January 16, 2019

AltaCorp Capital Managing Director on Flourishing Cannabis Pharma Space

Midas Letter
Midas Letter
AltaCorp Capital Managing Director on Flourishing Cannabis Pharma Space

AltaCorp Capital Inc is Western Canada’s largest investment bank and is backed by ATB Financial. Managing Director and Senior Equity Research Analyst David M. Kideckel, PhD, MBA provides an overview of the company’s cannabis coverage. The firm covers medical, recreational, and pharmaceutical cannabis, which are all core AltaCorp research capabilities. AltaCorp recently launched coverage of GW Pharmaceuticals (NASDAQ:GWPH) (OTCMKTS:GWPRF) (FRA:GWZA) and is the only Canadian firm to cover the British cannabis company, famous for developing the epilepsy treatment Epidiolex. In the Canadian space, AltaCorp is interested in Auxly Cannabis Group Inc (OTCMKTS:CBWTF) (CVE:XLY) (FRA:3KF). Auxly’s East Coast footprint, white label products, and high-margin product segments all appeal to AltaCorp analysts.


James West:   Hey, David Kideckel is here with me now. He’s the Managing Director of research at AltaCorp Capital Inc. David, welcome.

David Kideckel:    Thanks for having me, James.

James West:   You bet. David, AltaCorp is Western Canada’s largest investment bank – it’s probably one of the best-kept secrets. Give me a quick overview of what AltaCorp is and who’s behind it.

David Kideckel:    Sure, so I think AltaCorp Capital, one of Bay Street’s best-kept secrets, full capital markets investment bank based here in Toronto with offices both in Calgary, Denver and Buenos Aires. We’re backed by Western Canada’s largest bank, called ATB Financial, which provides companies a full suite of banking products, whether that’d debt, lending, etcetera.

So on the one hand, we have the capital markets side, and then we’re also backed, our majority shareholder is ATB Financial.

James West:   Sure. And you just had a conference here in Toronto that was really well attended – I heard about it from so many people, which led me to, you know, find out who you are and how to get you in the studio. Tell me about the conference and what’s sort of the mindset at AltaCorp around catching the cannabis industry?

David Kideckel:    So we just hosted our seventh institutional investor conference here in Toronto. The first day focused on cannabis an life sciences; the second day was around oil and gas, the third day was in diversified industries.

But we’re here to talk about cannabis, so the first day was our most successful conference to date. We had a number of leading both US and Canadian companies come in. I was moderating a number of panels, both with companies dedicated to recreational and medical cannabis, as well as cannabinoid-derive pharmaceuticals. Or the pharma side of cannabis.

There was just such a great buzz, there was standing room only, we held it at the Shangri-La hotel, and we just can’t wait for next year’s conference.

James West:   You bet, I can’t either. It’s interesting: the pharma side of cannabis is widely anticipated to be where the greatest value creation is going to occur in the whole cannabis complex over the lifespan of the industry, and you’ve got direct knowledge and you guys over GW Pharma, which is the maker of Epidiolex, the first FDA-approved drug for use in Children that is cannabis-based. Tell me about GW Pharma and what is their sold of future pipeline hold in terms of future value for investors?

David Kideckel:    Sure. So maybe I can just take a step back for a second to really provide some oversight as to what AltaCorp research actually brings. So we cover, like I said, not only medial and recreational cannabis, but the pharmaceutical side o cannabis as well, or cannabinoid-derived pharmaceuticals.

This is in stark contrast to any firm, whether that’s Bay Street or Wall Street, where you’ll typically see medical and recreational cannabis in one franchise, and then the pharma side of cannabis or cannabinoid-derived pharmaceuticals in the other.

So it’s a core capability that, from a research standpoint, at AltaCorp, we’re really just thrilled to be able to bring to our clients.

Now, GW Pharma we just launched this week. The world widely recognizes this as the world leader in cannabinoid-derived pharmaceuticals’ we’re the only Canadian firm to actually cover GW Pharmaceuticals, just spoke with them, in fact, this we, and to our point, James, their lead compound, Epidiolex, made history back in June when the Unites States FDA approved the first ever plant-derived cannabinoid for therapeutic use, ever. And then subsequent to that, the United States DEA rescheduled Epidiolex, which is 98 percent CBD, rescheduled from a Schedule 1 illegal substance to a Schedule 5 substance with recognized therapeutic uses.

So we’re just thrilled to have coverage with this world leader in the space, and certainly any company I engage with, especially on the pharmaceutical side, looks to GW for the right way to engage through lawful regulatory and commercialization practices.

James West:   So now, is GW strictly focus on cannabinoid extracts and compounds, or is cannabis extracts and compounds just a branch of a much larger platform?

