A few weeks ago, we issued an update on MediPharm Labs Corporation (LABS.TO) (MEDIF) after it expanded its presence on the international side of the industry. Through strategic agreements with leading operators in the European Union (EU) and South America, the company has significantly enhanced its growth prospects.
Despite the positive developments that were reported by MediPharm, we believe that the market substantially discounts the upside that is associated with the business in Canada and abroad.
When compared to Neptune Wellness Solutions Inc. (NEPT.TO) (NEPT), MediPharm is valued at less than half of Neptune (from a market capitalization standpoint as of October 15, 2020). We find the valuation disparity to be worth highlighting and believe that MediPharm has a favorable risk-reward profile as a result.
Executing on a Multi-National Growth Strategy
2020 has been a challenging year for the global economy and many companies pivoted the business model to be levered to the opportunities that were created by the COVID pandemic. During the crisis, Neptune entered the hand sanitizer business and started selling products across Canada.
When Neptune reported this development, the market responded extremely positive to the announcement. Since then, the shares have pulled back and we believe that the change of focus benefited MediPharm. By taking the full focus of the cannabis concentrate market, MediPharm was able to benefit and capitalize on its competitor’s change of model.
While Neptune was off making hand sanitizer, MediPharm was executing on a multi-national growth strategy. Currently, MediPharm has more than 30 tolling and processing agreements with operators in 8 countries. When compared to its peers, we believe that the company has more attractive growth prospects in Canada and abroad.
Although MediPharm has substantial domestic and international growth prospects, we believe the market is discounting this aspect of the story. In the first half of 2021, MediPharm expects to see international revenue growth ramp higher which should result in substantial margin expansion. In the EU, the price of cannabis products is incrementally higher than Canada and this is an attractive aspect of the international market.
Going forward, we believe that MediPharm will continue to take market share from companies like Neptune. The company operates a state-of-the-art GMP facility that allows them to capitalize on international markets while it continues to service the Canadian medical and recreational market.
During the last quarter, we have noticed a substantial increase in the amount of cannabis 2.0 products that are being sold in Canada. To create these products, licensed producers need access to cannabis oil, and this is where MediPharm comes into play. The leading Canadian cannabis oil company has formed strategic relationships with leading brands and operators and are bullish on this aspect of the story.
A Business that is Reaching a Key Inflection Point
We believe that MediPharm is in the beginning of a major transformation that will result in the business being more a junior pharmaceutical company. The agreement that MediPharm recently entered into with STADA puts the business in a league of its own and we are favorable on the potential avenues that it will have for growth.
In our opinion, MediPharm was miles ahead of its competition from the beginning. From the beginning, the management team understood that the best long-term opportunity would require that they have leverage to the global cannabis oil market. The Canadian market quickly became saturated and this made the economics of the business less attractive. MediPharm invested in the construction of a state-of-the-art processing facility that meets EU GMP standards to capitalize on the global market and this is an important pillar of the business.
One of MediPharm’s largest clients is Canopy Growth Corporation (WEED.TO) (CGC). Since inception, the management team focused on working and partnering with companies that are considered to be leaders in their respective industries. This stands true for the relationship that MediPharm has with STADA and we are bullish on the growth prospects that are associated with it.
Currently, STADA is a leader in its field and has approx. 20% of market share of the generic pharmaceutical industry in EU and Germany. We expect the relationship to play a key role in how MediPharm is able to capture market share and believe that the market discounts the potential that is associated with this opportunity.
Trading at a Discount on Several Metrics
From a valuation perspective, we believe that MediPharm represents a compelling opportunity. We are of the opinion that the Canadian cannabis oil company is trading at a discount when measured by profitability metrics, comparative analysis, and a forward-looking view of the business.
Over the next year, we expect MediPharm to report margin expansion as it continues to cut costs and ramp revenues. Once the international side of the business starts to ramp up, we expect the market to take notice. At this time, we are of the opinion that MediPharm will have laid the necessary infrastructure in key jurisdictions through its relationship with STADA. We believe the management team is bringing the business down a path to profitability and consider the opportunity to be underappreciated at current levels.
On top of the potential that is associated with the international opportunity, MediPharm is capitalizing on Canada’s cannabis 2.0 market. This market includes vape pens, edibles, topicals, beverages, concentrates, and more. To make these products, companies need access to cannabis oil. MediPharm makes the key input product that these operators and brands need and is positioned to be a major beneficiary of Canada’s 2.0 market.
Currently, MediPharm is making more than 60 products that are on the 2.0 market and we believe that the market does not fully understand the size and scope of the business. We consider MediPharm to be an undervalued opportunity that is focused on the pharmaceutical side of the industry. The company has a strong balance sheet and will be generating significant cash flow to support this side of the business. Going forward, we believe that MediPharm is well positioned to execute on several major growth projects and is an opportunity that we are excited about.
If you are interested in learning why we believe MediPharm Labs is positioned to take market share in Canada and abroad from companies like Neptune, please send an email to email@example.com with the subject “MediPharm” to be added to our distribution list.
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