 2015
Jun 2015
Jun 2015
Sept 2015
Oct 2015
Dec 2015
Feb 2016
Apr 2016
May 2016
Controlled Drugs and Substances Act enacted
First Marihuana Medical Access Program established
R. v. Parker - Paves the way for more formal regulations
Marihuana Medical Access Regulations (MMAR) born out of R. v. Parker
Jean Chrétien introduced a bill that would have decriminalized possession (15g or less)
First major revision of MMAR
Paul Martin introduced an almost identical bill to Chrétien's (the bill failed to pass)
Second major revision of MMAR
Third major revision of MMAR
Fourth major revision of MMAR
New regulations proposed, leading to the birth of MMPR
MMPR takes full effect, and MMAR is removed (court injunction remains)
MMPR amendment requiring more stringent data tracking and reporting
College of Family Physicians of Canada provides preliminary prescribing guidance
Health Canada issues advertising warning to LPs
R. v. Smith, and R. v. Allard court cases begin
Ontario patient granted insurance coverage for MMJ
Vancouver city council votes in favour of regulating dispensaries
R. v. Smith - Supreme Court decides patients should be allowed access to non-dried forms
Health Canada issues section 56 exemption to allow the production of cannabis oils
Health Canada fires warning shot to 13 illegal dispensaries
Liberals win a majority government
First cannabis oil sales begin
R. v. Allard - Federal Court declares MMPR unconstitutional, gives Health Canada 6 months
Health Minister announces at UN General Assembly legislation to be introduced in Spring 2017
City wide dispensary raids in Toronto
July 20, 2016
MMPR was created to address safety and security concerns with the MMAR
By December 2013,
MMAR had grown to
37,884 individuals, from
477 in 2002
There were 3 ways to access medical marijuana under MMAR, but there's only 1 way
under MMPR (a prescription from your doctor). Under MMAR, authorized persons/patients
could obtain product by:
1) Producing your own - under a Personal Use Production License (PUPL);
2) Designating a grower - under a Designated Person Production License (DPPL);
3) Purchasing from Health Canada - which contracted a private company called Prairie Plant
Systems Inc.
Under MMAR, as of December 31, 2013, 67% of patients produced their own, 11%
designated someone else to do it, and 22% purchased through Health Canada. The current
system, the MMPR, started on April 1, 2014.
MMPR was the solution to
mounting concerns
regarding administration,
safety, and diversion
Safety and security concerns, and the administrative burden on Health Canada, led to the
creation of the MMPR. The MMAR program grew from 477 individuals in 2002 to 37,884 by
Dec 2013. Since the vast majority of qualified patients produced marijuana under PUPLs and
DPPLs within private residences, concerns of public health, safety, and security were raised.
Major concerns raised by Health Canada, municipalities, and first responders such as police
and fire officials included abuse of the allotted licenses, exposure to chemicals and
electrical hazards, and most obviously, diversion. Patient complaints were also raised
regarding the limited number of strains offered and the long application processing times.
The combination of the growing administration costs incurred by Health Canada and the
concerns raised above forced the regulator to find a new solution - the MMPR.
The MMPR created a licensing scheme essentially privatizing the commercial production of
MMJ to a number of companies, rather than have people grow on their own. The MMPR
provided a structured and regulated guideline for LPs, reduced role and costs of
administering the program for Health Canada, increased choice of strains and suppliers for
patients, and reduced safety concerns for personal growers and law enforcement.
Figure A2 - Key Differences Between MMAR and MMPR
One MMPR-related court
case has been settled (R v
Smith), and another is
pending for August 2016
Supply:
Quality standards
Sanitation standards
Packaging/transport standards
Security procedures
Affordable pricing
Products - flower (bud)
Products - oils, extracts, etc.
Patient:
Health Canada application
Variety of supply sources
Doctor consult
Home/personal growing
Routes of access
Health Canada:
Supply from HC
Oversight for every LP
MMAR
MMPR
Court Case
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Some
Yes
No
R. v. Smith Revision to MMPR: allow LPs to sell oils (June 2015)
Yes
Yes
Yes
Yes
Various
Yes
No
Outcome
No
Yes
Yes
R. v. Allard Revision to MMPR: TBD (expected August 2016)
No
LPs only R. v. Allard Revision to MMPR: TBD (expected August 2016)
No
Yes
July 20, 2016
We expect home grow in revision to MMPR (August 2016) with little impact to LPs
We expect the revision to
MMPR to include some
form of limited home
grow
Back in March 2014, just before MMPR came into effect, an injunction was granted to
some patients who did not want to be forced to purchase from LPs. BC lawyer John Conroy
and his clients (Allard et. al.) argued that the MMPR would cause patients who cannot afford
black market or LP prices to choose between their liberty (being arrested) and health (access
to medicine). They were granted an injunction on March 21, 2014, and patients with PUPL
and DPPL licenses under MMAR (78% at the time, or ~30,000 patients) continued growing
their own while the constitutional challenge was heard.
Flash forward to February 24, 2016 when the Federal Court of Canada ruled in favour of
Conroy and Allard et. al., and gave Health Canada six months to revise the MMPR. The
release can be found here, and the decision document here. This was about the rights of
patients, not striking down regulation, since it’s not the role of the court to impose
regulations. The MMPR continues to operate as status quo, since the court also ruled
“striking down the MMPR merely leaves a legislative gap where possession of marihuana
continues as a criminal offence.”
The NEW MMPR will likely have a home grow plant count limit (~6 plants) with some
location restrictions and licensing-like or registration process. Other jurisdictions have used
a limit of 6 (mature) plants as a standard and most of all there needs to be some way to limit
production to prevent diversion to the black market. The cost of enforcement and
compliance could become costly quickly and Health Canada does not want to hire hundreds
of more inspectors. Marijuana enforcement currently costs the government $2.3B per year.
Acquiring a home grow license or permit is likely to be a stringent process that may include
an application fee, limit growing to residential addresses (often large industrial buildings
were used for unnecessarily large MMAR grows) and require registering with local
authorities or fire inspectors (to avoid licensing those with a criminal history, and to
coordinate safety). Reliable and safe sources for acquiring genetics will also need to be
addressed.
Figure A3 - Personal Medical Possession Limits in Select US States (by # of plants)
25
Possession Limit
(# of plants)
6 plants for personal
production has been a
precedent seen in other
MMJ programs
1998 1996 2004 2007 1998 2000 2004 1998 2010 2008 2000 2006 2000 1999
25
20
20
15
15
10
10
5
5
0
0
Mature
Immature
Year Medical Possession Law Was Passed
Source: ProCon.org, Dundee Capital Markets
We expect no material
exodus from the MMPR,
as home growers will
likely be only a drop in the
bucket compared to the
target audience
We may receive insight to
what rec might look like
when the revision to
MMPR is made
July 20, 2016
No material exodus is expected from MMPR as most of the home growers are likely
operating under MMAR or doing so illegally. We believe homebrewers of beer and wine
represent the most logical precedent. According to the National Institute on Alcohol Abuse
and Alcoholism (NIH), 70.7% of Americans over the age of 18 drank in the past year or 166
MM people. The American Homebrewers Association estimates there are 1.2 MM
homebrewers in the US equating to 0.7% of alcohol consumers. Combining a recent CBC
survey that found 20% of Canadians used marijuana in the last year, with the same 0.7% as
the homebrewers estimate, would equate to less than 50,000 home growers in Canada.
