MediPharm Labs Corp (CVE:LABS) (OTCMKTS:MEDIF) (FRA:MLZ) President Keith Strachan has nothing but praise for the MediPharm team in light of the company’s recent financial reporting. MediPharm recently released its Q4 financials for the period ending December 31, 2018 and the results were impressive. The company reported revenue of $10.2 million and adjusted EBITDA of $2.1 million. The pure play extractor has partnerships with Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) and Supreme Cannabis Company Inc (TSE:FIRE) (OTCMKTS:SPRWF) (FRA:53S1). MediPharm Labs is strictly a B2B company and Strachan explains that its private label approach provides a turnkey model for established brands to enter the cannabis space. While price competition in the extraction space is a concern, Strachan believes the company’s turnkey offerings, in addition to MediPharm’s specialized end products and secure supply chain, will offset any commodity pricing in the space.
Narrator: Founded in 2015, MediPharm Labs produces pharmaceutical-grade cannabis oil, using downstream secondary extraction methodology, distillation and cannabinoid isolation and purification.
MediPharm Labs provides B2B contract processing of cannabis to Canadian authorized licensed producers and international growers, supplying cannabis oil to qualified companies for sale under their own brand.
In addition, MediPharm Labs will supply raw materials, formulations, processing and packaging for the creation of ready-to-sell advanced derivative products.
Through its subsidiary, MediPharm Labs Australia PTY Limited, MediPharm has also completed its application process with the Federal Office of Drug Control, to extract and import medical cannabis products in Australia.
MediPharm Labs is listed on the TSX Venture and trades under the ticker symbol LABS.
James West: I’m joined now by Keith Strachan. He’s the President of MediPharm Labs Corp. Keith, welcome.
Keith Strachan: Thanks for having me! It’s exciting to be on the show. Big fan.
James West: Congratulations on your quarter, or on your – yeah, that’s amazing! 10.2 million, with adjusted EBITDA of 2.1 million in Q4.
Keith Strachan: No small feat. We have an amazing team there in Barrie, and it’s a lot of oil that we got put out there in the month of December.
James West: Okay, so how much oil does that represent?
Keith Strachan: We can’t give exact volumes, just to protect some commercial terms of some of our agreements where are a little bit bound, but you know, if you take a look at it about a whole, as far as the revenue goes, and kind of what you see retail value-wise and what’s going out, that could be, you know, anywhere between let’s call it 75 to 125 kilograms of crude resin. So most of that was wholesale; majority of it in the form of like winterized oil, which would then go on by one of our purchasers to be an end product such as a gel capsule or sublingual drop.
James West: So you guys are produced concentrated extracted cannabinoids?
Keith Strachan: Yes.
James West: And you have a partnership with Canopy. Is that who you’re – and Supreme?
Keith Strachan: Yeah, we have multiple partnerships. Those two are very different ones. So with our friends at Canopy, we actually buy wholesale flower from all across Canada, buying from over 15 different licensed producers right now. We make that into an oil concentrate, and then we sell that to Canopy. So we’re not actually repurposing some of their dried cannabis, we’re actually giving them an opportunity to increase their inventory, which is very unique to something that we do.
In the case of Supreme and 7Acres, great company. What we do for them is, we actually take their dried cannabis and make it into an oil product, put it into a bottle formulated with their label on it, and then we’ll ship that directly to a provincial retailer on their behalf.
James West: Okay. So how do we compare what you guys do with, say, for example, what ValensGro does, who also has these types of partnerships? I mean, the investing audience wants to know: is it a case of one is better than the other? Is it a case of one does things differently than the other and both are at the top of their game? Is it a case of, you let the best man win and we could argue about that all day long?
Keith Strachan: I would say, you know, both great companies. We think that we’re very differentiated in a number of ways. One of them is our private label model, where we are buying wholesale cannabis – so we’re putting our neck out, buying that supply, having a supply chain downstream where we’re bringing in dried cannabis from 15 different suppliers, and then we’re selling that wholesale. And what that really gives us an opportunity to do going forward is work with private label deals, where let’s say a consumer packaged good brand in a different vertical wanted to come into cannabis, we can give them a whole turnkey solution, including the supply chain.
So whereas we see other people getting into the extraction space are a lot focused on more of the toy model – so take a producer’s dried flower, turn it into something else, send it back to them – that’s more of a fee-for-service, and what we’re doing is something that’s fully turnkey, and I think that that’s really going to empower some big brands that we know from other verticals, and help them enter into the cannabis space.
