Peeking in at the 2015 Canadian Market

Canadian Market

It hasn’t been a good start to the year for publicly-traded cannabis companies. With a few exceptions, like GW Pharmaceuticals (NASDAQ: GWPH), which is up a solid 24% to start the year, money and investor interest has been sapped out of the space.

It is pretty natural to see this waning of interest, considering where we are in the cannabis-as-investment story. Because for now, an infinitesimal percentage of the total cannabis industry revenue being reported by places like ArcView is being captured by publicly-traded companies. Federal bans on interstate commerce and banking services have ensured that any regular investor can’t just hop onto a brokerage account and buy up shares of a U.S.-based cannabis producer.

This is neither inherently good nor bad; it is just the state of affairs right now. For investors, the best prescription is to maintain a wait-and-see approach while studying sound information. The opportunities will present themselves; from a publicly-traded company perspective, there may be a great deal of shaking out this year.

As Morgan Paxhia pointed out in a recent market wrap-up, 2015 should be thought of as the “Year of Revenue” for the cannabis industry. Companies involved in lab testing, consulting and ancillary products should be starting to book real revenues and give responsible guidance towards the future. Those that can’t will no longer be able to hide behind PR and lofty sales forecasts, especially when their peers are showing an ability to add clients and meet customer demand with actual products and services.

Investing “in the plant” remains a road that can only be traveled by a select few in the United States. But in Canada, it is a whole different story.


Canada Remains a Great Case Study

Our neighbors up north continue to operate in the petri dish that is national legalized medical marijuana. And it continues to be fascinating to watch the positioning of several larger players as they jockey to have production facilities approved, licenses issued and patients enrolled.

There are several publicly-traded firms in Canada that are fully engaged in the production and sale of medical marijuana, and Health Canada figures to grant many more licenses in the next couple of years. There will be a robust market, which will be interesting for a couple of reasons.

First, there will be an inevitable wave of consolidation down the road, as 15+ producers whittle down to three to four market dominators. Right now, there are less than 20,000 approved patients under the new Canadian enrollment system, and the cannabis producers are forbidden to advertise to them directly. So what you have is a situation where many companies are spending a lot of cash to build production capacity, in the hopes that they’ll “get there first” to what is currently a pretty small market.

Secondly, these Canadian “firms left standing” in a few years will have built up strong operational expertise, as well as marketing and branding expertise. These are all assets that could be exported to the United States if federal legalization occurs here. While we would just be getting started on a national rollout, here would come several branded Canadian products that could have stellar reputations, low costs and a strong distribution channel ready to go.

How much will branding affect the consumption patterns of cannabis users in five years? It is a fascinating question with no easy answer; there is not a lot of precedent except to say that it is pretty hard to find a single product space that isn’t dominated by just a few “name brands.”


Names to Watch in the Space

After some bumpy starts, most of the big players in the Canadian space have decent client lists and actual products rolling out the doors. And they are starting to put out real income sheets, which brings a special joy to data hounds.

Tweed Marijuana (TSXV: TWD), Bedrocan Cannabis Corp (TSXV: BED), and Mettrum Health (TSXV: MT) are the current alpha dogs in the publicly-traded cannabis space.

Mettrum reported operating results on February 12, 2015, and had revenues of $689,000 (all figures in CAD) in the quarter ending December 31, 2014. The company sold 94,695 grams at an average price of $7.28/gram. Gross profit margins came in at 34.5%, but it reported a net loss of over $1.2 million on the continued rollout of new production capacity. As of February 11, Mettrum reports having more than 2,200 registered clients.

Just this week, Bedrocan got final licensing for a portion of their new 52,000 sq. ft. production facility. Only six of the 34 total grow rooms can begin immediate operation, but Bedrocan does have an extension on its Dutch import program through the end of 2015, which allows for the import of another 240 kg to service current demand. CEO Mark Wayne said the company is on track to have a first domestic harvest and sale in the second quarter of this year.

The last reported operating results are through the third quarter of 2014, but in that period Bedrocan sold over $493,000 in product at a gross margin of 35%. The company had over 1,400 registered patients in the most recent public release.

But the clear momentum leader right now is Tweed, which just reported Q4 2014 revenue of $641,000 but a big acceleration to close out the year with over $357,000 of that coming in December. Tweed sold over 84,000 grams at a gross margin of 36%. The last metric is of particular note, as it rose markedly from the prior quarter and is reflective of both higher average order sizes and higher average prices per gram.

Tweed has apparently sold over 75,000 grams of cannabis in 2015 thus far, which has them on a pace to hit over $1 million in revenues in the current quarter. The company is approaching 3,000 patients and it has shown an uncanny ability to craft a brand and marketing strategy within the confines given to it.

Investors should note that while TWD shares have rallied ferociously the past few sessions (on legitimately good news), shares still sit well below their average price level in 2014.


*Author holds no shares of any companies mentioned in this, or any of his articles. All opinions stated here are for informational purposes only. Investors should do their own due diligence before investing in any industry, especially in high-risk areas like cannabis.

Ryan has spent nearly 20 years analyzing financial markets and investment opportunities for institutional and high-net worth investors. He specializes in determining the size and scope of new markets, changing industry trends and the market potential of new companies, products and services. Ryan has also published hundreds of articles on investment topics, market commentary and macroeconomic analysis.

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