David Kideckel:    So GW Pharma is widely regarded as the authority in cannabinoid-derived pharmaceuticals. So everything they do is focused on cannabinoids extraction. They do all of this themselves in-house. They’re based in the UK, with corporate headquarters as well in Carlsbad, California, which I’ve been to, of course, and besides CBD or Epidiolex, which again is their lead compound – which we have forecasted to be a blockbuster drug exceeding $1 million in sales – they have a number of other cannabinoids that are currently being studied. There’s another drug as well that’s approved for use in the UK, or Europe, I should say, called Sativex – it’s a 50/50 split between THC and CBD, it’s used for spasticity that’s associated with multiple sclerosis.

So GW has an extensive pipeline, we believe, they’re not a one-trick pony, and we’re just thrilled to be able to have a knowledgeable team that’s actually able to cover a company of this magnitude.

James West:   Right. GW Pharma, then, is, I mean, what’s the market cap of GW Pharma right now?

David Kideckel:    They’re around the $4 billion USD.

James West:   Okay. So from your perspective, is that just start of like the early stage of where this company is going to go, valuation-wise?

David Kideckel: We think so, I mean we’ve put a target price of $160USD on them; the last time I looked, they were trading at just north of $120 USD, of course, but we think this is the real deal in cannabinoid-derived pharmaceuticals.

James West:   Wow. What other companies in the landscape that are perhaps nowhere near the valuation of JS, might investors be more into looking at that might have a future similar to GW Pharma?

David Kideckel:    It’s a really good question. I’ll take a step back again and say we just launched coverage of the entire sector this week, and in that, we’ve compiled and provided a lot of insight about cannabis, both from the US market standpoint, Canadian standpoint, and international markets, where we’ve pegged what we think the market sizing opportunities will be. We’ve also explored cannabinoid-derived pharmaceuticals to provide investors and clients with up to date knowledge.

In fact, I’ve hard from several folks saying, just contemplating the level of rigour involved in this industry overview piece. So we’re very pleased to have that; I’m happy to send that to you if you’d like, as well.

James West:   Sure, you get.

David Kideckel:    Within that report, we also launched on another couple of companies called Valens GroWorks, which is based out of Kelowna, BC. We think it’s one of the premier business in the entire cannabis sector focusing really on extraction, and that’s their core capability. They have leading partnerships with Thermofisher Scientific, where they have a centre of excellence at their Kelowna operation, as well as the Canadian exclusive rights to a company called Tarukino – a US-based company that’s involved with beverages and looking at emulsification technology.

The other company that we launched on this week was called Auxly, which we also feel is a very undervalued company and involved in the streaming business. And in particular, what they can offer in both the midstream segment and the downstream segment is, we really feel they’re going to do well. And we forecasted them as well for a price target of $1.50.

James West:   Wow interesting. I also noticed that you had coverage of Aphria and Liberty Health Sciences, and that’s of sort of interest right now because there was this attempt by a group of short strategists to try to undermine the credibility of the company and achieve a exit at a lower price, which by all accounts, seems to have fizzled and failed. And certainly the idea that a company like AltaCorp covers Aphria and Liberty Health Sciences kind of puts you in the opposite position to say, you know, with quite serious authority, that nice try, guys, but you really missed the bar. And did they really miss the bar?

David Kideckel:    So, for full disclosure, we don’t cover Aphria or Liberty Health Sciences.

James West:   Oh.

David Kideckel:    We did in the past, when my predecessor was holding my seat.

James West:   I see.

David Kideckel:    So we don’t hold coverage of Aphria or Liberty Health Sciences. That said, I was on the earnings call, as I’m sure a lot of analysts were this morning, and there was, of course, news with the CEO and one of the Board members stepping down, which is, it’s interesting. I think maybe somewhat expected from what I’ve heard from a lot of people. That’s what I can comment.

James West:   Ok. That really clears the way for Green Growth Brands, who’s made a takeover offer at $11 a share. I mean, it looks to me like they’re just getting ready to say okay, here you go, guys, have at her.

David Kideckel:    Well, it’s an interesting way to look at it for sure. Certainly today the stock has been rallying quite a bit, because in large part, the short seller announced right during the actual earnings call that they’re moving on to other projects now and Aphria is no longer a target for them.

James West:   Wow, interesting. So tell me about Auxly: what’s it about Auxly that you think is really going to drive the share price higher in 2019?

David Kideckel:    So we think they have both Canadian and international operations; we really feel that a centrepiece of Auxly is heir Dosecan operation, which is based in Charlottetown, PEI. This is involved in similar extraction processes and techniques to say a balance as well, and it’s going to allow them to produce white label products, branded products…Dosecan also has the exclusive rights to Canada and Mexico for another well-known Colorado-based brand called Dixie. I’ve toured the Dixie site as well, and so we feel they’re positioned very well for success, and really what’s key to Auxly is a centrepiece of their business model is really well risk-mitigated, because they’re involved with a number of different streaming partners throughout the Board and they’re also involved with very high-margin product segments, like the edibles, beverages, and those kinds of products, once they actually come online in Canada by late 2019 sometime.

James West:   Wow, very good. All right, David, let’s leave it there for now. We’ll come back to you as soon as you can possibly be here again full of excellent insights; thanks very much for joining us today.

David Kideckel:    Thanks, James. Pleasure.


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