Another player recently joined the rapidly growing list of publicly-traded marijuana stocks in Canada. Writing in Investor’s Digest of Canada, Zachary McCrossin says WeedMD Inc.’s chief executive officer has a special entry to the fast-growing seniors’ market for medical marijuana—and soon, for recreational marijuana too. And, at that age, many no longer give a hoot about what the kids think of it!
Following the approval of recreational cannabis sales in Colorado and Washington a few years ago, the emerging subsector of companies involved in the production and sales of medical cannabis became one of the hottest investment trends in the market.
Here in Canada, the election of Justin Trudeau as prime minister has greatly renewed interest in legalizing recreational marijuana use. This has led to a surge in Canadian cannabis producers, similar to the trend that is underway in the United States. Consumption of medical cannabis is legal in Canada when dispensed via prescription for the treatment of a variety of illnesses.
As a highly regulated market, many unknowns remain as to how distribution, marketing and taxation will evolve. But producers are not waiting. A number of Canadian businesses have emerged as viable suppliers and distributors of high-quality cannabis for the Canadian market.
Health Canada, which regulates medical marijuana growers, has granted fewer than 50 licences to distributors and only one-third are publicly-traded companies. One of the most recent entries to this group, WeedMD Inc. (TSXV—WMD), was launched in 2013 to pursue the opportunity for legal distribution in this under-supplied market.
After an intense regulatory review process, the company was recently granted its cultivation licence for production of medical cannabis.
Seniors homes seen as a market for medical marijuana
The unique aspect of WeedMD’s business plan is its strategic decision to pursue a sales channel focused on senior care facilities across Canada. This market strategy is based on prior business relationships developed by CEO Bruce Dawson-Scully.
Mr. Dawson-Scully was formerly a successful operator in the long-term care industry, and has retained a working relationship with many of the leading senior care providers in the country. Internal market studies have named Canadian senior citizens as the demographic category that is positioned to benefit most from the use of medical cannabis.
Furthermore, trends indicate that the number of people over 60 in Canada is growing and will remain the dominant group in the country. Therefore, the strategy to target distribution avenues through this existing core segment of the market represents a viable means to grow sales.
In order to serve the projected demand from this plan, WeedMD retrofitted a large modern cultivation facility, amounting to more than 26,000 square feet, located on a four-acre property in Aylmer, Ont.
Tobacco cultivation facility converted for marijuana
This facility had been producing seedlings for tobacco farming and therefore it was an ideal candidate to upgrade into a state-of-the-art controlled environment for cultivating high-quality cannabis.
Perhaps more importantly, a building permit is already in hand to enable rapid expansion of this facility, and the company also holds an option agreement to acquire an adjacent four-acre parcel of land for future expansion plans.
Bearing in mind there is not enough supply to meet even the existing demand in Canada, this growth strategy is prudent and desirable. Consider that more than 130,000 medical cannabis users are already registered within Canada and this number is growing by an astonishing rate of 10 per cent a month. Intense regulatory supervision has limited the influence of foreign supply sources into the country. The growth prospects for the domestic medical marijuana industry could not be brighter.
Furthermore, the potential for exponential growth from the addition of recreational market demand is astounding. The federal government has introduced a motion in Parliament to legalize recreational marijuana use in Canada on or before July 1, 2018, thereby fulfilling a major campaign promise by Prime Minister Trudeau. A market of potentially tens of millions of new customers awaits.
Large inventory awaiting sales licence
The company is awaiting final approval for a sales licence at which point it will become one of a tiny handful of integrated companies legally allowed to distribute marijuana to registered Canadians. Over 2,000 customers have already signed up for this on the WeedMD’s interactive website. The company holds a large inventory of high-quality cannabis in its vault and the company continues to upgrade its production efficiency. Upon commencement of sales, management anticipates achieving profitability within eight to 12 months.
The company endeavours to reinvest every dollar of internally generated cash flow back into growth channels. The ultimate objective is to seize a large chunk of market share. There are a lot of moving parts in this industry and a lot of unknowns in terms of how the regulatory structure will evolve.
A recent national poll suggests that over 70 per cent of Canadians support marijuana legalization. We can infer there will be a vast open market with few production outlets to meet demand.
Speculators in this tiny subsector are not discouraged by the unknowns that remain to be resolved, sensing the tremendous profit potential that lies ahead. The market valuation for many aspiring marijuana producers has already been bid through the stratosphere. However, WeedMD only began trading on April 27.
Looking ahead, many other avenues for growth are worth noting as the company rolls out its business strategy. The drive to develop a brand name while pursuing whatever marketing avenues are available within the regulatory framework will open a platform for expansion.
This is comparable to the strategy that microbreweries employ, seeking consumer loyalty amidst an open market dominated by larger players. As with any marketing niche, if a company is able to deliver a superior and reliable product that is in demand by consumers, the sales will follow. The next few months promise to be an exciting time for shareholders of WeedMD. The rapid projected demand growth for Canadian medicinal cannabis represents a huge opportunity for this well-financed startup to seize market share.
Combine that with the potential for recreational consumption that is imminent, and this company has the capacity to follow up on a promising launch and rapidly grow to become one of the Canadian sector leaders.
As speculators, we have already seen many similar companies appreciate several hundred per cent from their launch date. I will not be surprised to see the shares of WeedMD follow a similar path.
Zachary McCrossin is a freelance writer specializing in small cap speculative stocks. He can be reached at firstname.lastname@example.org.
This is an edited version of an article that was originally published for subscribers in the May 12, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •5/25/17 •