By: Dr. George S. Mack, Principal Analyst at BioDecade
In the last week of July there were two important developments at Vancouver, British Columbia (BC) based cannabis producer Emerald Health Therapeutics, Inc. (EMHTF). On July 24, Emerald announced that it had signed a memorandum of understanding (MOU) with the British Columbia Liquor Distribution Branch (BCLDB) to supply its branded, proprietary cannabis products for sale in BC. It’s important to note that under the newly minted Cannabis Act that legalizes the use of cannabis for recreational use starting October 17th, the provinces will control distribution and sales of cannabis products. In Canada’s mixed public-private business model, provincial-government-owned distributors will be the exclusive buyer and reseller of regulated products. As such, the BCLDB is one of the largest liquor buyers in the world, and which means that BC could also become one of the largest cannabis buyers in the world.
Emerald’s announcement was significant because the company was not included in the original list of suppliers, published by the BCLDB back in early July. The fact that Emerald chose not to be part of the initial list because the company held out for better pricing from the provincial government, sent the stock tumbling as low as $1.86 per share.
However, we maintained even then that the selloff made little sense to us, since the company’s business model was still fundamentally intact. Additionally, the provincial governments were being very aggressive (penny-pinching) with their offers to producers, and we didn’t believe the company should be punished for maintaining a strong negotiating position.
Emerald has a highly experienced management in both pharma and agri-business, so a protracted negotiation with the provincial government didn’t concern us. In fact, CEO Chris Wagner developed his skill sets as a business development expert over a quarter century. He was a global team leader at Eli Lilly (LLY) where he propelled 15 small-molecule and biologic products to market, including several products that generated more than a billion dollars a year in revenue. Wagner has also spear-headed startup biotechs. In other words, this isn’t Mr. Wagner’s first attempt at complex negotiations.
The other news hit on July 30 when the company announced that its 50/50 joint venture partner Pure Sunfarms was awarded a license by Canadian government regulatory agency, Health Canada, to sell its dried cannabis production to Emerald and to other licensed producers. One of the primary functions of Health Canada is to reduce risks to patients and other consumers, and you can’t produce if you’re not licensed. Emerald and Pure Sunfarms had previously announced a supply agreement. Just this past May, Pure Sunfarms commenced industrial-scale cannabis production, and it is presently making use of 225,000 square feet of its 1.1-million square foot Delta 3 greenhouse facility. It expects to have the whole 1.1 million square feet converted for cannabis production by the end of this year. If that occurs, then Delta 3 will be one of the largest cannabis growing facilities in the world.
Emerald’s business model is focused on a couple of mainstay principles—the first being inventory and supply agreements. Beyond that, it’s committed to originality and product development to differentiate its offerings to enable high profit margins. Now that its joint venture with Pure Sunfarms is licensed and ready to expand, Emerald has laid the foundation to become one of the largest cannabis suppliers in Canada.
Disclosure and Declaration
Dr. George S. Mack, the author of this report is an independent contractor. Dr. Mack was compensated by Sylva to author this report. He owns, or his family owns, shares of the following companies mentioned in this article: None.
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