With the demand for cannabis whether medical or recreational expected to expand exponentially in the next few years, numerous companies are moving in the sector to expand production, open distribution facilities, and even develop therapeutic treatments. Emerald Health Therapeutics (OTCQX:EMHTF) is one company working on all fronts to develop end-to-end control of the processes while the stock still trades under the radar.
Emerald Health has been stuck just over $1 for a year now despite strategic moves that place the company in major growth mode in the cannabis market. Is this the Canadian company to invest in the wave of adult users and medical consumption of cannabis products?
Big Joint Venture
Emerald Health is a Canadian based licensed cannabis producer working on multiple fronts to expand cannabis production, focus on clinical research work, improve extraction expertise and product development, and expand distribution channels. The most notable and visible move is on the expansion of cannabis production.
The company is working on a fully owned production facility in Metro Vancouver that will include a 50,000 sq. ft. growing area in phase 1 to support the production of at least 5,000 kg cannabis flower per annum. Phase 2 will begin construction immediately after completing phase 1 with the ability to grow to 1 million sq. ft. The development is positive, but the real news is the large scale joint venture that provides the company with credibility.
Back in June, Emerald Health formed a 50/50 joint venture with Village Farms (OTCQX:VFFIF). The later is an established large-scale greenhouse grower of produce that views cannabis as a more profitable product opportunity. The company operates over 10.5 million sq. ft. of greenhouse space in both British Columbia and Texas plus partner greenhouses around North America.
The JV starts with Village Farms contributing a 1.1 million sq. ft. greenhouse facility covering 25 acres previously growing tomatoes to the production of cannabis. Emerald Health will contribute $20 million to the deal.
The JV expects to yield 15x the amount that Emerald Health expects to grow at its own facility from phase 1 construction. As well, Village Farms has another 3.7 million sq. ft. in greenhouse facilities covering 110 acres to contribute to the program to provide a total potential yield of 300,000 kg per annum.
Outside of the scale of the operation, the inclusion of Village Farms adds credibility to Emerald Health. Village Farms had 2016 revenues of C$206 million and EBITDA of C$12.5 million. The company has a sizable business already and decided the most profitable option was to form a JV with Emerald Health to grow cannabis versus the existing multi-million dollar business.
The goal is to have both of these facilities up and producing cannabis in 2018 ahead of legalization of the adult-use market in Canada. The sheer scale of the planned operation does raise some red flags.
Deloitte does predict the Canadian market reaching demand of 600,000 kg by 2021. A retail value of up to $8.7 billion and a total industry of $22.6 billion is naturally very attractive, but Emerald Health has plans to potentially meet 50% of the market demand alone. The JV isn’t moving forward directly on the full 4.8 million sq. ft. so investors will want to ensure the company doesn’t over expand supply and pull down cannabis prices while opportunity might exist to export cannabis to other countries.
Therapeutics Plan
While cannabis production is the original area of growth, upside exists in developing therapies that solve unmet medical needs. Unlike some other players mostly focused on either path, Emerald Health is pursuing the full spectrum to succeed in the market for cannabis with a push towards treatment solutions.
The company recently hired a CEO with a background in drug development. Chris Wagner has spent 25 years in building biotech companies with his most prominent work at Aspreva Pharma after working for 10 years at Eli Lily (LLY). In the process, he worked on several major drug developments and developed partnerships with other big pharma companies to market drugs.
Chairman Avtar Dillon has a background in drug development having been the CEO of Inovio Pharma (INO) and remains the Chairman now. As well, the sits on the board of the Cannabis Association of Canada placing executives in influential positions in the industry. Several other executives have held key roles at pharma firms suggesting a push toward clinical research not as apparent in the recent announcements and focus on growing cannabis.
The company formed a clinical advisory board that includes multiple PHDs from North America, Italy and Spain. The board provides Emerald Health with experts in the field of cannabinoids and general specialization in related fields of pharmaceutical product development.
Corresponding with that move, Emerald Health Therapeutics’s scientific advisors released news of a promising discovery related to the treatment of neurodegenerative diseases. The advisors found that THCA, a naturally occurring non-psychotropic cannaboid, has the potential to teat Huntington disease amongst other neurodegenerative diseases.
The advisors published the findings in the British Journal of Pharmacology. Per Edward Munoz, PhD, Chief Scientific Officer and Professor of Immunology at the University of Cordoba (Spain):
A large number of patients suffer from neurodegenerative diseases and they are not responsive to available medical treatments. Our research data provide further evidence that cannabinoids hold therapeutic potential for a wide range of diseases and condition, including, neurodegeneration, which, represents a significant unmet medical need.
The company plans to work towards clinical trials based on the THCA cannabis oils Emerald Health offers. The good news is that the investment thesis is not based on clinical research, but rather this area is a potential catalyst for the stock.
Financials
After raising C$27.2 million prior to fees back in April, Emerald Health listed a cash balance of C$36.2 million at the end of June. At the time, the company still has $18 million remaining to pay Village Farms on the JV.
The market will closely want to watch the quarterly results as the company ramps up cannabis production and sales into 2018.
The stock has generally not moved since the big JV announcement so the market may not understand the magnitude of the deal. As some examples of the missing value, Village Farms is worth a reported $123 million from growing tomatoes and cucumbers. Aphria (OTCQB:APHQF) is worth roughly $863 million from generating 1/10th the revenues as Village Farms due to growing and selling medical cannabis.
Emerald Health traded at $1.20 about a year ago when the company had limited plans regarding cannabis production facilities and no formal move into cannabis science. The fully diluted market value is now about $142 million assuming the exercise of the outstanding options and warrants that bring the diluted share count to 121.5 million. Exercising of these options and warrants will provide additional cash for expansion and clinical trials.
Takeaway
The key investor takeaway is that Emerald Health still has to finish construction and conversion of multiple facilities to even grow cannabis at large scale. A large opportunity exists and market values support this move by the company, but Emerald Health hasn’t proven this ability as of yet.
The risk would appear small, but investors always need to consider the downside possibility. The JV with Village Farms provides some credibility to the plans and the stock is cheap relative to sector plays like Aphria, especially considering the massive scale of the JV. The bigger risk would appear the potential to over supply the market with cannabis though investors will only have to deal with that concern several years down the road.
The best part of the story is the configuration of a management team and scientific advisory board to work on cannabis science. Emerald Health has the expertise to advance clinical trials, but the best part of the investment is that the stock hardly trades based on the cannabis production and extraction work. An investor gets any positive clinical developments as a bonus with the market valuation down at $140 million.
As typical with small cap in emerging growth sectors, the stock is only recommended for a diversified portfolio willing to accept capital losses.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Article source: https://seekingalpha.com/article/4114079-emerald-health-therapeutics-cannabis-science-catalyst