- Early leaders MediPharm Labs and Valens GroWorks have already produced multi-bagger returns
- Expanding capacity signals more gains in the future
As the cannabis sector starts to mature, investors are now seeing a number of well-defined business models within this industry. There is cultivation, biopharma, nutraceuticals/cosmeceuticals, cannabis retail, medicinal clinics, and cannabis infotech.
There are also all the “vertically-integrated cannabis companies.” They combine two or more elements from the list above. However, what most of these segments depend on is cannabis extraction.
A couple of the early leaders in this speciality have already carved out strong footholds. With both rapidly expanding their extraction capacity, there is abundant additional growth potential here. More on this later.
Technically, cannabis extraction is the process used to extract cannabinoids from the cannabis plant. Cannabinoids are the active ingredients in the cannabis plant, and which also occur naturally in the human body.
These cannabinoids are extracted in the form of cannabis oils. It is these oils which are the foundation for virtually all value-added cannabis products.
This includes all forms of cannabis concentrates. Cannabis oils are also key inputs in cannabis “edibles” cannabis-infused products (such as beverages), and most cannabis nutraceuticals and cosmeceuticals.
Investors would be hard-pressed to find any cannabis company that is involved with cultivation, product manufacturing, or cannabis retailing that is not already expressing a strong commitment to integrate such products into their operations.
Such companies have two choices.
They can fund, construct and operate their own extraction facility. Or, they can partner with a cannabis extraction specialist.
Apart from the savings in time and capital costs, there are two principal reasons why a majority of players in the cannabis industry are now choosing the latter route:
As with any other economic niche, it’s difficult to compete with scale in terms of efficiency. Cannabis extraction specialists (especially in Canada) are ramping up toward massive extraction capacity.
Along with this scale is expertise.
These extraction specialists did their homework before jumping into this niche. They either acquired or internally developed industry-leading technology for the clean and efficient extraction of cannabis oils.
This makes them ideal partners for other players in the cannabis industry. They can not only provide reliable, timely delivery of cannabis oils. They can also provide the QA/QC that is highly desirable with respect to any manufacturing input.
Not surprisingly, a couple of these Canadian extraction specialists are already flying high. Both MediPharm Labs Corp. (CAN:LABS, US:MLCPF) and Valens GroWorks Corp (CAN:VGW, US:VGWCF) have rewarded shareholders with the foresight to get in early.
[charts courtesy of Stockcharts.com]
Both MediPharm and Valens have announced numerous supply agreements with other cannabis companies. This includes most of the industry leaders: Canopy Growth, Tilray, TGOD, and on and on.
Generally, these are multi-year agreements. Many contain options to extend or expand the scope of the deal. Some of these agreements are already being expanded.
Earlier today, TSI reported that Valens and Tilray have expanded on the volume of extraction services and added an option “to provide contract manufacturing services”.
Another reason why seasoned investors may lean towards the extraction specialists is a clear path to revenues and profits.
As an emerging sector, the cannabis industry carries with it considerable uncertainty over the short to medium term. This relates to two important hurdles the industry needs to overcome: regulation and bureaucracy.
The cannabis industry is grossly over-regulated. Because of this, companies all along the supply chain from cultivation to retail are having to navigate through a maze of restrictions.
Much of this regulation adds to the cost of doing business. That eats into margins.
Then there are the excessive bureaucratic headaches that inevitably accompany over-regulation. In particular, this is impacting the retail end of the industry. While recreational cannabis has been legalized in Canada nationally, poor execution on the provincial side has created severe supply bottlenecks in several provinces.
The extraction specialists are largely immune to these issues. They can contract with and sell to anyone. Very little regulation or bureaucracy directly impacts their operations.
The cannabis industry has almost limitless long-term commercial and investment potential. In the short term, however, many investors may see the cannabis extraction specialists as the path-of-least-resistance to investment profits.