Meanwhile, we estimate the MMPR will have enrolled nearly 100,000 patients by the
beginning of 2017. In our view, home brewing is easier and cheaper to maintain (depending
on size) than a marijuana grow-op (even on a small scale), and more people like the idea of
home growing than those who actually know how to do it.
Access is a topic of contention so we might see pharmacies included in the new MMPR,
other revisions are possible but may be left for what the Liberals table in Spring 2017. We
may get some indication of how distribution unfolds if pharmacies are allowed to be access
points for medical retail (not yet recreational), to be discussed in further detail later in this
report. Other topics we may see discussed in August's revision include: offering wage
subsidies to low income Canadians, new insurance coverage, license application or
maintenance fees for the costs of inspections of current LPs, and the elimination of HST
from MMJ.
The MMPR is becoming an international standard for MMJ regulation
Many countries around
the world are paying
attention to the high
standard Canada has set
The industry in Canada has had its share of bumps but many people fail to realize the
Canadian MMJ program is becoming an international standard due to strict guidelines for
production, security, and education. The application and licensing fervor has calmed down,
most of the right companies are getting financed, operational efficiencies at the LP level are
being realized, both patients and physicians are more knowledgeable of the system, and
international partnerships are already being signed.
Early issues with the program have been solved or are making progress. Product quality
issues or recalls have not happened since early 2015, product supply by LPs for patients is
more consistent, and public company transparency is more consistent. Many applicants
were up in arms from waiting for licenses but in our view Health Canada desired a fewer
number of larger capacity producers as opposed to many small producers in order to focus
the attention on those that successfully crossed the line. Transparency on the licensing
process has been better but the standards kept getting raised - it appears Health Canada
was learning through this process as much as those whom it licensed. Patient and physician
education has improved with specialist cannabis clinics and guidance documents from
organizations such as the College of Family Physicians of Canada, although later on the
College had to clarify that kickbacks are not allowed to physicians. In late 2014, Health
Canada warned LPs against advertising according to guidelines in the MMPR, the Narcotic
Control Regulations (NCR), and the Food and Drugs Act (FDA) suggesting that information
disclosed by LPs avoid health claims or promotion of their products.
July 20, 2016
Judicious selection of LPs early on, acceleration of patient enrollment, and greater
participation from physicians illustrate the forward momentum of the program. As of
January 2014, 400 LP applications had been submitted to Health Canada, 700 by April, 900
by July, and over 1,000 by September 2014. In the first full year of the MMPR ~1,500
applications were submitted but by Q1/15 only ~20 licenses were granted. As of June 2016,
there were 416 applications in the queue and 20 applications submitted each month. There
are 33 flower licenses and 22 oil licenses granted as of this published date.
LP inventories are
increasing, showing
better production and
yields
Inventories have been increasing in lock-step with patient enrollment. Health Canada
tracks and discloses industry data on its website that shows steady increases in the amount
of dried marijuana produced and sold, but much more rapid increases in inventory with a
relatively lower number of licenses. Data release is usually delayed 3-4 months after quarter
end. We view this inventory trend positively in that the LPs are becoming more efficient in
increasing yield, crop turns, and inventory available.
Figure A4 - Sales Steadily Increasing While LPs Build Inventory
11,000
35
30
9,000
Dried Marijuana (kg)
8,000
25
7,000
20
6,000
5,000
15
4,000
10
3,000
2,000
5
1,000
0
Dried Flower Licenses Granted (#)
10,000
0
Q2/14
Q3/14
Licenses Granted
Q4/14
Q1/15
Amount sold (kg)
Q2/15
Q3/15
Amount produced (kg)
Q4/15
Q1/16
Inventory at Q-end (kg)
The MMPR has enrolled
5,000 new patients per
month in Q2/16
As for patients, approximately 5,000 patients started in the MMPR in April 2014, and now
the program has enrolled more than that in each of the last few months putting the
program on pace to exceed 100,000 registered by mid-Q1/17. The LP industry association
(Cannabis Canada Association, aka CCA) reported that in each of December 2014, January
2015, and February 2015 ~900 physicians wrote a prescription, but for March 2015 that
number jumped almost 40% MoM to ~1,300, which may explain the inflection point in
enrollment in early 2015. Furthermore, the first cannabis oil licenses were granted in Q3/15
providing an alternative method of administering medical cannabis for physicians that
would prescribe it but don’t feel comfortable having their patients smoke. Though there has
been some controversy in the cost of reimbursement for veterans, this patient population is
important to LPs for consumption because the group generally consumes a much greater
than average daily amount. However, in our view more focus should be placed on the
opioid-sparing ability of MMJ as the dangers of prescription drugs that veterans and other
patients rely upon for the cessation of pain, for example, are often under-highlighted as
much as these drugs are overprescribed. Greater product supply of both flower and oil, and
physician education can be attributed to the inflection point in late 2015 and early 2016.
July 20, 2016
Figure A5 - MMPR Patient Enrollment Accelerating in 2016
80,000
75,000
70,000
65,000
Medical Marijuana Patients(#)
60,000
55,000
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
PATIENT ENROLLMENT IS ON PACE TO FAR EXCEED HEALTH CANADA'S ESTIMATE
The MMPR would need to
only enroll ~4,200 new
patients per month, on a
straight line basis, for the
next eight years to meet
HC's 450,000 estimate by
2024
Health Canada's estimate was in part based on a 2011 population-level survey of Canadians
aged 15 years and over who indicated they use marijuana for medical purposes; a figure at
that time was 420,000 people. Health Canada assumed a growth rate to get to 450,000 in
ten years (from 2014 - 2024) building off a base of ~40,000 registered patients.
The MMPR would need to only enroll ~4,200 new patients per month, on a straight line
basis, for the next eight years to meet Health Canada's estimate of 450,000 by 2024. In
fact, the MMPR has enrolled over 5,000 new patients per month in Q2/16, and should
exceed Health Canada's estimate by August or September 2016.
