As investors dive deeper into the cannabis extraction space, INN asked two firms for the key metrics to follow in this market.
LEGALIZATION 2.0 COVERAGE
One year after Canada completed the federal legalization of recreational marijuana, the nation will now open its market to novelty products infused with the drug. This includes edibles such as cookies and gummies, as well as cannabis beverages, which will be introduced to the market in an attempt by legal producers to tap into a replacement product for alcohol.
As such, on the eve of the launch of this second phase of the marijuana market in Canada, the Investing News Network brings investors a collection of stories and interviews on the impact this opening will have.
As marijuana extraction companies bulk up for a projected increase in business operations in Canada, experts are sharing key points for investors in this space.
The extraction market is set to see a turnaround in prominence as Canada legalizes edibles and concentrates; meanwhile, these products are seen expanding across the fractured US market.
The cannabis market has seen metrics vary with time as some gain more importance in the minds of investors. With that in mind, the Investing News Network (INN) asked two leading companies what investors should track when it comes to the cannabis extraction space. Here’s what they said.
Cannabis extraction companies gain traction
As the second round of cannabis legalization in Canada approaches, extraction companies have launched initiatives to expand their footprints and the capabilities currently seen in operations in order to meet consumer demand.
Extraction firms operate alongside the producer space. These companies offer services to attain the cannabis oils used to infuse marijuana items such as edibles and cartridges for vape pens.
The market has seen the entry of new companies dedicated to extraction as well as the rise of existing companies in the minds of investors.
“I’ve been kind of banging this extraction drum for four years,” she said. “We see the markets moving towards that. That is where a lot of the money is going now, so extraction is really that next play.”
Companies offering extraction services to marijuana firms are gearing up as the October 17 date for the legalization of edibles and concentrates nears in Canada. Many are expanding their operations and capabilities in the country.
However, Health Canada, the federal agency tasked with regulating the market, has indicated that sales won’t start until mid-December. This delay is related to the 60 day notice needed for any new marijuana-based products looking to hit the market.
In June, business research firm Deloitte issued a report projecting annual sales for the entire cannabis edibles and infused product market at C$2.7 billion.
Michael Cammarata, president and CEO Neptune Wellness Solutions (NASDAQ:NEPT,TSX:NEPT), told INN that he elected to leave Schmidt’s Naturals, a health and wellness brand, in favor of the cannabis market since the timing of his move was aligned with the rising role for extraction firms.
“I think the extraction market was something that a lot of people who invested in the cannabis industry were not focused on,” he told INN.
Knight explained that for investors, the extraction market is very appealing because of the margins seen from development and operations, whereas traditional cannabis plays in Canada have offered lackluster results recently.
The Valens executive said if investors compare the development of the extraction market to innings in a baseball game, the sector is only about to enter the first inning.
What are the key metrics for a cannabis extraction company?
The Neptune executive told INN he is seeing a rise in interest in extraction companies as investors realize this process leads to the production of key products, such as vape pen cartridges.
“I think that people (will) start seeing extraction as much more than just consumption … Ultimately the extraction process is a key to the formulation,” Cammarata said.
Cammarata is interested in investment in new intellectual property from extraction companies, and the ability to meet growing consumer demand with expanded capacity.
Capacity for an extraction firm is related to the amount of cannabis product these companies can receive and turn around with large-scale processing for the development of products such as vape pens, infused cookies and other novelty items.
“You’re seeing us rapidly expand as we’re trying to keep up with demand from our customers,” Knight said. He confirmed that the firm currently has a capacity of 425,000 kilograms, with a projected increase to 1.1 million kilograms by the first half of 2020.
Knight explained that, while capacity remains at the top of investors’ minds when it comes to evaluating these companies, he expects that rationale to evolve very quickly.
“(Extraction capacity) matters in the sense of your capabilities. But what matters is what you can actually extract, and what everyone is talking about today is, ‘What contracts are you doing? How much are you actually going to extract going into the next year?’” Knight said.
Despite the natural interest in capacity numbers, both Cammarata and Knight agree the key is the quality of extraction.
Quality will determine the winners in the space
“The capacity is one thing, but the quality inside the capacity has to stand out,” Cammarata said.
Knight added that he is also expecting the extraction capacity metric to instead develop into a question about distillate capacity.
“What everyone should be focusing on and (what) they will be focusing on six months from now — they are not going to be asking what your input capacity is anymore. They are going to be asking what your distillate capacity is.”
Cannabis distillates are oils produced from the extraction process. This oil is potent in its compound content and is used for a variety of edibles and topicals.
“You can’t have edibles and concentrates without extraction, and you can’t have high-quality product development and products on the market without high-quality extraction,” Knight said.
This article was originally published by the Investing News Network in August 2019.
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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: World Class Extractions and Valens GroWorks are clients of the Investing News Network. This article is not paid-for content.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.