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AltaCorp Capital Inc Analyst on Top Pick Valens GroWorks Corp (CNSX:VGW)

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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 shares his thoughts on the HEXO Corp (TSE:HEXO) (NYSE:HEXO) (FRA:74H) acquisition of Newstrike Brands Ltd (CVE:HIP) (OTCMKTS:NWKRF) (FRA:0N8). Kideckel likes the synergies between the two companies, particularly when it comes to the industry’s main value drivers of branding, beverages, and consumer packaged goods. Kideckel discusses AltaCorp’s top pick in the space, Valens GroWorks Corp (CNSX:VGW) (OTCMKTS:VGWCF) (FRA:7LV). He notes that the company’s recent deal with The Green Organic Dutchman Holdings Ltd (TSE:TGOD) (OTCMKTS:TGODF) (FRA:01GA) positions Valens as the leading extractor in the hemp segment of the industry. He notes the specific cost advantages of extracting from hemp and believes this gives Valens an advantage over other extraction companies. Kideckel offers his opinion on biosynthetic cannabinoids and whether such companies will have an advantage over cultivators.

Transcript:

James West:   David Kideckel joins me now. He’s a research analyst with AltaCorp Capital Inc. David, welcome back.

David Kideckel:    Thanks for having me, James.

James West:   Dave, we always have a wide ranging and interesting conversation, but let’s start today with the merger between HEXO and Newstrike.

David Kideckel:    Sure – certainly an exciting M&A in the space today with HEXO doing an all-stock transaction with Newstrike valued at about 260 million. This is more of a general theme in the whole sector, which is what we’ve pegged in our research: M&A, to be a, and consolidation, to be a key theme moving forward in 2019.

This was certainly a very interesting move by HEXO; we just actually toured the site in Gatineau, Quebec, a couple of weeks ago, and as a whole, within HEXO and Newstrike and the sector as a whole, three of the main value drivers in the entire industries are branding, beverages and CPG, or Consumer Product Goods. We see a lot of synergies between these two companies, both Newstrike and HEXO, and what this can offer. And especially with HEXO’s JV with Molson-Coors, trust, positioning them to be a true brand in Canada.

So this is just one example, the HEXO and Newstrike M&A deal just announced today, that we see is going to be really occurring quite a bit this year in the Canadian LP space.

James West:   Sure. Consolidation and, you know, mergers, seem to be the way that a lot of these companies are relying on growing, and I don’t mean that in a pun sense – but there’s also been a huge sort of focus on extracts. And another company that you’ve been covering, Valens Gro, has developed huge expertise in the space. In fact, we’re starting to see them ink a lot of deals consistently with some of the biggest players.

So you recently put out a note on Valens Gro, as well.

David Kideckel:    We did. So just this week, Valens announced a contract with The Green Organic Dutchman, or TGOD, and this will be both a marijuana and a hemp extraction contract. We really like this deal between the two companies because it really positions Valens as the leading extractor in the hemp segment now of the market, too. We know from a cost and efficiency perspective, when you’re trying to extract CBD from hemp, it’s actually quite a bit more efficient compared to marijuana, and over and above the hemp component here, the contract spelled out that this is going to be a big deal from the organic certification process for Valens.

So a really impressive contract, here. Valens continues to be our firm’s top pick in the entire cannabis space, and the reason being – well, there’s many reasons, but the one I’ll focus on, if you look at this time last year, everybody was talking about the Canadian LPs getting ready to sell certain legalized products: the dried flower, certain oils, etcetera. With legalization of the new derivative-type products, with extracts, edibles, beverages, vape pens coming online in October 2019, this is exactly where folks want to be in the space: with the extraction-type companies, where the margins you’re talking about, these products, are the highest within the segment.

So for that reason in particular, Valens and, with this contract announced with TGOD, it’s a very big deal. Certainly we’ll be having quite a bit more to say about that over the next few days.

James West:   Sure. Do you know, does the CBD content of the plant itself, for example, if a plant is 34 percent CBD and low THC, does that have a cost benefit relative to producing from hemp, which typically has low CBD, low THC?

David Kideckel:    Well, sure. So hemp, by definition, is under 0.3 percent of THC. So the content of THC is almost negligible. So from a cost perspective, yes, it’s actually, there are specific cost advantages for extracting hemp and producing the same CBD from hemp as you would from the marijuana plant. Because at the end of the day, CBD is CBD is CBD.

James West:   Right. So the other guys would have a disadvantage because they have to separate out the THC.

David Kideckel:    Sure, I mean, unless some of the other companies out there can also manufacture, or be able to acquire contracts within the hemp business, specifically.

James West:   Sure. An emerging space that is still very much under the radar and threatens both the licensed producer who’s growing it and the extraction business, arguably, in the future, is the biosynthetic realm, and we’re starting to see more and more entrants into that space. and just talking prior to the start of this segment, we found out that we both share a fascination for this space.

So what is your take on the status of that today, of how soon till that becomes a real threat?

David Kideckel:    Yeah, so I love talking about this, James. Certainly it’s been tying up a lot of my time lately, in educating institutional investors on this disruptor-type space.

