This is a copy of the April 29th edition of our weekly Newsletter, which we have been publishing since October, 2015.
Friends,
A few weeks ago, we weighed in on the debate about the potential for a supply shortage or a glut in Canada, sharing our view that there will be a shortage initially and then possibly oversupply a few years out. The factors that will impact the longer-term outlook include how well the LPs scale production, how quickly extracts and edibles are added to the product set, how strong the enforcement against the black market will be, how long the export window remains open and perhaps as well the progress made in pharmaceutical substitution.
Recent data confirms our concerns about the potential for an acute supply shortage initially. The most recent aggregate data provided by Health Canada suggests that there are 50 million grams (55 tons) in inventory at LPs as of December 31st. The inventory was about 75% dried flower and the balance in oils. The retail value of this product is likely no more than $500 million, which is a small fraction of the expected annual demand. The net addition from September to December was only 13 million grams, and a reasonable estimate for how much product might be available for sale at the end of August would be 100 million grams or so, assuming production picks up at current facilities and the inclusion of a few additional LPs or new facilities.
Several LPs have reported financials recently, and we aren’t seeing significant progress in building inventory. This week, for example, Organigram reported inventory of 1 million grams of dried flower and 1.3 million ml of oil at the end of February, carried at $8.3 million, up from the $4 million in the prior quarter. This represents about 1.15 million grams on an equivalency factor, and just its New Brunswick supply agreement requires 5 million grams. Its PEI supply agreement represents another 1 million grams per year. Sensing its lack of inventory for supplying the adult-use market, Aphria revealed on its quarterly conference call earlier this month that it is exiting the wholesale market. The company ended its quarter in February with inventory valued at less than $12 million, an increase over the prior quarter of just $3 million. Total inventory, including dried flower, trim and oils, amounted to 3 million grams. Aphria is supposed to supply just Quebec with 12 million grams. Hydropothecary is expected to deliver 20 million grams to Quebec in the first year. In the quarter ending January 31st, it sold 131K grams, or just 2.5% of the Quebec contract on an annualized basis. Inventory at the end of the quarter was valued at just $7.4 million.
Our review of the inventory across all of the publicly-traded LPs suggests that Canopy Growth, which had inventory valued at almost $91 million at the end of 2017, currently maintains the lead with respect to product inventory. We will receive another update when they report their Q4 ending in March near the end of June. We plan to follow up with more detail about which LPs have accumulated the largest inventories over the next few months as we move closer to legal sales, which are now expected to commence in late August or early September.
Investors should be monitoring which of the LPs will be able to meet their provincial supply agreements, as well as meet the demand from their existing medical patient base or international customers and consider the possibility that some may not be able to fully do so. Finally, we expect the shortage to be even greater for high-quality flower, as much of the supply at the margin is coming from greenhouse facilities creating product better suited for extraction.
With a unique focus on the wholesale market, Supreme’s 7ACRES is a Canadian licensed producer that is doubling down on cultivating craft quality cannabis at commercial scale. To stay up to date with the company, which is a client of New Cannabis Ventures, visit their Investor Dashboard and click “Follow Company”.
New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
- Cannabis Customer Loyalty Platform springbig Partners with Cova to Enter Canadian Market
- Exclusive: Cannabis Publisher Dope Media Raises $875K
- Canopy Growth Unit Files 8 Additional Cannabis-Related Patents in U.S.
- Exclusive: Coda Signature Captures Cannabis Value Chain with Premium Infused Products
- Compass Cannabis Clinic Raises $2.5 Million to Fund Retail Expansion Across Canada
- Emblem Announces 2017 Financial Results
- Exclusive: Flow Kana is Building an Artisan Cannabis Farming Distribution Platform at Scale
- Exclusive: How FDA Approved Cannabis Products Could Affect CBD Distribution Channels
- Indiva Acquires 15% of DeepCell Industries for $1.5 Million and Licenses Cannabis IP for Canada
- PharmaCielo to Raise Up to $60 Million Ahead of Going Public
- TerrAscend Invests $2.5 Million into Canadian Cannabis Lifestyle Brand Fire and Flower
- TGOD to Debut on Toronto Stock Exchange on May 2
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Sincerely,
Alan & Joel