Figure A6 - MMPR Patient Enrollment Should Soon Exceed Health Canada's Estimates
Patient enrollment is on
pace to exceed Health
Canada's estimate
80,000
80,000
75,000
75,000
70,000
70,000
65,000
65,000
64,907
60,000
55,000
60,000
55,000
50,000
50,000
50,954
45,000
45,000
40,000
35,000
40,000
40,000
35,000
30,000
30,000
25,000
25,000
20,000
20,000
15,000
15,000
10,000
10,000
5,000
5,000
0
0
MMPR Enrollment (historical)
We assume the long term
penetration rate of the
MMJ program in Canada
is 2% of the total
population, comparable
with other programs
July 20, 2016
Though new frameworks must be in place to unlock the full potential of the industry, we
assume the long term penetration rate of medical patients in Canada reaches 2% of the
total population by 2024, which is comparable to existing programs in other countries.
Though the MMPR is relatively young, the MMJ industry in Canada has existed since 2001, in
line with the age of programs in Israel (1999) and the Netherlands (2003, prescriptions &
pharmacies), as well as with some of the older programs in the US that also have legal
frameworks in place (Colorado - 2001, Oregon - 1998, Washington - 1998, Alaska - 1999).
Advantages that Canada has include greater access to healthcare, early participation from
insurers, and a concentration of thought leaders in the space.
2.50%
800,000
700,000
2.00%
600,000
500,000
1.50%
400,000
1.00%
300,000
200,000
0.50%
100,000
0
Penetration Rate
Figure A7 - MMJ Population and Penetration Rates for US States
0.00%
Medical marijuana patients
Penetration
Source: ProCon.org (March 2016)
Figure A8 below illustrates our more aggressive view. With the acceleration of physician
participation we estimate the MMPR enrolls 6,000 patients per month until 2020 and then,
with the development and introduction of alternative products and exposure from
legalization (we expect H1/18), 9,000 patients per month until 2024 to reach nearly
~800,000 patients (2% of the Canadian population, similar to other programs). We note that
the MMAR patients that refused to migrate over to MMPR and the potential homegrow
population combined represent a fractional percentage of the target population.
We estimate patient
enrollment accelerates
with the development of
alternative delivery
methods and exposure
from legalization
Figure A8 - We Estimate MMPR Patient Enrollment Will Reach 2% of Total Pop. By 2024
800,000
800,000
700,000
700,000
600,000
MMPR enrollment will surpass
HC's 2014 estimates in mid-2016
... if it hasn't already
600,000
500,000
500,000
400,000
400,000
300,000
300,000
200,000
200,000
100,000
100,000
-
2014
2015
2016
MMAR & Home Grow
2017
2018
2019
2020
2021
2022
2023
2024
DUNDEE ESTIMATES (medical only)
July 20, 2016
MORE EXPANSIONS & MORE LICENSES WITH DIFFERENTIATED VALUE PROPOSITIONS
The MMPR aims to treat marijuana as much like a medication as possible by creating a
licensing scheme for the commercial production and distribution of MMJ, and by granting
access to patients through a physician's prescription. Health Canada's cost-benefit analysis
published in the Gazette assumed a total of only ~60 licenses granted from 2014 to 2024, in
our view, desiring a fewer number of larger capacity producers as opposed to many small
producers.
We believe more licenses
could be on the way
We believe more licenses could be on the way (~10 more in the next year), but many LPs
have massive expansion plans already underway. Our enrollment estimates imply over
~550,000 kg of dried flower MMJ would be demanded in 2024 by ~800,000 patients plus
recreational market consumers, which is 300% more than the amount currently licensed and
built. We note however that a number of current LPs are already embarking on expansion in
preparation for Spring 2017.
Much more capacity will
be needed to supply the
demand from both the
medical and rec markets
Capacity: licensed, built, or needed (kg)
Figure A9 - Our Enrollment Estimates Imply More Capacity Expansion Needed
600,000
600,000
550,000
550,000
500,000
450,000
400,000
350,000
Our market estimates imply over 550,000 kg of
dried flower MJ would be demanded in 2024...
500,000
300%(!) more than the ~135,000 kg of supply
currently built under today's LPs
400,000
450,000
350,000
300,000
300,000
250,000
250,000
200,000
200,000
150,000
150,000
100,000
100,000
50,000
50,000
-
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Capacity Licensed by Health Canada (kg)
Unlicensed Built Capacity Under Current LPs
DUNDEE ESTIMATES (rec only, flower only)
We believe we'll start to
see more differentiated
producers
$10 MM of capital =
10,000 kg of capacity
We believe that some of the next in line will apply to be licensed for only part, not all, of
the value chain unlike their vertically integrated incumbents. We see some of the smaller
LPs already starting this, and believe that this would be a sign of the industry advancing. The
early days of the MMPR fostered LPs to become multi-faceted vertically integrated
production operations; however given the large head start some of the larger LPs have, we
see the laggards positioning themselves to specialize in different parts of the value chain
such as only growing or selling wholesale or only focusing on oils/R&D.
More expansion + more licenses = more capital investment required. From our
conversations around the industry, we gather that it costs ~$10 MM to build ~10,000 kg of
capacity. We estimate there is currently ~85,000 kg of licensed capacity, and another
~50,000 kg of built un-licensed capacity, for a total of ~135,000 kg. Even if we only look at
the medical-only flower-only market, our estimate of 280,000 kg of demand implies another
~145,000 kg needs to be built, requiring ~$145 MM of investment. This doesn't even include
the recreational market…
July 20, 2016
WHEN WILL REC START? WE BELIEVE H1/18 (ONE YEAR BEFORE NEXT FED ELECTION)
We believe the
recreational program will
start in H1/2018
We expect the Task Force
Update in November 2016
will provide greater
insight into LP
participation
Introduction of legislation is NOT the same as implementation of legislation. On April 20,
2016 at a special session of the UN General Assembly in New York, Health Minister Jane
Philpot announced that federal legislation for the legalization of marijuana will be
introduced in Canada in Spring 2017. The Minister was quoted saying "We will introduce
legislation in Spring 2017 that ensures we keep marijuana out of the hands of children and
profits out of the hands of criminals."
If legislation is tabled in Spring 2017, that would mean the Task Force would have had one
year since it was formed to gather best practices and consult stakeholders to draft
legislation to present to parliament. We expect an update from the Task Force in November
2016. Important questions that should be addressed include: taxation, appropriate age for
consumption, purchase limits, method of retail, hours of sale, advertising and promotion,
labeling, penalties for improper possession, education and scientific evidence, and
prevention of access to children. Prime Minister Trudeau's throne speech included the
phrase "legalize, regulate and restrict access to marijuana", while Blair has placed emphasis
on the safety of children, communities, and citizens by "adhering to a strict set of
regulations."
If legalization is implemented in H1/18, it would give approximately one full year of data
ahead of the next federal election (expected October 2019). The legislation that is
presented will go through the House, the Senate, and Committee hearings to get this one
shot on goal correct the first time. If we're going to have a legitimate recreational market,
we'll need legitimate sources for both medical and rec. The timeframe for implementation
could be politically-driven as approximately one year of (positive) sales data and tax revenue
could show the Liberals made good on their promise during their first term, as well as
provide them momentum going into the next election.