So we see a number of companies in the space already; I believe most, if not all, of them are private. We see Cronos, for example, with Gingko Bioworks of Boston, Hyasynth Biologicals as we were talking about with Organigram.

Where this, we believe, can really offer a lot of advantages: first of all, let me say we don’t view this as plant-derived versus biosynthetically derived. It’s really the two offering synergies among one another.

The reason being, if you look at the cost to actually extract the rare cannabinoids – CBN, CBG, there’s over 100 different cannabinoids in the plant – the cost to extract these from an actual plant, it’s cost-prohibitive. I would be surprised if you see any company try to extract at scale, these rare cannabinoids, and then try to manufacture them within CPG products.

So the real advantage, one of the real advantages here is with the cost, but also the type of cannabinoids you can actually produce.

Now, as far as the commercialization part to this, this is why this is a great time to get into the space. we’re looking at about anywhere, the estimates suggest, between 18 and 24 months to be able to commercialize these cannabinoids at scale. Our firm, just recently we were involved in a transaction with a private company that’s going to be going public; it will be called Willow Biosciences, and they’re in the biosynthetic space, as well.

So this is another great company, and as time goes on now, I can tell you, among several companies I’ve been speaking with, the Canadian LPs, even big US companies, most if not all are already talking about biosynthetic cannabinoids, although we obviously haven’t seen any major deals in the space.

James West:   Sure. So if we’re looking at a future where biosynthetic cannabinoids displace all plant-born, plant-derived cannabinoids because of cost effectiveness, do entities like GW Pharma, who’s another company that I know that you cover, do they gravitate towards those biosynthetic sources because they can so closely define what the product actually is that they get?

David Kideckel:    Right. So it’s a great question. Now, I guess our view isn’t that the biosynthetically derived cannabinoids are going to outright replace the plant-derived cannabinoids. They’re going to be complementing one another, certainly for CBD and THC, which are the two most commonly occurring cannabinoids in the plant. As I mentioned, with the rare cannabinoids, that’s where we see value.

Now, GW Pharma, we’re the only firm in Canada to actually cover this world-leading company; in fact, we just took the marketing in Boston last week and met with some of the world’s leading funds, and this was a conversation we actually discussed. So GW, I think, the way to think about GW now is, they’re all plant-derived. Everything they do is plant-derived; you see with their Epidiolex product, which was just launched and they announced results a couple of weeks ago, I think it blew all analysts’ expectations out of the water, to the point where I boosted my target price by $25 USD alone, which is still quite conservative.

So I still there’s room and a lot of upside, and just hearing how GW thinks about the space as a whole, it was just a great experience, I think, for everybody. So we’re working with them now to bring them to Canada; I’d be happy to set up a meeting with you and any other folks that would be interested.

James West:   Absolutely.

David Kideckel:    But I think it just speaks, it’s a nod to where AltaCorp Capital sits from a research standpoint, being able to attract the best companies in the world. And that’s the type of franchise we’re building at AltaCorp Research.

James West:   Fantastic. Does GW Pharma source its cannabinoids from plant-borne sources, currently?

David Kideckel:    Yeah. In fact, they’re a plant-derived company, entirely. All of their grow is done in the UK.

James West:   Really? So they’re growing cannabis in the UK?

David Kideckel:    Yeah.

James West:   And this is interesting, because the UK had been saying up until recently that there’s no way we were ever going to license cannabis in the UK, and that obviously turned on its head as soon as this kid with Dravet Syndrome was brought into the public eye. That seems to be the catalyzing effect in most markets.

David Kideckel:    So just to be – I’ll just comment on that quickly: it’s an interesting point you bring up, James, because that’s more on, I would say, the medical cannabis side. What GW Pharma is operating in is cannabinoid-derived pharmaceuticals. These are like, you can think of cannabinoid-derived pharmaceuticals as following the traditional pharmaceutical and biotechnology models, running all the way from Phase I through Phase III clinical trials.

So the way GW should be looked at isn’t as a cannabis company; they’re biotech company that happens to be using cannabinoids as the active pharmaceutical ingredients.

James West:   Wow, fantastic. So the focus of AltaCorp on cannabis companies seems to be growing; again, there’s that pun, but – is that a result of investment success that you’re seeing good performance by these companies still? Even though the space continues to get crowded, there’s still quality companies coming at us, and certainly these mergers make for great opportunities.

David Kideckel:    Certainly, I think, AltaCorp is growing, and in fact, we’re very selective in the companies we decide that we want to get engaged with, largely because we want to pick our spots. We’re not a Me, Too voice or a Me, Too firm; we want to add value to whatever we’re doing. So even with all the M&A and consolidation we’re talking about in the space, there’s still plenty of room for more. In fact, that’s what we’re going to see, we believe, moving forward into 2019.

And now when we talk about the biosynthetically derived cannabinoids, this has just opened up a completely new world, and we’re so pleased to be able to say that these companies are coming to us to ask how we feel about the space.

So there’s certainly many opportunities I think that you’ll continue to see, that I’m happy to share as we move forward.

James West:   Great. Well, David, that’s an enlightening conversation as per usual. Great to have you here, we’ll have you back soon. Thanks for joining me.

David Kideckel:    Look forward to it, thanks.

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.