James West: So just by way of example, I use a CBD sublingual oil every day; olive oil and 98 percent CBD oil, and so do you guys make that for – no.
Keith Strachan: Yes. Yes, we totally turnkey that oil, so that sublingual drop, we make those now. So we can do a private label for someone who’s not involved with cannabis so they never have to touch it; we just put their logo on it and send it out to provincial retailer. Or, we can do it for another licensed producer. So in the case like I mentioned with Supreme, 7Acres, what that is, is a full turnkey solution where we will use their unique formula – so it stays unique to them, not for any other customer – a very great formula. And then we bottle it into a bottle, package it, excise sticker, out to provincial distribution.
James West: Right. So if I have a proprietary process, I share it with you, you do the processing, and it’s protected by agreement?
Keith Strachan: Yeah, protected by agreement, and that’s the great thing about MediPharm Labs not having a brand. So we’re never competing with our customers. So when you bring in a proprietary formulation, although we may love it, we keep it just for you, because we don’t actually have a way to mobilize it just for ourselves, and that’s not our business model. Our business model is strictly to empower other brands.
James West: That’s really interesting. So, strict, strict, and we’re talking strict B2B.
Keith Strachan: Strict is the key to positive EBITDA, and I think that being singular focused on extraction, and really hunkering down on our business model and staying laser-focused is really what gave us the opportunity to come out of the gates and, frankly, surprise a lot of people in this industry with that profitable quarter.
James West: Yeah, we’re not used to cannabis companies with profits. Okay, so then, what’s the next step? Are you guys able to project what the rest of the year’s going to look like in 2019?
Keith Strachan: Yeah, I think financial-guidance wise isn’t something we’re ready for today, but you know, projecting out, I think we talked about the white label solutions, private label, so empowering some big brands, whether that’s from natural health food or from CPG, bringing them into cannabis. I think that there’s a huge opportunity there. You’ll see a lot of those announcements made over the next quarter, as far as who we are going to be working with in those spaces, and I think there’ll be some names that everyone recognizes. So we’re really excited about that, and then we’re also looking at the science side.
So where we were the first person to do extraction only, we’re not hanging our hats just on that; we want to remain a leader, and what we’re doing is, we’re working on the science side to do things like isolate, fractionate, novel smaller cannabinoids and things like that, and really commercialize some of those activities from outside the lab to actually getting products on the shelf. So, lots of good things coming up in 2019, and obviously sticking with our laser focus to make sure we remain positive on our EBITDA.
James West: Right. I was present at a, call it a discourse, where a guy held up a, I think it was, what did he say – I can’t remember – it was like, I don’t know, like a 10 litre jug of extracted concentrate.
Keith Strachan: Oh, yeah.
James West: And he said ‘This is worth $67,000’. And the other guy said, Yeah, in Canada; in the US it’s only worth 100. So it’s my sort of long-winded way of leading into the conversation about commodity pricing for the raw material. Obviously, if you’re buying the raw material, that’s your input, commodity pricing is welcome. But now what happens when you’re not capturing the only remaining margin left, which is in the retail pricing, because you’ve got to sell to a wholesaler who’s now going to say to you, All right: I want cheaper oil, because otherwise I’ll go elsewhere?
Keith Strachan: Yeah, because your prices are coming down. So we are seeing a bit of price compression on the dried cannabis side. I think in the kind of bulk formulated, as you mentioned, our bulk concentrate, we will see a little bit of price compression, and I think that’s why it’s important MediPharm moves forward in the way that we are, actually making end products. So where we’re working with these partners on private labels, they’re not from cannabis; they’re coming into cannabis, we’re giving them a turnkey solution. I think because we’re bringing so much value to the table, it’s not an actual kind of pure CMO, contract manufacturer, relationship that you see in other industries. It’s more of a partnership. So whereas we’re bringing our regulatory expertise, our formulation expertise, and that secure supply chain, that’s where we really get to realize a lot of that revenue, where you said – on that end product. And I think with specialized end products, especially in health care and pharmaceutical-type products, we don’t see that price compression.
James West: Sure. The imminent legislation in Canada for edibles and beverages, which we’re expecting in October, theoretically, this year – is that a huge value catalyst for you guys?
Keith Strachan: Massive. So, like, that, for us, we make distillate now; so when you see, like, a vape pen that’s so popular in other jurisdictions, we make that distillate now. So as soon as we get the Health Canada regulations, we’ll be filling vape cartridges and we’ll be getting our partners’ brands on the shelf with things like vape pens. I think we’re going to see some big consumer packaged goods companies come in from the edibles side and from the drinks side, and what we want to do is work with those big companies. So rather than launch a MediPharm water, which you know, with the restrictions on marketing, we don’t see a big brand awareness opportunity there. We want to work with someone who maybe sells water already on the shelves that you know, and then give them either the CBD or THC inputs to empower that brand.