Figure A10 - Dundee Estimated Timeline of Events
HC
Amends
MMPR
Aug 2016
Task
Force
Update
Nov 2016
Liberals Table
Legislation vof
of
Spring 2017
Potential
Start of Rec
Federal
Election
H1 2018
Oct 2019
Jul-1
6
Aug
-1 6
Sep
-1
Oct- 6
1
Nov 6
-1
Dec 6
-1
Jan- 6
1
Feb 7
-1
Mar 7
-1
Apr 7
-17
May
Jun- 17
17
Jul-1
7
Aug
-1 7
Sep
-1
Oct- 7
1
Nov 7
-17
Dec
-1
Jan- 7
1
Feb 8
-18
Mar
-1
Apr 8
-18
May
Jun- 18
18
Jul-1
8
Aug
-1
Sep 8
-1
Oct- 8
1
Nov 8
-1
Dec 8
-1
Jan- 8
1
Feb 9
-19
Mar
-1
Apr 9
-1
May 9
Jun- 19
1
Jul-1 9
9
Aug
-1 9
Sep
-1
Oct- 9
19
We expect material stock
volatility around the
November 2016 Task
Force Update
We expect
material stock
volatility around
this event
A Liberal Party policy paper from 2013 concluded that "annual government revenue in
Canada from legalized marijuana based on 3 million annual consumers would likely exceed
$4 billion/year." The tax rate assumed in the paper ranged from 30-35%, which would imply
$11-13B in annual revenue for the marijuana industry.
July 20, 2016
WHAT ARE THE IMPLICATIONS OF A REC MARIJUANA MARKET IN CANADA?
How many people would
participate? More than
you think.
We believe a rec market
would draw in new
customers to the market,
as well as more diverse
offerings
First off, we believe it will be bigger than most people think due to the large percentage of
Canadians that would participate in a legal rec market. A number of fairly recent statistics
support this:
•
59% of Canadians surveyed support new laws that would legalize, tax and regulate
recreational marijuana (Forum Research survey, via CBC, Nov 2015)
•
That same survey found that 30% of Canadians would consume marijuana if legal, and
that 20% had done so in the past year
•
12.2% of Canadians aged 15 or older used marijuana in the previous year (Statistics
Canada, 2012)
•
During the first year of legalization in Colorado, approximately 9% of residents
consumed recreational marijuana at least once per month (Colorado Department of
Revenue, via theCannabist, Dec 2014)
•
StatsCan also revealed that 3.2% of Canadians aged >15 consumed marijuana more
than once per week in the previous year, and 1.8% aged >15 consumed daily
A rec market would likely draw in new customers whom never would have been in the
market in the first place. Not only would the medical market grow as we've outlined above,
recreational users that are "self-medicating" via black market purchases would join a
medical market with expanded product offerings and from innovation of new drugs, delivery
methods, or devices. Some rec users whom purchase from the black market may purchase
from a legal market with the introduction of new offerings, ancillary products, and services.
New customers would enter the market with the introduction of more diverse offerings.
Though it's difficult to place value on the new products that could be introduced, given the
lack of clarity on the framework, we can look to sales in recently legalized US states for
insight. For example, only 50% of Colorado's first year's sales were comprised of flower or
bud; the rest were derivatives, oils, edibles, tinctures, creams and the like. Canada is unlikely
to unfold as quickly given we believe a more stepwise approach will be taken, but medical
cannabis oils are starting to catch on.
Canada would be the first
G8 nation to legalize
marijuana
New businesses and services, and the potential to go global, would arise as Canada would
be the first G8 nation to legalize marijuana. The proliferation and branding of products and
accessories beyond just dried flower would open up new verticals within the industry and
foster expertise in segments such as growing, regulatory, branding, marketing, and R&D.
Other revenue streams for LPs may come from broader export opportunities, once Canada's
participation in three international treaties is amended. Two current LPs brought strategic
partnerships from countries that have mature medical programs – Bedrocan with Bedrocan
BV in the Netherlands, and MedReLeaf with Tikun Olam in Israel. Countries still developing
medical programs or working towards legal frameworks represent opportunities to export
Canadian know-how, and we've already seen early evidence of this. Bedrocan Canada
expanded its license agreement with BV to include South American sub-licensing
opportunities (Dec 2014), Tweed partnered with a prospective LP in the Australian medical
cannabis program (May 2016), Tilray exported two varieties of cannabis oil capsules to
patients in Croatia where an MMJ framework was established last year (June 2016), and
Canopy set up Bedrocan Brazil (June 2016). International markets may be tilted towards
local players which is why these recent moves are important for establishing brand
recognition early on.
Barriers to entry are
high… for now
July 20, 2016
Barriers to entry are high for applicants right now, but big pharma, big tobacco, big
alcohol, and big retail certainly have the balance sheets to consolidate the sector if they
choose to step in. Potentially positive market drivers including the allowance of widespread
insurance coverage, qualifying for a DIN (drug identification number), or tax exemptions may
cause one of the big players waiting on the sidelines to make the first move. Currently
regulatory hurdles like the licensing and approval process are keeping new LPs from entering
the market. As costs rise and capital requirements intensify, it could be a market with fewer
players with more capital, larger regional benefits, and international networking benefits.
HOW BIG COULD A MED + REC MARKET BE IN CANADA? WE SAY ~$8B PER YEAR
We say the market will be
$8.0B per year
Canada has one of the highest marijuana consumption rates in the world, and if the demand
for the products available in (illegal) dispensaries is any indication, we believe uptake of a
recreational market would be rapid and widespread, provided the right products were made
available. In 2014, Canadian liquor stores, agencies and other retail outlets sold $9.0B worth
of beer, $6.7B worth of wine, and $4.9B worth of spirits. We believe that medical and
recreational marijuana sales can reach similar levels with the proper framework in place.
Figure A11 - Medical and Rec Marijuana Estimates vs. Alcoholic Beverage Sales in Canada
10,000
9,000
8,000
Revenue ($MM)
Canadians spent nearly
$30.0B (retail) on alcohol,
cigarettes, and tobacco in
2011
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Cigarettes
& Tobacco
Beer
Wine
Spirits
Cigarettes & Tobacco, Alcoholic Beverage
Sales (2014)
MMJ
(2024)
Rec MJ
(2024)
Total MJ
(2024)
MJ Black
Market
(2016)
DUNDEE ESTIMATES
Source: StatsCan, Canopy Growth Corp., Dundee Capital Markets Estimates
We begin by looking first at the medical market, which we estimate at $3.0B per year by
2024, ~3x Health Canada's estimate of $1.2B. Referring to our enrollment projections in
Figure A8 above, we estimate nearly ~800,000 patients in 2024 (~2% of the total population)
compared to Health Canada's 450,000. Figure A12 illustrates a flower-only medical market
could exceed $2.0B per year if we assume 1.0g/patient/day and $7.50/gram. This floweronly scenario is too conservative in our view given LPs are already selling oil extracts.
