The cannabis extracts market in Canada will get a significant boost this fall when new regulations allowing for edibles and products that can be vaped go into effect.
Some analysts predict that extracts will make up at least half of Canada’s cannabis market as consumer demand shifts from pre-rolls and flower. That’s a huge gain from the segment’s estimated 13% market share at the end of 2018, according to GMP Securities.
Poised for Growth: Companies to Watch
The incoming wave of new cannabis products opens a host of attractive investment considerations. Some large cultivators are already ramping up in-house extraction, while others tap outside firms that focus primarily on extraction.
Here’s a quick overview of the evolving landscape:
- Barrie, Ontario-based MediPharm—Canada’s largest extractor—has inked more than 20 supply or sales agreements with licensed producers across the country to provide extraction services. The company posted revenue of CA$10.2 million in its fiscal fourth quarter, ended Dec. 12, 2018, placing it among the top 10 Canadian cannabis companies by revenue. Analysts forecast 2019 revenues of $100.4 million, climbing to $137.1 million by 2020.
- Valens GroWorks signed multiyear extraction agreements with a number of other leading licensed producers in Canada, including The Green Organic Dutchman, Organigram and Tilray. Revenue for Canada’s third-largest extractor is projected to grow to $32.6 million this year and then spike to $89 million in 2020, according to projections from analysts at Alta Corp.
- Canopy Growth, Canada’s largest licensed producer, entered into a two-year processing and extraction agreement with Smith Falls, Ontario-based HollyWeed Manufacturing & Extracts. The company also has agreements in place with MediPharm and Valens GroWorks.
Branded Products Versus White Label
In the near term, Canada’s leading extractors are positioning themselves as critical white label partners to the top licensed producers when rules allow for vape pens, edibles, beverages and other extracted products.
These agreements are proving lucrative.
In February, MediPharm inked a $35 million deal to produce cannabis concentrates for a Canadian licensed producer – the name of which was not disclosed. The company has inked a total of four such agreements valued at more than $85 million in the last year.
While white label services are in high demand now, longer-term extraction firms may need to reconsider their offering to remain competitive, noted Christopher Carey, a research analyst with Bank of America Merrill Lynch.
For investors, extraction firms that also have their eyes on producing their own branded products may have the most staying power, Carey noted.
“We believe extraction equipment, and companies focused on extraction, will be in high demand in the near term. Longer term, we don’t think this is a competitive advantage,” he wrote in a recent research note. “In order to protect margins, companies focused entirely on extraction today will likely need to evolve to produce their own branded products.”
