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AltaCorp Capital Inc Analyst on Potential of Biosynthetic Cannabinoids

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

AltaCorp Capital Inc Research Analyst David M. Kideckel, PhD, MBA provides an update on AltaCorp’s operations and shares his thoughts on the emerging biosynthetic cannabinoids space. Backed by Western Canada’s largest bank, ATB Financial, AltaCorp is the only firm to cover medical, pharmaceutical, and recreational cannabis from an equity research standpoint. Significantly, AltaCorp is the only company covering GW Pharmaceuticals, plc (NASDAQ:GWPH) (FRA:GWZA), makers of the drug Epidiolex. Kideckel notes that large scale equity deals are still the missing link for the sector. Kideckel discusses the emergence of biosynthetic and chemically derived cannabinoids in the space, which are cheaper to produce and provide higher percentages along with greater purity.

Transcript:

Benjamin Smith:    Welcome to Midas Letter Live. Today in studio we have a very special guest: I’m with David Kideckel from AltaCorp Capital by ATB Financial. David, welcome to the show.

David Kideckel:    Thanks for having me, Ben.

Benjamin Smith:    Now getting right into things here, I know you’re a research analyst at AltaCorp, and you’ve managed to raise a $57 million equity raise for HEXO Corp recently, and you also have other significant deals along with that in the cannabis space. Now, what – are you considered one of the main book runners and co-managers in the space?

David Kideckel:    Sure, so let me start off by just giving a preface: I haven’t raised the money, in fact, I’m in research; that would be our banking team that’s raised the money. But certainly we were a co-manager with HEXO, involved in a number of other multiple deals very recently, including Cardiol Therapeutics on the TSX, a cannabinoid-derived pharmaceutical company; Origin House, Fire & Flower, which is a retail company that will be going public within the next two weeks.

So we’re a very well-diversified or positioned in a very well diversified way. On the one hand, from a research standpoint, we cover medical and recreational cannabis, and then on the other side, we also cover cannabinoid-derived pharmaceuticals.

Now, at AltaCorp Capital, we’re backed by ATB Financial, or as I like to say, probably the best well-kept secret on Bay Street. ATB Financial, the largest bank in all of western Canada. So as a corporation, AltaCorp Capital, what we offer on the one hand is the capital markets, that’s research, sales and trading, and investment banking; but on the other, we have ATB Financial, which provides corporate financial services, whether that’s debt, lending, credit cards, that kind of thing.

So, really exciting times for us at AltaCorp Capital.

Benjamin Smith:    Great. Now, are you beginning to see more interest in the equity research side, as some of these junior cannabis names mature into requiring coverage going forward?

David Kideckel:    Sure. So the way we position ourselves as an entire firm, we differentiate ourselves in the names that we actually want to get involved with. We’re looking to be a part of these companies, cannabis life sciences or energy oil and gas, diversified industries. We really want to be a part of the company long-term. We’re not looking to be making a quick buck and being with these companies for the very short term.

So from the equity research standpoint, we have probably the leading franchise on all of Bay Street. In fact, if you compare any North American firm to AltaCorp Capital, we’re the only firm to actually have the capacity and capability to cover, on the one hand again, medical cannabis, recreational cannabis, and then cannabinoid-derived pharmaceuticals. In fact, we’re the only firm in Canada to maintain coverage of the world leader in cannabinoid-derived pharmaceuticals, GW Pharmaceuticals. And their lead product, Epidiolex, of course, was approved by the US FDA back in June, and the US DEA subsequently rescheduled that from a Schedule 1 illegal substance to a Schedule 5 substance.

So it’s now available for sale in the United States, and we believe Epidiolex will be a blockbuster product, generating sales over $1 billion.

Benjamin Smith:    Great. That seems like a huge differentiator going forward, especially with a lot of investors expecting that the ancillary end of the cannabinoid market, you know, and the profits, eventually will lie in the research division, biotech, you know, the substances that derive out of cannabinoids flower.

David Kideckel:    And maybe I can just add one thing to that. So we’ve seen it’s been a big area, to your point, Ben, with Big Alcohol, Big Tobacco. You see Constellation in with Canopy, with HEXO you see their industry-leading partnership with Molson-Coors on the beverage side, and then tobacco, with Altria coming in to Cronos.

What we really feel is the missing link here in the entire sector is where Big Pharma comes in.

Benjamin Smith:    Yep.

David Kideckel:    And until we get, I think, the community as a whole gets more clarity from the US government where they’re going to take cannabis at a Federal level, you might see some of the players come in. We’ve already seen, you know, CannTrust working out some R&D and distribution agreements with Apotex, Tilray is an example with Novartis. But as far as big equity deals of the Constellation type magnitude, we feel that this is really the missing link in the entire sector, and we’re just in such a great position to be able to have an opinion on this, given that for myself, I spent over 10 years in industry working for Fortune 500 companies in both biotechnology and Big Pharma.