Our ~$3.0B medical
market assumes half of
patients only purchase
higher priced oil extracts
Our $3.0B flower & extracts medical market assumes 50% of patients only purchase flower
and 50% of patients only purchase extracts, we assume no cross-selling though it is likely.
We introduce other products into our medical market estimate in Figure A12, and look to
two US states to draw comparison. In Oregon some "recreational-like" products have been
made accessible to patients through prescription as that state transitions from medical to
medical + recreational, and in the first two years of legalization in Colorado only ~50% of all
sales were from flower, meaning the rest were from oils, extracts, edibles, creams, etc.
We believe Canada's
system unfolds in a slower
stepwise fashion
compared to Colorado or
Oregon in the US
July 20, 2016
We believe the Canadian system evolves in a slower stepwise fashion than Colorado or
Oregon. We assume it takes three years from legalization (expected in 2018) to reach the
point where 50% of patients are only purchasing extracts as we believe a stricter slower
approach to legalization will create a time lag between the development and
commercialization of a broader range of products. New regulations would have to be put in
place to allow LPs to produce the vast array of products currently offered on the black
market. We use the same 1.0g/patient/day consumption rate for extract products as
smoked cannabis because we assume the much higher concentration in extracted products
(60-80% THC for extracts vs. ~15% THC for smoking) is offset by their much lower
bioavailability (4-12% for extracts vs. ~50% for smoking) (British Journal of Psychiatry, Feb
2001). For pricing we assume $15.00/gram, which is roughly the implied price per 'infused
edible unit' we calculated from the Colorado Department of Revenue, and in line with the
pricing some of the LPs are charging for oils today.
Figure A12 - Canadian Medical Market Estimates: Flower Only (top) / Flower & Extracts
(bottom)
$2,250
Revenue from medical
flower only could exceed
$2 billion in 2024
$2,000
$1,750
Revenue ($MM)
$1,500
$1,250
$1,000
$750
$500
$250
$0
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
$4,000
$3,500
Revenue ($MM)
$3,000
60%
Revenue from
medical flower AND
extracts could exceed
$3 billion in 2024
50%
40%
$2,500
30%
$2,000
$1,500
20%
Our medical market
estimates imply a $2.0 $3.0B MMJ market in
2024
$1,000
10%
$500
$0
0%
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Our $8.0B total market
estimate is derived from
our medical market
estimate, but we also
looked at a bottom up
approach
July 20, 2016
Our $8.0B medical AND recreational revenue estimate is derived from our $.03B medical
estimate above (Figure A12) and the assumption that Canadian recreational sales drives
60% of total revenue. In Colorado's first year of legalization, medical and recreational sales
were split 50:50, but in its second full year recreational sales outweighed medical 60:40,
with sales of extracts accelerating. Again, given our view of the relatively slower rollout of
regulation and differentiated products, we assume it takes five years for rec sales to reach
60% of total sales, with rec sales contributing 20% of the total in 2018E and 40% of the total
in 2019E. A summary of our estimates is in Figure A14 below, and we have also looked at the
market using a bottom up approach in Figure A16 to back into our recreational estimate.
We believe the Canadian cannabis industry is likely to reach a similar point that other
legalized jurisdictions have, where the medical program and the adult use or legal
program coexist and contain a wide range of products. However, a slower stepwise
approach with a best-in-class medical framework already in place, in a country that regularly
fosters innovation, Canada has a chance to yield a flourishing recreational market.
Figure A13 - Canadian Med AND Rec Market Estimates: Flower & Extracts  $8.0B in 2024
$10,000
$8,000
70%
Revenue from recreational
AND medical, flower AND
extracts, could near $8 billion
in 2024
60%
50%
$7,000
$6,000
40%
$5,000
30%
$4,000
$3,000
20%
We expect
legalization
in H1/18
$2,000
$1,000
$9,000
Revenue ($MM)
We estimate 60% of total
market sales will be from
the recreational market
10%
$0
0%
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
DUNDEE ESTIMATES (medical & recreational, flower & extracts)
Figure A14 - Canadian Medical AND Recreational Market Estimates: Summary
Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
Medical
sales ($MM)
$133
$332
$598
$904
$1,261
$1,795
$2,239
$2,682
$3,125
Rec Sales
($MM)
$0
$0
$150
$603
$1,032
$1,795
$2,736
$4,023
$4,688
Total Sales
($MM)
$133
$332
$748
$1,507
$2,294
$3,590
$4,974
$6,705
$7,814
Rec
(% of total)
0%
0%
20%
40%
45%
50%
55%
60%
60%
*Rec sales calculated based on a multiple of medical sales
July 20, 2016
We estimate extracts will
eventually become a
majority of the market
Figure A15 - Extracts Will Gain Market Share On Flower As The Industry Advances
Year
2016
2017
2018
2019
2020
2021
2022
2023
2024
Rec Sales
flower
%
%
($MM)
revenue
flower extracts
same as above
($MM)
$0
0%
0%
$0
$0
0%
0%
$0
$150
75%
25%
$112
$603
70%
30%
$422
$1,032
65%
35%
$671
$1,795
60%
40%
$1,077
$2,736
55%
45%
$1,505
$4,023
50%
50%
$2,011
$4,688
45%
55%
$2,110
# of grams
@ $7.50/g
0
0
14,958,987
56,277,060
89,449,233
143,603,447
200,637,547
268,199,308
281,292,127
extracts # of extract
revenue
units @
($MM)
$15.00/unit
$0
0
$0
0
$37
2,493,164
$181
12,059,370
$361
24,082,486
$718
47,867,816
$1,231
82,078,996
$2,011 134,099,654
$2,579 171,900,744
Figure A16 - We Estimate The Rec-Only Market At $3.5B Using A Bottom Up Approach
Canadian adults
% of population
Canadian adult users
Dried flower uses per month
Extract units uses per month
30,000,000
1.8%
540,000
24
8
30,000,000
3.2%
960,000
6
4
30,000,000
5.0%
1,500,000
2
1
Infrequent
users
30,000,000
5.0%
1,500,000
0.333
0.167
Grams per use
Grams per month
Grams per year
Price per gram ($)
Estimated flower sales ($MM)
1.00
12,960,000
155,520,000
$7.50
$1,166
0.75
4,320,000
51,840,000
$7.50
$389
0.50
1,500,000
18,000,000
$7.50
$135
0.50
250,000
3,000,000
$7.50
$23
225,360,000
Units per use
Units per month
Units per year
Price per unit ($)
Estimated extract sales ($MM)
1.00
4,320,000
51,840,000
$15.00
$778
1.00
3,840,000
46,080,000
$15.00
$691
1.00
1,500,000
18,000,000
$15.00
$270
1.00
250,000
3,000,000
$15.00
$45
115,920,000
Daily users
Weekly users Monthly users
Total sales ($MM)
Total
30,000,000
15.0%
4,500,000
$1,713
$1,739
$3,452
Figure A17 - The Comparison Of Our Two Approaches Shows A Rec Market Range of $3.5B - $4.7B
2024 estimates
Flower sales ($MM)
Extract sales ($MM)
Total
$2,110
$2,579
$4,688
Bottom up
estimates
$1,713
$1,739
$3,452
Delta
$397
$840
$1,237
July 20, 2016
OUR ESTIMATES COMPARE FAVOURABLY WITH PROJECTIONS FOR THE US
Using projections from US marijuana market research firms, ArcView Research and
GreenWave Advisors supports our estimates above. Currently only Washington, Oregon,
Colorado, Alaska, and DC have legalized marijuana, with California, Nevada, Arizona, Maine,
Vermont, and Massachusetts not far behind.
