MediPharm Labs Inc specializes in extraction and is the first company to get an oil production license without a cultivation license in Canada. CEO Pat McCutcheon explains that MediPharm has the largest extraction footprint in the country and will be doubling its production capacity to over 200,000 kilos by the end of Q1 next year. MediPharm creates pharmaceutical-grade CBD extracts for medical and recreational end product production. MediPharm is going public in mid-September, at just over $82 million. McCutcheon believes there’s great investor value in MediPharm, compared to competitors Neptune (NASDAQ:NEPT) (TSE:NEPT) and Radient (CVE:RTI) (OTCMKTS:RDDTF) (FRA:RD8), because of the company’s existing inventory, customer, base, and plan to generate wholesale and processing revenue.
James West: Hey, welcome back to Midas Letter Live. My guest this segment is Pat McCutcheon; he’s President and CEO of MediPharm Labs, Inc., which as yet is a privately held company, soon to go public. Pat, welcome.
Pat McCutcheon: Thanks so much, James. I’m so happy to be on this show. I’ve watched you guys for a long time, and I’m really excited to be here.
James West: Oh, well thank you. Tell me about MediPharm Labs. What is it that you guys are going to do in the cannabis space that is differentiated from what everybody else is doing?
Pat McCutcheon: Absolutely. So MediPharm Labs is a really unique company. We’ve been the first company to get an oil production license without first getting cultivation.
James West: Congratulations.
Pat McCutcheon: It’s pretty unique in the space, and it took us a number of years to get this, and we had to break the mold of the actual licensing kind of application process with Health Canada. The one big thing was that Health Canada didn’t feel it was necessarily appropriate to do oil production without cultivation first on the same license, and we felt very much that if you look at any other parallel kind of industries, that there’s no other real comparison, especially when looking at big pharmaceutical companies, or industries, I should say, or automotive, where there’s not a segmentation or a horizontal where you have companies specializing.
So we specialize in extraction, and we, I think, have the largest extraction footprint in Canada.
James West: Really? Okay, so where is it, and what’s it comprised of, exactly, in terms of equipment and methodologies?
Pat McCutcheon: Absolutely. So we are in Barrie, Ontario, which is pretty unique. We’re going to be the first headquartered public company in Barrie, Ontario, which we’re really excited about. We have a lot of kind of local investment, and we actually bring a lot of local suppliers into the mix, and we’ve had a lot of great support from Barrie City as actually one of our first letters to Health Canada.
The facility which we’ve actually just finalizing purchase now on is 70,000 square feet. We use 7,500 square feet of that right now, which is going to get us up to production of about 100,000 kilos of biomass annually. We actually have, we only use about 10 percent of the building, and we can move into, I guess now, I guess a huge portion where we can look at other extraction methodologies for other product developments.
James West: Okay.
Pat McCutcheon: In terms of extraction methodologies themselves, we use supercritical CO2 extraction. We have three lines, starting in Phase I, and then we winterize the product; we have a number of different distillation methods that we use, as well as, we’re putting a lot of focus on – financial and people resource allocation – on downstream post-processing of smaller cannabinoids through different chromatography.
James West: Is your supercritical CO2 systems proprietary, or could you access those from a vendor?
Pat McCutcheon: We access them from, actually, a couple of different vendors. One of the things that’s pretty unique about our company is because we’re looking at a GMP approach, or a pharmaceutical critical environment, and that’s going to be pulled through kind of our SOPs and our methodology. We’ve had to very much modify our equipment. So there’s going to be an element of protected IP on that primary extraction, but we’re focusing actually more on protected IP downstream and post-processing, so when we’re looking at specific, unique distillation methodology, as well as chromatography. And we’re targeting the smaller cannabinoids for end product production.
James West: Okay. So you’re creating pharmaceutical-grade ingredients for other pharmaceutical products?
Pat McCutcheon: Exactly. And so we don’t look, actually, at a distinction between pharmaceutical products or medical products versus recreational products; we’re going to play in both sides of the fence, so to speak, and we feel that the top quality is as important on a medical product as it is in a recreational product.
James West: Okay. So you’re getting ready to go public; at what valuation will you go public?
Pat McCutcheon: Yeah, so there’s a lot of great value and there’s a lot of opportunity for our stock to run versus some of our competitors in the space right now, so we’re going to be launching in early to mid-September; I know we’re here now, so we’re expecting to launch pretty soon. We’re looking to go public at just over $82 million, and actually, if you look at that in terms of a value stock, and you compare us against a couple of companies that would be regarded as our competitors – Neptune and Radient, that are already trading – their market caps are fluctuating anywhere between 250 to 500 million, and we are actually the only company out of the three of us that have a license, have already 10-plus customers that we’re working with, cultivation partners that we’re either buying product from or processing for, and we’ve actually got just over 3,000 kilos in our vault right now. That directly aligns to being able to show revenues immediately out of the gates.
James West: Wow.
Pat McCutcheon: So a lot of value in that stock to run, James.
James West: You bet. So what about distribution and, where is it all going to go?
Pat McCutcheon: Well to start in our kind of phased-in approach, we’re looking at kind of two revenue business models, and that’s going to be wholesale back to the cultivator. So our first main line is wholesale purchase, where we’re doing white-label solutions for our cultivation partners, where we’ll buy wholesale from one cultivation group and then we’ll actually do the processing to whatever different level that we’re looking at actually selling back to another cultivator. That cultivator would then sell into the different provincial distribution streams, or to their medical patients.
