The Canadian medical cannabis industry is expected to reach $1.3 billion in size by 2024, according to Health Canada, with over 400,000 patients joining over the next nine years. With about 16 licensed producers under the new MMPR program, the market has been heating up following the Canadian Supreme Court’s ruling that cleared away at least some of the concerns related to the program and opened the door to wide-scale production and sales activity.
Tweed Marijuana Inc. (TSX-V: TWD) (OTC: TWMJF) became the first publicly-traded, federally-regulated cannabis company in North America after becoming a licensed producer under the MMPR. With a 180,000 sq. ft. facility in Smith Falls, Ontario and a second 350,000 sq. ft. facility in Niagara-on-the-Lake, Ontario, the company has been licensed to produce up to 3,500 kg of medical marijuana per year, although it is only starting to realize that potential.
The company began shipping product to customers in May of 2014 from the Smith Falls facility. It is currently charging $6-12 per gram and operating at 40% of its anticipated peak capacity at that location. The larger Tweed Farm operation located in Niagara-on-the-Lake began shipping product in December of 2014, but operates at just 10% of its anticipated peak capacity as the company works to ramp up its operations.
During the first quarter of 2015, the company reported revenue that increased 39% over last quarter to $1,710,157, driven by a 29.56% increase in production and a 6.76% increase in the average price per gram. Net income came in at just over $1 million, or $0.02 per share, driven by gains on the changes in fair value of biological assets, while the company reported cash and equivalents of over $15 million, as of June 30, 2015.
In a recent interview, CannabisFN’s Mike Elliott met with CEO Bruce Linton to discuss the company’s background and what sets it apart from the competition, as well as the company’s acquisition of Bedrocan Canada.
Court Decisions Should Drive Demand
The Supreme Court’s temporary injunction that permits previous MMAR participants to grow and consume cannabis outside of the MMPR dealt a mild setback to the newly created industry, since a portion of the 40,000 or so existing patients wouldn’t be required to purchase medical marijuana from licensed producers. However, all future patients must go through licensed producers and the Federal Government is appealing the decision.
In June 2015, the Supreme Court separately ruled that restrictions on the use of non-dried forms of marijuana violate the rights to liberty and security of individuals, opening the door to edibles and synthetic marijuana. Licensed producers could benefit handsomely from this decision, since it will allow them to broaden their product offerings and potentially attract an increased number of patients and prescribing doctors who desire more options than just dried marijuana.
Tweed received its license to produce cannabis extracts following the Supreme Court’s edibles ruling on August 20th in its state-of-the-art Smith Falls facility. With seven new precision climate-controlled drying rooms, a dedicated trimming room, extraction room, and processing room, all approved by Health Canada, the company is well positioned to capitalize on the increase in edibles demand with a commercial-scale operation.
In early September, the company announced the acquisition of MedCannAccess that provides both a network of community engagement centers in Ontario and a 33% stake in CannScience Innovations, a drug development company based out of the MaRS Centre in Toronto working collaboratively with the University Health Network to develop cannabis extracts. These extracts incorporate Generex’s RapidMist™ drug delivery technology, setting it apart from competition.
The impact of these court decisions is a mixed bag over the near-term, but clearly a positive development over the long-term. While the MMAR decision slowed the initial revenue potential of licensed producers, it protected the market for future patients that is expected to grow to over 400,000 people by 2024. The ruling on non-dried forms of marijuana also opened the door to a significantly greater number of patients and prescribing doctors.
Bedrocan Acquisition Boosts Market Share
Tweed received one of the earliest MMPR licenses from Health Canada and has grown into the industry’s largest player. Over the coming months, the company’s domination of the market could grow even greater following its acquisition of Bedrocan Cannabis Corp. (CVE: BED) (OTC: BNRDF) – a major player in the space – for $61 million. The combined entity could capture between 25% and 40% of the market, according to analysts covering the stock.
Tweed and Bedrocan already have a combined 5,600 active registered customers, but the unique strengths of each brand could dramatically expand those figures over the coming quarters. Tweed has built an impressive medical brand with the first accredited CME program for doctors and the most doctor visits in the industry, while Bedrocan has a 14-year track record of standardization and international expansion opportunities.
Capturing just 20% of the to-be $1.3 billion industry, could equate to revenue of $260 million in just nine years. With a market capitalization of just C$138 million now, the company’s valuation could grow to over a half billion dollars, assuming a modest price-sales ratio of just 3x. The tobacco industry, by comparison, has a ratio above 5x. These dynamics make the stock very attractive on a discounted cash flow basis at its current levels.
The company also compares favorably to others within the growing industry:
Tweed is well positioned to capitalize on Canada’s burgeoning medical marijuana market as a premier licensed producer. With its acquisition of Bedrocan, the company will secure an even greater portion of the market moving forward. The Supreme Court’s recent ruling on edibles, combined with the potential for a successful appeal of the MMAR ruling, creates numerous catalysts that could boost the industry’s long-term potential.
The company’s recent acquisition of MedCannAccess provides it with a unique in-person client services division and a network of existing community engagement centers, making the firm the largest licensed producer to offer in-person services in the industry. With its heavy focus on customer service, the company believes that these centers could significantly enhance the customer experience and further drive revenues over the long-term.
Over the coming quarters, the company will continue to grow its business through efforts like its collaboration with Canabo Medical Corporation to study marijuana for medical use and present the findings to healthcare practitioners. The company also continues to build up its intellectual property portfolio with agreements like its pilot program with Indoor Harvest Corp. to develop an aeroponic system to better grow medical marijuana.
For more information, visit the company’s website at www.tweed.com.
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