Figure A18 - Current Status of Marijuana Legalization in the US
Source: ArcView Research, 2016
The "10% Canada/US rule" arrives at a similar market estimate in 2020 as our approach
outlined above. US marijuana market research firms, ArcView and GreenWave, estimate the
US legal (medical + rec) market in 2020 to be US$23B and US$21B, respectively. We note
that ArcView assumes more than 50% of revenue derived from the adult use (rec) market.
Using an average of US$22B in 2020 and the commonly used 10% rule, we arrive at US$2.2B
(C$2.9B) in 2020 for Canada's estimate, which is in line with our $2.7B estimate.
Looking at ArcView's projections for adult use (only rec) in the currently legalized states
provide similar support. Figure A18 below outlines ArcView's adult use (not including
medical) sales projections for 2020 and adjusts them for differences in population size,
which in all cases, are larger our Canadian rec market estimates. We note the major
difference in these states is the access to higher priced 'recreational-like' products such as
those found in Canada's illegal dispensaries, and the time lag between the start of medical
and recreational programs. The implied values for Canada average $8.9B.
Figure A18 - Sales Projections for Legalized States Imply $9B Canadian Adult Use Market In 2023
A
B
Start of medical program
Start of recreational program
Population (MM)
Relative population multiple (Canada / state)
Estimated adult use sales in 2020 (US$MM,
ArcView Research)
A x B Implied sales in Canada in 2023
Alaska
1999
2016
0.74
47.7x
Colorado
2000
2014
5.4
6.6x
DC
1998
2015
0.66
53.4x
Oregon
1998
2015
4.0
8.9x
Washington Average
1998
1999
2014
2015
7.1
5.0x
$134
$2,020
$94
$985
$2,266
$6,409
$13,259
$4,995
$8,725
$11,282
Canada
2001
2018*
35.2
Time Lag
2 years
3 years
$8,934
*Dundee estimate
Source: ArcView Research, Dundee Capital Markets
July 20, 2016
DISTRIBUTION AND ROLLOUT: FEDERALLY LEGAL, PROVINCIALLY DISTRIBUTED
We believe marijuana is
likely to become 'federally
legal, provincially
distributed'…
… but we still need a
framework from the
government
In our view marijuana is likely to become 'federally legal, provincially distributed' giving
provinces the jurisdiction to decide their preferred distribution methods. A cross
governmental strategy might be implemented where the federal government controls
approval of new drugs and oversight of manufacturing and labelling (similar to how the FDA
operates for pharmaceutical drugs) and the provincial government licensing and
distribution, insurance coverage and provincial healthcare plans. Importantly, the
framework needs to protect patients’ rights to access and distribution.
It will be important to roll out a framework that early on prevents raucous demand from
outstripping supply, in which case potential consumers would again seek out the black
market. The government still needs to provide a framework for distribution and retail.
Since retail distribution is complex and more likely to fall on the shoulders of established
channels, various distribution options including but not limited to pharmacies, grocers,
liquor stores, and dispensaries may be the preferred choices. Direct mail will likely continue
to help stem the tide of the rush in demand.
Figure A19 - Possible Distribution Methods of Marijuana in Canada
PHARMACIES / BIG RETAIL - Likely Medical and Later Recreational
Pharmacies represent a
natural channel
Pharmacies represent a natural channel to dispense MMJ given their experience in
dispensing more serious narcotics, while big retail chains (such as Shoppers Drug Mart /
Loblaws) already have the infrastructure for controlled substances. Interestingly,
pharmacists were originally supposed to be part of the new regulations in 2014, but wanted
little to do with distributing MMJ when the MMPR began. The Canadian Pharmacists
Association (CPhA) was hesitant its members would be prepared to oblige without proper
provincial regulations in place, that the product didn't have adequate evidence for safety
and efficacy, and the potential security risks would need to be considered. Flash forward to
April 2016 when the CPhA updated its position statement on the matter saying "the best
July 20, 2016
way to enhance patient safety, education, and appropriate access is through pharmacist
dispensing and management of medical marijuana, while promoting the use of nonsmokeable products as opposed to smokeable forms." In May 2016 the Canadian Journal of
Hospital Pharmacy published a survey that showed ~50% of Canadian hospital pharmacists
who responded agreed that MMJ is safe and/or effective, yet there exists a large knowledge
gap about how to prescribe since many of them work in institutions that don't have proper
policies in place. Some pharmacists would need more published evidence to prescribe
smoked cannabis, and may be more inclined to prescribe or dispense oil or extracts in a pill
or capsule provided proper dosing regimens were outlined.
Pharmacies in Canada
used to distribute
cigarettes
Time to go back to the future? Changes to Ontario's pharmacy reimbursement structure ten
years ago removed rebates paid to pharmacies, and for political reasons, marijuana may
be a good time for the government to give back. Many forget that in Canada pharmacies
represent the largest landlord for doctors, and adoption by pharmacies would likely help
penetrate a physician market of 77,000 physicians across the country from the 7,000 10,000 currently prescribing today.
National retail chains that used to distribute tobacco, a similarly controlled and taxed
substance, are starting to throw their hats in the ring for recreational distribution of
marijuana. Chains such as Loblaw's (which owns Shoppers) have come out in support of
pharmacists being a reputable distribution point, but may also be setting the stage to
participate in the rec market. Pharmacies used to be able to sell tobacco on the shelves just
like any other product that can be found there today. Shoppers used to be owned by
Imasco, a large tobacco company, and London Drugs, Safeway, and Walmart all stopped
selling tobacco in Ontario in 1994. Other provinces enacted similar legislation over the next
ten years but BC hasn't done so yet. Shoppers has more than 1,300 locations across Canada,
and is rumoured to be in talks with suppliers about a generic brand that would be sold under
the drugstore's own name. Retail or pharmacy chains might clip ~30% margin from the LPs
selling wholesale to this channel, which is justified by the LP avoiding the cost of setting up
the distribution network, and which may be made up for in volume later on.
