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What’s the BEST reason to buy WeedMD?

Jeff Nielson Jeff Nielson, Stockhouse
2 Comments| December 11, 2017


Click to enlargeCannabis stocks are running again. After a quiet summer with flat to falling valuations, many of these companies have taken off in recent weeks. One of those names-in-the-news is WeedMD Inc. (TSX: V.WMD, OTC: WDDMF, Frankfurt: 4WE, Forum).

Some of these high-flying cannabis stocks have been soaring higher with very little to report from an operations standpoint. This is not the case with WMD. Only a couple of weeks ago, the Company released a major announcement.

WeedMD has just rolled out a huge expansion strategy. Currently, WMD’s cultivation operations are centered on its 26,000 square foot Aylmer, Ontario facility (14,000 square feet under lights), with a present maximum yield of 1,500 kilograms. This is about to dramatically change.

The Company’s phased growth plan begins with Phase I, a 217,800 square foot expansion, achieved via leasing an existing state-of-the-art greenhouse, covering five acres. The estimated cost for retrofitting this modern greenhouse is less than $70 per square foot, one of the lowest numbers in the sector. Retrofitting is already underway, with first harvests estimated for June 2018.

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Based on current industry yield figures, management projects cultivating more than 20,000 kilograms per year from this new facility. This equates to greater than a 1,300% increase from current harvest levels. Approval for the expansion has already been obtained from Health Canada.

Even better for WMD shareholders, this 98-acre property hosts 610,000 square feet of greenhouse space, and WeedMD has an option to expand into the remaining 392,040 square feet. At full capacity, that projects to an annual harvest of more than 50,000 kilograms. The Company also holds an option to purchase a 100% interest in Perfect Pick’s property – consisting of  greenhouses, infrastructure and cultivation equipment.

Providing these facilities is Perfect Pick Farms Ltd., an experienced agriculture company with more than 40 years of cultivation expertise. The acreage provides full infrastructure, including free water, state-of-the-art boilers, a fertigation system, and a 350 kw solar array. Perfect Pick’s agricultural operations are located in Strathroy, Ontario.

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New investors will still require an introduction to WeedMD. The Company is a Licensed Producer under Health Canada’s ACMPR cannabis regulatory framework. It is one of the few cannabis companies with licensing in place to produce and sell dried flower, produce and sell cannabis oil, and sell live plants. This diverse cultivation/production model is already producing multiple revenue streams.

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A glance at the WMD stock chart shows that WeedMD has gained significant traction from its recent expansion news. Does this make the Company fully valued?

Many cannabis investors would look at the rising valuations of some other cannabis stocks and immediately reply “no”. Clearly a closer look is in order.

On November 21, 2017 (the day before the major announcement), WMD was trading at $1.49. At the current share price of $2.39, that’s a very solid gain, but it’s dwarfed by the rise for a few of these cannabis stocks.

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Given the tremendous growth potential represented with this newss, arguably the recent upward move in share price doesn’t fully reflect the fundamentals of this expansion strategy. But is this even the best reason to buy into WeedMD?

As its name implies, the Company’s focus since its inception has been on Canada’s medicinal cannabis market. Along with this, WMD has worked to become an industry leader in the cloning, packaging, and sales of live plants – both direct to consumers as well as other licensed producers.

CEO, Bruce Scully, explains how and why WeedMD is becoming the go-to name in the cannabis industry for live plants.

We are proud to be offering such a compelling selection of cannabis strains for those patients looking to grow at home, and new licensed producers requiring starting materials for cultivation. WeedMD has identified sales of clones and genetics as an emerging revenue stream, further diversifying our business. The key to our success has been offering unique strains at a reasonable and affordable price point. We look forward to expanding this offering as we continue to discover additional strains in our expansive genetics library.

The Company’s sale of live plants is not just a robust revenue stream. With cannabis genetics still an emerging science, producing and distributing cannabis clones is a high-margin business. Indeed, some other cannabis companies that are making their genetics available have been charging exorbitant prices.

Management has taken a different approach. Clones are priced very attractively in relation to other cannabis producers, while still preserving strong margins on the bottom line. WMD’s unique, proprietary packaging sets the industry standard for the shipment and sale of cannabis clones.

Why buy into WeedMD?

  • A cost-effective, near-term strategy for delivering huge production growth
  • “Seeding the industry” with WMD’s industry-leading cloning program

Those are a couple of compelling reasons why investors may look to acquire shares in WMD. However, this doesn’t even represent the heart of the Company’s business.

The foundation of the WeedMD business model is to leverage management’s broad experience and deep industry connections to penetrate the most-lucrative demographic in the medicinal cannabis market: seniors, also encompassing long-term care and assisted living.

What makes the seniors market such an attractive bull’s-eye for medicinal cannabis?