James West: Very cool.
Keith Strachan: It’s really a big opportunity, yeah.
James West: Yeah. So in terms of the supply of cannabis, I mean, it sounds to me like the advent of edibles and beverages and vape cartridges and all of that in October could cause the entire supply chain to be under pressure again, whereas currently, you know, to me it’s always interesting. I hear from an extractor like MediPharm that you’re able to buy all you need of dried flower from existing producers, yet on the retail side, we hear that there’s this huge shortage of material. And so it’s very hard to reconcile those differences from, you know, from watching the centre; it’s like being at a tennis game and there’s like five tennis players playing with eight balls, and you’re just like, okay, what is really going on here?!
Keith Strachan: Yeah, I think what’s important to note is, well, we could always use more cannabis, but we’re not seeing a big supply shortage at this point. I think we did a press release earlier this week; we bought 5,000 kilograms of cannabis just in the last three or four weeks.
James West: Premium dried flower?
Keith Strachan: Yeah. Brought that into us. So maybe not always premium; so that’s kind of where we’re going with that.
James West: What does that cost you?
Keith Strachan: Cost varies a lot by partner; not all cannabis is created equal, so we might be buying 10 percent THC trim or we might be buying 20 percent THC flower. So really, that difference obviously causes a difference in price; so it ranges a lot as far as whether we’re buying it for $3 a gram or $4 a gram as far as what the price of the input is. And I think what there’s a big opportunity out there right now is, as all these great Canadian cultivators scale up, and bring on these greenhouses, we’re seeing a lot of extract-ready cannabis. So where it might be your first or second test crop, or you’re growing at large scale, that might not be the perfect bud that you want to put on the shelf and put your name on it, but it’s perfect for extraction.
So then we bring in stuff like that. So we’re not seeing a big supply shortage. I think the other shortage that we’re seeing is the kind of expertise in the final mile. So whereas a lot of companies have focused on growing great cannabis and doing that, I think the regulations came quickly, and you know, getting it from the plant to the store is a whole other level of expertise. We’re seeing a lot of maturity in the market now, but there’s a still a long way for us, as a whole industry, to go. So that’s what we bring to the table, is our expertise of actually getting the product to the shelf.
James West: Sure. In the United States they’re restricted to putting only CBD derived from hemp, which is, by definition, a cannabis plant that has below 0.3 percent THC content. But does it also max out at 3 percent CBD?
Keith Strachan: I think in the United States – and I’m not a professional on that jurisdiction – but there is some cultivators in places like Kentucky, Colorado, who are growing high-CBD hemp. In Canada, we’re not seeing those genetics now, so where we’re –
James West: High CBD, meaning what percentage?
Keith Strachan: Higher than, let’s say, 8 percent cannabinoids by weight.
James West: Okay. What’s the highest CBD feedstock you’ve encountered?
Keith Strachan: CBD feedstock from hemp in Canada? I haven’t seen a certificate of analysis of anything over 5 percent.
James West: Okay.
Keith Strachan: So that’s not something we’d look to process.
James West: Right. So is – and to what extent does the percentage of contained CBD at the plant feedstock level, affect the economics of the concentrates that you’re producing?
Keith Strachan: It’s huge. So basically we’re doing, let’s call it, like an 80 to 90 percent recovery on those cannabinoids – in this case, CBD. So if we’re putting in 5 percent, and then we’re only, like, 5 percent, 100 kilograms, we’re only getting 4 to 5 kilograms of actual concentrate oil; if we put in 20 percent THC, we’re getting 20 kilograms. So obviously there’s a huge economies of scale opportunity there with a more potent plant, and so we’ve tried to stay away from some of that low-CBD hemp. And because we have a pharmaceutical facility, as you saw kind of in the intro video, there; we operate an ISO-ready clean rooms, very professional chemist and pharma team. So really, we focus on those high-value products, and right now we’re just not seeing that in hemp in Canada.
James West: Cool. Well, it’s an amazing story; I am really blown away at how fast you guys came out of nowhere and become, you know, this profitable company. Congratulations again, Keith, and we’re going to leave it there for now. I’ll have you back soon. Thanks for joining me today.
Keith Strachan: Great, thanks for having us.
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