LCBO / Provincial Distributors - Likely Recreational
Provincial liquor channels
will likely have a play too,
the tax implications are
too tantalizing
Provincial alcohol monopolies like the LCBO (Liquor Control Board of Ontario) represent
channels for controlled substances but not all provinces have these structures in place.
Ontario, Quebec, and British Columbia, three of the most populated provinces in Canada, all
have provincial Crown corporations in place that monopolize most of the alcohol in their
respective provinces. Since those organizations have the established distribution network
for a controlled substance, they could be open to pilot trials in select locations.
Certainly some politicians think these distribution channels are well suited for handling
marijuana (e.g. Kathleen Wynne in Ontario), and tax revenue may have something to do
with it. According to StatsCan, in 2009 Canada generated $4.6B in tax revenue from 'liquor
profits' and $6.7B from 'remitted gaming profits'. Meanwhile, in Colorado's first year of
marijuana legalization, the state generated US$70 MM in tax revenue from marijuana and
only US$42 MM from alcohol.
July 20, 2016
However, proper controls must be put in place to promote responsible consumption.
Limits on the amount someone can purchase in one transaction or if they are even allowed
to purchase alcohol at the same time should be considered. Some people are of the opinion
the two substances shouldn't be sold in the same place because of the negative outcomes
that could result from inexperienced users who think it's ok to mix consumption, while a
June 2016 poll showed Ontario citizens aren't quite sold on the LCBO yet.
DISPENSARIES - Might Have A Play In Rec, But Not All Will Make It Through
Dispensary owners too
easily forget most
bootleggers didn't make it
through alcohol
prohibition
Shop owners hope to stick around long enough to make it through to the legal market, but
most too easily forget the hundreds of bootleggers that didn't during alcohol prohibition.
The impending legalization of marijuana has sparked the proliferation of dispensaries across
Canada. We believe a dispensary in Toronto or Vancouver can generate between $500k - $1
MM per month(!) in revenue selling a much wider array of products than are available
through legal medical LPs operating under the MMPR. Simply put, many key opinion leaders
tasked with establishing the legalization framework don't like dispensaries and the black
market activity that goes on behind them.
Dispensaries and
compassion clubs have
existed in Canada since
1996
Dispensaries or compassion clubs actually have a much longer history in Canada than
many know; some of Vancouver's oldest compassion clubs have existed since 1997, and
some in Toronto since 1996, that were providing 'access' or 'compassion' to patients that
didn't have a legal means to acquire MMJ. Police often turned a blind eye because, as listed
above in Figure A1, the evolution of the MMAR and subsequently the MMPR was largely
driven by court decisions which led to patients acquiring MMJ through dispensaries.
Confusion around the legal framework has caused municipalities such as Vancouver and
Victoria to regulate or license these dispensaries, while Toronto has taken a less tolerant
approach. Dispensaries are generally more ingrained in the culture out west which is likely
part of the reason Vancouver took a more liberal approach. In Toronto, however, a much
denser city, the cost of monitoring and licensing likely didn't make fiscal sense, thus the
much publicized raids in May 2016. If perhaps, dispensaries were forced to acquire legal
product from LPs, then we see a scenario where they could be allowed to stick around. A
survey taken in the US showed the majority of cannabis users in states where legal
dispensaries operate obtain cannabis through legal means, while just 17% rely on the black
market.
HOW DO LPS FIT INTO THESE DISTRIBUTION METHODS?
As mentioned earlier, we believe that some of the next in line will apply to be licensed for
only part, not all, of the value chain, and some strategies might depend on how
distribution rolls out. We see some of the smaller LPs already starting this, and believe that
this would be a sign of the industry advancing. The early days of the MMPR fostered LPs to
become multi-faceted vertically integrated production operations; however, given the large
head start some of the larger LPs have, we see the laggards positioning themselves to
specialize in different parts of the value chain such as only growing or selling wholesale or
only focusing on oils/R&D. Branding will be very important as the industry evolves.
July 20, 2016
Figure A20 - How Might LPs Position Themselves Based on Distribution Methods
Pharmacy
Liqour Channel / Grocers
Self Distribution / Dispensary
Management Expertise
Growing & Packaging
Branding & Marketing
Vertical Integration
Brand Positioning
Medical
Recreational
Both
Unique Offering
Volume
Service & Brand Support
Customer Experience
Branding Importance
Medium
Physician Or Pharmacists
Recommendations
High
More On-The-Shelf Competition
High
More On-The-Shelf Competition
Capital Needed &
Infrastructure
Low
Pharmacies Have Retail
Network Established
Low
Liquor Channels Have Retail
Network Established
High
Capex Costs For Retail Outlets
Pricing & Margins
Low
Lower Pricing Power Due To
Lower Capex Needs
Medium
Low Capex But Charging Retail
Prices
High
Vertical Integration Commands
Higher Pricing
Volume Demand
High
Over 10,000 Pharmacies
Across Canada
High
5,000 Liquor Stores And 10,000
Grocery Stores Across Canada
Medium
Point Of Sale Limited To Number
Of Locations Established
R&D
High
Different Delivery Methods For
Drugs And Devices
Low
More Likely To Start With Simple
Products Available Today
Medium
Customers Will Be Drawn To
Diverse Product Offerings
HOW DOES IT SHAKE OUT?
Local Distribution Networks Evolve, Better Segmentation Of LPs
Details from the federal government on a regulatory framework are expected in the next 612 months, and will determine what extent the LPs will be involved in the distribution and
retail. We expect to see LPs position themselves differently to tailor to some or all of the
distribution methods listed above and believe that this would be a sign of the industry
advancing. Word of mouth, anecdotal and qualitative evidence amongst patients should
cause acceleration of enrollment. Dominant producers will have advantages in technology
and physical infrastructure.
Consolidation & Shakeout, International Networks Are Established
M&A will be important for big players looking to control greater market share as well as for
smaller players that might not be fit to expand and serve a larger market, as we expect
legalization in H1/18. As the cannabis market heads towards legalization and barriers to
entry are lowered, today's LPs would benefit tremendously from having larger market share
and brand recognition ahead of a much larger addressable market, and we're already
starting to see the seeds of international networks planted already.
We believe distribution
will be driven by
pharmacies in the medical
market, then big retail for
the recreational market
Major Producers Evolve, Big Retail and Big Pharmacy Drive Distribution
We believe distribution will be driven by Big Pharmacy in the medical market, and then by
liquor chains and Big Retail for the recreational market. We believe only a portion of today's
producers will be there when the industry gets to this stage, where a small number of
producers control large portions or segments of the market. The producers may stay
independent if they become large enough or may be owned by first mover distributors (big
retail / pharmacy / alcohol). Both medical and recreational markets should have most of the
rules and frameworks in place by this phase.
July 20, 2016
Figure A21 - We Estimate The Rec Market Could Be Larger Than The Medical Market
Others
CGC
CGC
Others
CGC
MEDICAL
Others
MT
MT
OGI
APH
OGI
OGI
2016
APH
2020
MT
APH
2024
RECREATIONAL
Bubble size is approximate market size in C$MM
WHAT IF LEGALIZATION DOESN'T HAPPEN?
