The Florida Marijuana Market – Weekly Recap (January 10th, 2020)

Capital 10X breaks down the Florida marijuana market by looking at:

  • Weekly Market Moving News
  • Trends in the Florida Marijuana Market
  • Weekly Competitive Analysis

In a rapidly expanding market investors need to stay on top of who is growing like a weed and who is being squeezed out.

Weekly Market Moving News

Liberty Health Sciences Changes Auditors

This week Liberty Health Sciences announced they have changed auditors from MNP LLP to Zeifmans. While this may seem worrisome, there are no outstanding issues with the previous auditors.

Interestingly enough, MNP LLP is the same accounting firm that represents Cresco Labs . This has led to the speculation that acquisition discussions may occur, as a single auditor could not represent two clients in acquisition discussions and they would often side with the larger company. We’ve previously highlighted Liberty Health Sciences as a potential target ever since Cresco cancelled the VidaCanna acquisition.

Given Cresco’s desire to become one of the top MSOs, they will need to find an entry into the second largest state in the U.S. and LHS is an excellent target.

LHS has a healthy cash balance, solid market positioning (see below), a CFO burn of $1.5 million and a net operating loss of $0.45 million as of the last quarter. While they only just closed the Origin House acquisition, and have their work cut out for them, they would be smart to make moves while the industry is in a bear market.

Looking at the premiums of past public acquisitions like Cresco/Origin House (26% on the initial announcement) and iAnthus/MPX (31%), the opportunity could be big for Liberty Health investors.

While the market has cooled off, even a 20% premium would result in a $260 million deal for LHS. The net result would be 34 million Cresco shares or a 48% dilution from current levels at an exchange of approximately 0.1 Cresco share to one Liberty Health Sciences share.

Active Patients Reach Another Big Milestone

This week the active patients broke 300,000 for the first time. While this represents substantial growth, more importantly, it means they have reached another milestone of 100,000 patients added to the registry.

According to government regulations, each company is now permitted to open an additional 5 dispensary locations on top of their previous count. While it’s unclear when the change will take effect or when companies will open the stores, it will certainly help boost market growth.

iAnthus’ GrowHealthy Continues Expansion

Shareholders should expect to see substantial market share growth, otherwise, it will be a sign iAnthus is failing to capture market share from entrenched competitors.

iAnthus’ subsidiary GrowHealthy announced the opening of it’s 12th Florida dispensary. They have also indicated they have “several” additional stores that will open in early 2020 pending approvals, and “several” others under construction with a total of 10 more under lease.

While they are still a small player in the Florida market, a near doubling of dispensary footprint would be significant for the company. It will be important for iAnthus shareholders to watch the effect these rollouts have on total sales.

Investing in a highly competitive state will present many challenges. Shareholders should expect to see substantial market share growth, otherwise, it will be a sign iAnthus is failing to capture market share from entrenched competitors.

Trends in the Florida Marijuana Market

This week three new dispensaries were approved by the state of Florida and patient growth broke the 300,000 mark. The growth of the Florida market is showing no signs of slowing.

However, overall this signifies an increasingly competitive market where dispensary growth outpaces patient growth, leaving fewer patients per store.

Growth of Florida Patient Count and Dispensaries

Source: Florida OMMU.

Looking at overall consumption and consumption per patient, we saw a bounce back from what appears to be a sporadic time around the holidays and into the new year.

While it’s unclear whether the dip in flower sales was due to any supply bottlenecks, it did line up with a drop in concentrate sales. Next week will indicate whether consumption rates will continue to grow at their breakneck pace or whether supply is finally starting to keep up with demand.

Marijuana Concentrate Consumption

Source: Florida OMMU.

Marijuana Flower Consumption

Source: Florida OMMU.

Weekly Competitive Analysis

Now turning to the companies themselves, the following three graphs break down the market share of dispensaries, marijuana concentrate sales, and marijuana flower sales.

Overall, there were no notable changes. Investors looking to buy into the growing Florida market should look for companies with substantial market share. These players will capture an outsized portion of the market’s growth.

Market Share of Dispensaries

Source: Florida OMMU.

Market Share of Marijuana Concentrate Sales

Source: Florida OMMU.

Market Share of Marijuana Flower Sales

Source: Florida OMMU.

Diving a little deeper, if you want to see the best return on your capital, you should invest in efficient operators. These will be the companies that generate a higher share of sales compared to their share of dispensaries.

Opening and operating dispensaries is very capital intensive. A company with a lot of stores but fewer total sales is using your capital inefficiently, signalling there are likely better investments.

The following graphs look at dispensary efficiency (x-axis) and market share (bubble size). Investors should look for companies that operate their dispensaries efficiently (highest ratio) while still capturing a meaningful portion of the total market (largest circle).

Market Share and Store Efficiency for Extract Sales

Source: Florida OMMU.

Market Share and Store Efficiency for Flower Sales

Source: Florida OMMU.

Companies with ratios greater than 1 are generating a higher proportion of total sales compared to their proportion of dispensaries — this signifies efficient operations. The size of the circle indicates how substantial their operations are relative to their peers.

Invest in companies with higher efficiency and greater market share (large circle). For example, Trulieve and AltMed punch above their weight in extract sales, while Trulieve and Liberty Health dominate the flower category.

Investors can get a more detailed view of how a company’s sales are divided between extract and flower in the following graph.

Extract and Flower Sales Per Store

Source: Florida OMMU.

Wrapping things up, we wanted to look at how companies have been performing over the medium term. This last graph shows the change in total sales this week compared to the last month’s weekly average.

Any companies making significant gains could be up-and-comers to watch if you believe in the upside of the Florida market.

Sales Change for Week of Jan. 10

Source: Florida OMMU.

Notably, Trulieve has seen a slight decrease, which is to be expected as the competition heats up. Considering the size of their market share, these losses are minimal if they occur sparingly.

Liberty Health saw a more substantial drop in flower sales. Given they sit second in market share in this category, this could signify competition is heating up with other producers bringing capacity online. Investors will need to watch this closely to see if LHS can maintain their position in the flower market.

GrowHealthy saw a substantial drop in concentrate sales this week. Looking closer at the data, this is due to two massive sales weeks in December that increased their monthly average. On a week-over-week basis, sales are flat. Investors should watch for healthy growth to pick back up, especially with GrowHealthy’s new dispensaries coming online.

For any investors looking to buy into the Florida market, the following graph shows which companies may show an entry point. Keep in mind, only Trulieve and Liberty Health offer largely pure-play exposure to the market.

Weekly Stock Performance

Source: Yahoo Finance

iAnthus Capital Holdings is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Evan Veryard
Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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