Despite nationwide legalization, Canada’s cannabis market is suffering from growing pains

As the first cannabis bull, Cowen’s Vivien Azer was a trailblazer on Wall Street. So, it made headlines when she admitted defeat on her lofty price target for Tilray and other Canadian licensed producers. The analyst followed the path of peers and trimmed her price target after the Canadian cannabis company posted disappointing results in Q2. Though Tilray beat revenue expectations with $45.9 million versus $40.34 expected, the company lost a worse than expected $0.32 per share versus the consensus estimate of $0.26. Tilray shares tumbled another 4% after these results. Even with the modest rebound in early September, shares are down 55% year-to-date through Sept. 4, 2019. 

Tilray, the first cannabis company to go public, also faces uncertainty in the Canadian market as well as its path forward in the U.S. cannabidiol (CBD) market. In Canada, the next wave of legalization is set to occur in December 2019 as infused edibles, creams and extracts will be added as new classes into Health Canada’s legal framework. Some industry analysts believe they are not as prepared as other large-scale licensed producers such as Canopy Growth, whose stock has faced its own bearish pressure. The stock is down 52% since peaking in January 2019, with much hand wringing surrounding the ousting of co-CEO Bruce Linton. Of course, this frustration came from Constellation Brands shareholders and board members who have very little patience remaining for Canopy’s inability to turn a profit. In Linton’s wake, the company leaned into the growth plan he left behind, issuing a statement that it believed it would take three to five years to achieve profitability, as reported by Reuters – not exactly music to shareholders’ ears. Canopy reported C$1.2 billion in losses in Q1, and losses could continue to mount as new cannabis products in the edibles market are launched.

The entire Canadian cannabis market has struggled as the 49 publicly-traded Canadian licensed producers have posted losses of 11.2%. Among the factors may be Health Canada’s handling of licensed producers and the tepid introduction of edibles and vaping products – the department delayed the release by two months – which has effectively limited sales for most of the year. In short,  Canada is hamstringing producers with regulations and limits on THC contents, health claims, and advertising. 

In a surprising turn of events, the U.S. cannabis market, especially in mature adult-use zones, has shown remarkable growth.

Below the 49th parallel, the picture for cannabis is decidedly more optimistic. In Colorado, wholesale prices have increased 17% over the last 365 days, according to a report by Seaport Global. Furthermore, the Centennial State just celebrated $1 billion in sales. The rest of the numbers the state released also are enticing for interested investors. 25% of tourists who traveled to Colorado between 2013 to 2018 listed cannabis as a reason and per-person sales are also highest in Colorado, with people buying, on average, $280 worth of cannabis per year, according to CNBC.

“We were one of the first states to create a comprehensive approach to the cannabis market,” said Governor Jared Polis. “We built a first-mover advantage into a strong leadership role in America and around the world.”

Denver-based Medicine Man Technologies (MDCL) is right in the thick of this mature and robust market. The company has been a stalwart name in the Colorado cannabis retail community as a trusted consultant but has rapidly transformed into a vertically-integrated operator that has been accumulating more and more storefront space across the state. On September 4, 2019, the company added three retails centers under its umbrella with the acquisition of Colorado Harvest Company. The latter is one of the pioneers in the Colorado cannabis market, and founders Tim Cullen and Ralph Morgan bring aboard their proprietary growing technology and their industry experience. 

Just the day before acquiring Colorado Harvest, Medicine Man Technologies acquired five Starbud Colorado dispensaries in Louisville, Longmont, Pueblo, Niwot and Commerce City. As already built-out operations with strong customer bases, these dispensaries will immediately contribute to the company’s bottom line with more than $19 million in revenue and $5.6 million in EBITDA this year. 

The Starbud and Colorado Harvest acquisitions were Medicine Man’s eighth and ninth announced acquisitions of 2019. Other notable additions have included the acquisition of related party Medicine Man Denver along with Dabble extracts, an award-winning shatter producer, Los Sueños Farms, North America’s largest sustainable cannabis farm, and Purplebee’s, a dispensary and extractor among. 

One of the most important pieces acquired this year may be MedPharm Holdings. Acquired in January 2019, MedPharm is an important player in the cannabis research world and previously had a pending federal research bulk manufacturer license to provide cannabis and cannabis dosage forms. In late August, the company announced it had passed a key hurdle in the Drug Enforcement Administrations’s process as it was selected to move forward as one of the first applicants for a license. The news for MedPharm came as the government and the DEA announced they would be granting more cannabis research licenses, and the company is clearly well positioned to be among the first providers of federally legal cannabis for medical research purposes.

In addition to MDCL’s significant presence across the Colorado cannabis landscape, the company intends to grow its international footprint. In June, it began the acquisition of Colombian company Green Equity S.A.S., paying $5.4 million for 100% of assets. In the deal, Medicine Man receives valuable intellectual property, the international licenses for cultivation, extraction, manufacturing and R&D along with Green Equity’s 271-acre farm outside of Bogota. Besides the ideal growing climate, Colombia is an attractive location for cultivation because of the government’s friendly legal framework for cannabis exports. Former President Juan Manuel Santos Calderon laid the foundation for Colombia to be South America’s cannabis hub by planning to grow 40.5 tons of cannabis, capturing as much as one-fifth of the global market, according to Reuters. Medicine Man is now strategically positioned to be a major part of this coming growth. Further, the Colombian grown products could also be used as biomass for extraction purposes in the U.S.

Medicine Man Technologies stock has been a peak performer.

In sharp contrast with the stocks of larger Canadian producers, Medicine Man’s stock has paralleled the ramping of its business with an 81% gain over the previous year. Investors have been cheered by record revenues, as the company executes its comprehensive rollup strategy. The company recorded $1,757,819 for Q2, an increase of 24% year-over-year.

“From an operating viewpoint, the second quarter’s positive sequential trends in gross margin and normalized operating expenses are encouraging as we increased our product sales and recognized economies of scale,” stated Andy Williams, Co-Founder and Chief Executive Officer of Medicine Man in the company’s press release. “Our key strategy is to become a vertically integrated global operator in the cannabis industry and deliver the best products through leading cultivation, extraction, and manufacturing methods.”

Medicine Man’s strategy got the attention of Justin Dye, managing partner of Dye Capital, who previously was an integral part of the private equity consortium that acquired Albertsons Companies. As Chief Strategy Officer, Chief Operating Officer and Chief Administration Officer, Dye led Albertsons’ expansion through over $40 billion in acquisitions, divestitures, real estate and financing transactions. Dye Capital had already invested $14 million in Medicine Man, and after the company’s moves over the summer, raised its stake to $21 million, while Dye himself became Chairman of Medicine Man’s Board of Directors.

“The members from Dye Capital are not only increasing their investment, but are personally invested in the Company and have directly been responsible for successfully implementing a similar growth strategy through acquisitions in the grocery industry,” Williams stated in the press release. “There they grew Albertsons from $10 billion in revenue to over $60 billion in revenue. We have increased our industry footprint with the announcements of several pending acquisitions to build a vertically integrated powerhouse that will combine the best and brightest industry founders into one organization.”

One of the key catalysts for the company’s momentum this year was the passing of House Bill 19-1090 by the Colorado Legislature. The bill was a gamechanger for Medicine Man, as it repealed a provision barring publicly traded companies from holding a marijuana license, enabling the company to accelerate its vision for the Colorado cannabis market. 

With a number of impressive milestones now in its rearview mirror, and a valuation that’s still modest despite the gains enjoyed by investors over the past year, Medicine Man Technologies is one of the rising cannabis companies investors should be watching in Q4 and into 2020.