MediPharm Secures $30m Cronos Supply Deal

Extraction specialist MediPharm Labs Corp. has secured a $30 million deal to supply Cronos Group with private-label cannabis concentrates over the next 18 months.

There is the potential for the deal to increase to $60 million over 24 months if Cronos enjoys strong sales. Concentrate sales will be permitted in Canada this October and demand is expected to be high, based on sales data from U.S. states.

In December 2018, concentrates captured 37% of the cannabis market in California, ahead of flower, which had 33%. Sales of edibles and other concentrates are also soaring in states like Colorado and they are all but certain to prove popular in Canada too.

However, MediPharm is on track to increase annual throughput capacity from 150,000 kg to 250,000 kg during 2019, yet it has only been contracted to produce a fraction of that so far. It is therefore imperative for the firm to tie up more deals if it is to meet consensus and EBITDA estimates, and this agreement with Cronos is a step in the right direction.

High-Quality Specialized Services

Marlboro tobacco producer Altria Group purchased a 45% stake in Cronos in March 2019 for $2.4 billion and it is bidding to become one of the world’s largest marijuana producers. It currently has an annualized production capacity of 40,000 kg, but that is set to increase to 110,000 kg next year and it has various operations across the globe.

It is a cash-rich business and it could become a lucrative partner for MediPharm going forward. Some large cannabis companies, like Aphria, are taking extraction services in-house, but there is a significant opportunity for MediPharm and its peers to tie up deals with the remaining large players that prefer to contract it out.

It already has agreements in place with Canopy Growth Corp. and TerrAscend, and Cronos was impressed by MediPharm’s operations.

“As the industry develops and matures, we see opportunity to work with companies like MediPharm Labs that provide specialized, high-quality services and inputs for our products,” said Mike Gorenstein, chief executive at Cronos Group. “Along with our internal capabilities, we are pleased to be working with MediPharm Labs to bring great products to consumers in anticipation of the derivative market launching in Canada this fall.”

The Sector’s Darling

Cronos’ wholly owned subsidiary, Peace Naturals Project Inc., will purchase a minimum of $30 million worth of cannabis concentrate from MediPharm over the next 18 months. It will have first refusal to purchase an additional $18 million worth of cannabis concentrate over the same period, subject to the availability of such supply from MediPharm.

There is a mutual extension in place that would see Peace Naturals purchase another $6 million of concentrate and enjoy first refusal on another $6 million over the ensuing six months if activated. That could see the total rise to $60 million by 2021.

Shares in MediPharm have increased from $1.74 on Dec. 31, 2018, to $6.43 when trading closed on Monday, May 13, vastly outperforming the sector. It was up to $7.06 by 10.30 a.m. on Tuesday, May 14. LABS could see further short-term increases by announcing more deals like this, while its long-term health depends on demand increasing significantly for concentrates.

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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.

Martin Green
Martin Green is an experienced journalist with a strong focus on the cannabis, alcohol, and gambling industries. He is particularly interested in the political issues affecting the global marijuana trade, and he has a keen focus on regulation changes and legal topics. He holds a BA English Literature, MA Creative Writing and a National Qualification in Journalism diploma. He has worked in journalism since 2009 and written for a broad range of newspapers, business titles and magazines, including The Sun, The Metro, The Journal, Livestrong, Drinks Retailing News, Harpers, Sportsbook Review, Vital Football, Essex Live and Surrey Live. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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