Benjamin Smith:    Absolutely. Now, sticking with the research side, does AltaCorp have the proper checks and balances to make sure your research isn’t excessively compromised on the buy side? Or, how do you structure that so you don’t have excessive optimism?

David Kideckel:    Sure. So actually, I would even argue that a lot of the optimism is coming from the sell side, not necessarily the buy side. The reason being, you see a lot of analysts putting out research out there and slapping very high multiples on a number of these cannabis companies. So what we take very much a lot of pride in doing at AltaCorp in research is being extremely conservative in our approach to any company we take on. Like I said, we’re selective and differentiate ourselves in the names we choose to get behind.

We just recently led a deal as sole book-runner for Valens GroWorks who we also cover. We view them as one of the premier businesses in the entire sector. They have industry-leading partnerships with Thermo Fisher Scientific, and as well as the exclusive Canadian rights to a beverage technology by a US-based company called Tarukino. So from a research side, we do feel that one of the key differentiators we bring to the table is a very balanced approach, where both our corporate and side-by-side accounts look to AltaCorp Research as a trusted contributor to the overall business.

Benjamin Smith:    Fantastic. Now outside of cannabis, which you’re co-managing a lot of deals, co-managing/book-running a lot of deals, are you – which other sector are you starting to see the most deal flow?

David Kideckel:    Right. So I think of attention now is being shifted to what’s called the synthetically derived cannabinoid space. Most of these companies are private right now, so a lot of folks don’t even hear about them. The main difference of synthetically derived – let me backtrack a second: There are about over 100 different cannabinoids in the cannabis plant. Synthetically derived cannabinoids, whether that’s chemically derived or biosynthetically derived, you’re essentially producing these, whether they’re from a genetic level on the biological perspective, or at the chemical level, creating new molecules through organic chemistry, versus plant-derived, where you’re taking cannabinoids from the plant.

So a lot of the deal flow we’re seeing – and we’re involved with a number of the private companies – is from the synthetically derived cannabinoid space. One of them in particular, called Willow Biosciences, very impressive, this company. They are in the business of biosynthetic cannabinoids; they actually have a history. The management, another key part to any company we’re going to look at and get involved with is, can their management team actually execute?

So we see management from Willow Biosciences, they already have a previous track record in synthetically deriving thebate in the opioid side. So to close the loop on that as well, just got back this week from the US, where I was doing a site visit with one of the world leaders in controlled substances – and these are all chemically derived – this company called Noramco, it’s a private company, historically a big part of their business has been in the derivation of opioids. That’s still continuing, however, they’re seeing now a big shift to cannabinoids. And in fact, they have a partnership with Cardiol Therapeutics, and as a firm, we were the sole book-runner taking Cardiol Therapeutics public on the TSX.

And just to say, too, of all the cannabis names that did an IPO on the TSX, AltaCorp Capital, we actually were involved with, we actually led two of them: Cardiol Therapeutics – and this is two out of four – the other one was CanniMed, which of course was taken out by Aurora.

So when people look to AltaCorp, I think the main message that folks should know is, really, it’s not just our solid team, whether it’s sales and trading, banking, research, or on the ATB Financial side; it’s also the intellectual capital that we bring just having been in the space from Day One.

Benjamin Smith:    So I take it you’re genuinely interested, and you genuinely believe that the synthetic cannabinoid space is going to grow? It’s not going to end up, say, like the synthetic meat industry, where you can grow it in a lab, but you know, consumers don’t really want it. You would say that this is a lot different than that?

David Kideckel:    I would. In fact, we’re hedging our bets on it, so to speak. This is a major direction I’m taking our franchise into, and you look at companies like a Cronos that has a deal with the Gingko Bioworks; they’re also in the biosynthetically derived cannabinoid space, as well as Organigram, who has a partnership with Montreal-based Hyasynth Biologicals. So we don’t think this space is going anywhere; it’s only going to get bigger.

Now I do just want to point out that I don’t think it’s plant-derived versus the synthetically derived space; I think it’s a combination of both, and the reason being, the purity levels that you can obtain with the synthetically derived cannabinoids, they’re much higher. The yields are much higher, and costs can actually be a lot lower. And when you’re looking at very rare cannabinoids, to extract these from plants, the cost is so high and the yields are so low, and this is where the synthetically derived cannabinoid space is really going to come into play.

Benjamin Smith:    Absolutely. Well, great update, David. Thank you for stopping by the studio; we hope to have you back again.

David Kideckel:    Thanks, Ben.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.