The second revenue stream will be for our just processing, and we feel that actually it’s probably going to represent a little bit more of a kind of ratio of, let’s say, a 60-40 percentage representation for processing versus wholesale purchase, just because there’s a lot of cultivation companies that have realized now they need an extraction partner to actually execute on their business plan to get oils on the shelves. So with processing, we charge on a per-gram processing rate of whatever we’re actually looking at: either a crude oil, a winterized oil, or a final bottled solution.
James West: So per gram of finished product or per gram of input?
Pat McCutcheon: Per gram of finished product.
James West: Okay.
Pat McCutcheon: And so then that would be sent back to the cultivators to then be sent into whatever distributions stream that they have negotiated with.
James West: Uh-huh. What kind of gross margin on those kinds of transactions?
Pat McCutcheon: We’re actually looking at a pretty good gross margin; we’re starting just north of 30 percent now as we’re moving through actually 25 percent capacity of our capacity right now for extraction in our Phase I. As we actually move past the 50 to 60 percent capacity, we’re looking at a margin of 40 percent plus. One of the really unique perspectives of our business is because we take the risk out of cultivation, we focus all of our resources on extraction, and then scalable extraction. So with our last raise, actually, we targeted 15 million, we raised just over 22 million; with a good portion of those funds, we’re actually now building out our first expansion, which will over double our capacity and will then enhance those margins north of 50 percent once we get to those high capacities.
James West: Okay, and you mentioned that you’re only using 10 percent of your footprint right now. Do you have the CapEx to build out the rest of it?
Pat McCutcheon: We have the CapEx to build out, it looks like we’re two phases. With the completion of the second phase, which we expect to come online end of Q1 next year, as I said, we’ll double production capacity over 200,000 kilos. Right now, with the size of the building, we’re looking to actually do another subsequent raise once we hit the target that we’re expecting to trade at, post-launch.
James West: Oh, okay, interesting. Are you at all intimidated by the crowded landscape on which you are embarking your adventure?
Pat McCutcheon: It’s interesting to say it, and I think we get this question a lot in our marketing. From our perspective, it’s not too crowded, because we’re in fact the first extraction-only company in the space. And so if you look at other jurisdictions like Colorado, California and Washington, there’s actually a solid representation of extraction-only companies. And so if you want to make the parallel to say that we’re the first extraction company when there will be, let’s say, 40 to 50 companies in the space that focus solely on extraction, there’s not really that much competition on that side; when you compare us to other large cultivators that are growing as well as extracting, our economies of scale, and the fact that we can do concurrent customers at one time, actually give us the ability to do it faster, cheaper, and at higher quality than what most of these large cultivators are.
James West: Hmm. So what’s your entire throughput capability at the outset?
Pat McCutcheon: So for Phase I, as I said, it’s about 100,000 kilos of biomass going in, which yields, it’s dependent on what actually the certificate of analysis is, or the percentage of cannabinoids by weight. One of the things that we feel really strongly about as an extraction company is that we are, in fact, strain-agnostic, and we’re actually cultivator-agnostic. So we can work with numerous cultivators and numerous strains.
What we ended up doing is, actually we just focus on pulling out that cannabinoid recovery level, and the better – we don’t like to say better or best strains, we like to look at it from an analysis perspective, where if you have, let’s say, 8 to 10 percent in trim versus 10 to 15 to 20 percent in flower, flower is more advantageous because we get a better return on investment for our extraction purposes. When you’re looking at the costing relative to that, the costing model in Canada, because there’s such limited supply, cost is not relative, necessarily, to the actual cannabinoid percentages.
So we’re looking, actually, to change the industry by negotiating with our long-term, sustainable kind of definitive agreement partnerships, where we will negotiate on cost per gram of cannabinoid in the starting material, and not just necessarily, I guess, for lack of a better term, how the black markets look at it, for shelf value or costing.
James West: So does the dynamic between the fact that CBD can be extracted from, you know, CBD is present in stalk, seed, root, almost. So you can grow outdoor hemp and extract CBD, and you can create CBD extracts from that at an obviously much greater price and volume and lower cost of input than you could if you’re trying to create a high THC extract for vaporizing?
Pat McCutcheon: So this side is really interesting. As being the only company in Canada to have an extraction-only license, or an oil production-only license, when the new licensing regime and the distinction between the new licenses is coming out now and it’s well-pressed, and everyone, I think, sees it coming – this is outdoor grow being allowed is an incredible opportunity for a company like ours. When I think those, when kind of that was released from Health Canada that was what they were looking at, I would argue that a lot of the cultivation companies actually were not cheering, because that would actually now compete against the cost per gram production.
Even though Canada is not the premier climate to grow outdoor cannabis, you can still get arguably two crops if you’re doing it correctly, and that could bring cost per gram sub-$1.00, which then creates a great advantage in terms of return on investment for us in pulling out those cannabinoids.
James West: You bet. All right, Pat, well, that’s a great intro. It’s an exciting business model, because there’s, like you say, not too many people doing it. We’re going to leave it there for now. We’ll come back to you once you’re public and have another conversation. Thanks for joining me.
Pat McCutcheon: Awesome. I just want to say one thing: So we’ll be going live on the TSX-V in early to mid September, as I said before, and our ticker symbol will be LABS.
James West: Oh, okay, perfect! Good one! Thanks for joining us.
Pat McCutcheon: Thanks, James. Great.
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