We believe the downside
case is a medical only
market in which 27
companies are competing
for $2.0B - $3.0B
The downside scenario is a medical-only market capable of $2.0B - $3.0B in sales per year,
by our estimates, split between 4 or 5 major medical players assuming consolidation along
the way. In that case, LPs would own the market having years of physician education and
patient data under their belts.
If there is relaxation of the rules surrounding dosage and concentration it would likely give
LPs a head start in R&D. More extracted products and dosage forms, along with evidencebased research and prescription guidelines, would increase adoption amongst physicians
and increase enrollment in the medical program.
Clarity around the rules would likely invalidate dispensaries' excuses of providing access or
"it's just going to be legal soon anyway", which could leave tens of thousands of patients
currently not in the system to migrate over to legitimate LPs.
A $2.0B market split 5 ways is $400 MM, which is a healthy amount of upside in an industry
where the largest player is currently operating at only a $20 MM annual revenue run rate.
This scenario further highlights our thesis why we prefer larger LPs with access to capital,
low unit costs, strong revenue growth, expansion capability, and brand recognition.
July 20, 2016
DUNDEE LP TRACKER
Figure A22 - Dundee LP Tracker
Company
Mkt Cap
($MM)
SL-C
$48
1
ON
Cultivation Only
Hybrid
Greenhouse
2
ON
Cultivation & Sale
Indoor
ON
Cultivation & Sale
Production & Sale
Indoor
MT-T
4
ON
Cultivation & Sale
Production Only
Greenhouse
APH-T
$125
5
AB
Cultivation & Sale
Production Only
Indoor
ACB-C
$59
6
ON
Sale Only
Production Only
Indoor
(Importing)
CGC-T
Agripharm
Public Co.
Ticker
Flower License
3
Oil License
Facility
Type
Province
Indoor
Production & Sale
(Production)
7
ON
Cultivation & Sale
8
BC
Cultivation & Sale
9
PEI
Cultivation Only
10
BC
Cultivation & Sale
Production & Sale
Indoor
11
SK
Sale Only
Sale Only
Indoor
12
ON
Cultivation & Sale
Production Only
Indoor
13
MB
Cultivation & Sale
14
BC
Cultivation & Sale
15
ON
Cultivation Only
16
QC
Cultivation & Sale
17
BC
Cultivation Only
Indoor
18
ON
Cultivation Only
Indoor
19
ON
Cultivation & Sale
Production Only
Greenhouse
20
ON
Cultivation & Sale
Production Only
Indoor
Production Only
CGC-T
Indoor
Indoor
Indoor
Production & Sale
Indoor
EMH-T
$10
MJN-T
$12
Indoor
Production Only
Greenhouse
21
Mettrum (BRN)
ON
Cultivation & Sale
Production & Sale
Indoor
MT-T
22
Mettrum (BRS)
ON
Cultivation & Sale
Production & Sale
Indoor
MT-T
$91
23
NB
Cultivation & Sale
Production & Sale
Indoor
OGI-T
$77
24
ON
Cultivation & Sale
Production & Sale
Indoor
25
SK
Cultivation Only
Production Only
Indoor
26
ON
Cultivation & Sale
27
BC
Cultivation Only
Production Only
Indoor
THC-C
$10
28
BC
Cultivation & Sale
Production & Sale
Indoor
29
ON
Cultivation & Sale
Production & Sale
Indoor
CGC-T
$284
30
ON
Cultivation & Sale
Production & Sale Greenhouse
31
BC
Cultivation Only
Indoor
32
ON
Cultivation Only
Indoor
33
BC
Cultivation & Sale
Greenhouse
Production & Sale
CGC-T
MMJ-A
$36
Indoor
Total (unique) Public Co.'s
10
July 20, 2016
Disclosures & Disclaimers
This research report (as defined in IIROC Rule 3400) is issued and approved for distribution in Canada by Dundee Securities
Ltd. (“Dundee Capital Markets”), an investment dealer operating its business through its two divisions, Dundee Capital
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July 20, 2016
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July 20, 2016
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Explanation of Recommendations and Risk Ratings
Dundee target: represents the price target as required under IIROC Rule 3400. Valuation methodologies used in determining the price
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Recommendations: BUY: Total returns expected to be materially better than the overall market with higher return
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Risk Ratings: risk assessment is defined as Medium, High, Speculative or Venture. Medium: securities with reasonable liquidity
and volatility similar to the market. High: securities with poor liquidity or high volatility. Speculative: where the company's
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Investors should not deem the risk ratings to be a comprehensive account of all of the risks of a security. Investors are
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comprehensive account of all the risks. Investors are directed to read issuer filings which contain a discussion of risk factors
specific to the company’s business.
Medium and High Risk Ratings Methodology: Medium and High risk ratings are derived using a predetermined methodology
based on liquidity and volatility. Analysts will have the discretion to raise but not lower the risk rating if it is deemed a higher
risk rating is warranted. Risk in relation to forecasted price volatility is only one method of assessing the risk of a security and
actual risk ratings could differ.
Securities with poor liquidity or high volatility are considered to be High risk. Liquidity and volatility are measured using the
following methodology: a) Price Test: All securities with a price <= $3.00 per share are considered high risk for the purpose of
this test. b) Liquidity Test: This is a two-tiered calculation that looks at the market capitalization and trading volumes of a
company. Smaller capitalization stocks (<$300MM) are assumed to have less liquidity, and are, therefore, more subject to
July 20, 2016
price volatility. In order to avoid discriminating against smaller cap equities that have higher trading volumes, the risk rating
will consider 12 month average trading volumes and if a company has traded >70% of its total shares outstanding it will be
considered a liquid stock for the purpose of this test. c) Volatility Test: In this two step process, a stock’s volatility and beta are
compared against the diversified equity benchmark. Canadian equities are compared against the TSX while U.S. equities are
compared against the S&P 500. Generally, if the volatility of a stock is 20% greater than its benchmark and the beta of the
stock is higher than its sector beta, then the security will be considered a high risk security. Otherwise, the security will be
deemed to be a medium risk security. Periodically, the equity risk ratings will be compared to downside risk metrics such as
Value at Risk and Semi-Variance and appropriate adjustments may be made. All models used for assessing risk incorporate
some element of subjectivity.
SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate
voting shares).
Dundee Capital Markets Equity Research Ratings
77%
65%
% of companies covered by Dundee Capital
Markets in each rating category
66%
55%
44%
% of companies within each rating category
for which Dundee Capital Markets has
provided investment banking services for a
fee in the past 12 months.
35%
28%
33%
22%
15%
7% 9%
11%
0%
Buy
Neutral
Sell
As at June 30, 2016

Medical Marijuana Sector - Dundee Portal

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