  • Rapid growth market: Statistics Canada estimates that by themselves, seniors will represent 25% of the Canadian population by 2036, from just 16% today as a result of the significant and aging “baby-boomer” demographic
  • Regular consumption: the chronic health issues that afflict many seniors mean that they will tend to be “sticky” consumers, with regular/frequent consumption profiles
  • Cost-effective patient acquisition

Today, most registered cannabis clinics in Canada derive the majority of their revenues from “referring” their clients to cannabis companies that are licensed to sell direct to consumers. This translates to these clinics effectively selling their clients to cannabis companies. There can be a royalty of as much as 15% – 20% payable to the cannabis clinic in return for the referral.

WeedMD surveyed this existing distribution model for medicinal cannabis and came up with a plan. Management looked at the rapidly expanding seniors market for cannabis and they saw more than just a huge market. They saw the opportunity for the most cost-effective means of patient acquisition.

Understanding WMD’s strategy for penetrating this market requires taking a closer look at its management. The Company’s corporate presentation notes that the management team has a collective 100+ years of experience in senior management and ownership within the senior care industry.

This translates into extensive knowledge of the industry, and that implies understanding. CEO Bruce Dawson-Scully possesses 22 years of senior management experience in the long-term care industry by himself, accumulated with both public and private companies.

Much of this experience was acquired with start-ups of government-regulated companies. In turn, this has allowed Dawson-Scully to gain considerable expertise in government relations. Additionally, this broad depth of seniors/long-term care experience in management means that the Company has already established working relationships throughout the industry.

WMD did more than just identify the seniors/long-term care demographic as an especially attractive segment of the population on which to focus their marketing efforts. The Company came up with a high-efficiency strategy to execute on this goal. The key to WeedMD’s strategy to penetrate the most-lucrative niche of the medicinal cannabis market is building relationships at the institutional level.

As already noted, with the conventional distribution model for medicinal cannabis companies, acquiring clients is very inefficient – slow and expensive. Not only do referrals from cannabis clinics occur on a one-by-one basis, the royalties charged by these clinics can eat up a significant percentage of the profit margin.

WeedMD’s focus is to establish exclusive supply contracts directly with senior care providers. Instead of acquiring its cannabis clients one-by-one, WMD’s institutional focus means acquiring new clients by the hundreds or thousands.

WeedMD is the first company in the medicinal cannabis space to have executed multiple supply contracts with long-term care facilities. The first series of these contracts already include more than 1,000 patient beds. Management anticipates additional near-term announcements as more of these deals already in the pipeline crystallize.

This is an important start in acquiring market share in this vital market. But it’s a proverbial drop in the bucket in relation to the total size of this opportunity – just a fraction of 1%.

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The Company has a couple of major advantages versus its competitors when it comes to locking up contracts in this premier market. The most obvious advantage is management’s depth of experience and knowledge of the seniors and long-term care sector itself.

Beyond this, there is WMD’s status as the provider of clones and genetics to other Canadian LP’s. If WeedMD’s cannabis strains are the clones of choice for other Licensed Producers, that’s a strong endorsement that the Company’s medicinal cannabis will fully meet the needs of the patients of these long-term care facilities.

WMD boasts unmatched expertise in meeting the medicinal cannabis needs of the expansive seniors care market. Equally important, it has a proven strategy for locking-up market share in this cannabis niche in the most cost-effective manner. Surely this is the best reason for investors to buy into WeedMD?

This still leaves out one variable in the Canadian cannabis equation: the enormous, pending market for recreational cannabis usage. Once again, the Company’s management team already has their strategy in place for market penetration.

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WeedMD has an aggressive but cost-effective strategy to dramatically ramp up its cannabis cultivation.

WeedMD is “seeding the industry”: providing its cannabis clones to both Licensed Producers and individual consumers.

WeedMD is best positioned to capture the largest market share of the large, growing medicinal cannabis market for seniors, and to do so in a highly efficient institution-by-institution basis.

WeedMD has a multi-faceted strategy to capitalize on the imminent recreational cannabis market in Canada.

So what is the best reason to buy WeedMD? Investors could have a robust debate discussing this question. Some will choose to skip that debate – and simply go buy some shares.

 
FULL DISCLOSURE: WeedMD Inc. is a paid client of Stockhouse Publishing.

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Comments

ambrose5
I hope that the management of WEED MD inc will have a look at the Dutch way of modern agriculture (with the help of high-tech very cost-effective way of plant growth without chemicals)
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December 31, 2017
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visionenfocada7
I read stockhouse periodically and am quite glued to your editorials. I am hoping that investing in this stock I will be able appreciate the growth not by the thousands but progressively and modestly. Little and steady is better than plenty and short,.
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December 16, 2017
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