Emerald Health Therapeutics Positioning Itself for Revenue Growth & Differentiation

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On October 17, recreational cannabis will become federally legalized in Canada.

One of the largest, yet under-the-radar Canadian-based cannabis companies is Emerald Health Therapeutics Inc. (TSXV:EMH; OTCQX:EMHTF)(“Emerald”). Emerald is positioning itself in both the medicinal and recreational cannabis markets in Canada, as well as internationally. If the company is able to execute its strategy of creating proprietary cannabis-based products, it could become a market leader.

The company already co-owns one of the largest indoor cannabis grow facilities in the world. You can read about our site visit here. Emerald’s strategy is to focus on creating proprietary products that command high-profit margins.  To that end, the company has been moving forward with alliances and agreements to increase and strengthen cultivation, production, distribution, research, development, import/export, and laboratory analytical testing.

Emerald recently announced a production agreement that will give it the ability to produce branded CBD products: an exclusive strategic alliance with Factors R&D Technology. That entity is a division of Factors Group of Nutritional Companies Inc., an industry leader in extracting bioactive compounds from plants, and Canada’s leading nutritional supplement manufacturer.

As a non-psychoactive compound with medicinal properties, CBD potentially represents a growth opportunity for Emerald. Emerald intends to use its alliance with Factors Group to produce value-add CBD products.

In addition to extraction technology, the alliance will give Emerald access to pharmaceutical grade, industrial-scale manufacturing and softgel production, a major differentiator for Emerald in the medical cannabis market given the size and scale of Factors Group. The Factors Group facility is capable of processing one million kilos of biomass a year and producing 600 million softgels. The agreement allows Emerald to use Factors Group’s technology to set up its production facility closer to its cultivation center.

Emerald’s executive chairman, Dr. Avtar Dhillon said, “Accessing FTI’s infrastructure will allow us to dramatically shorten our commercial ramp-up from years to a few months, allowing us to leapfrog competitors attempting to build out their own extraction and encapsulation facilities.”

Initially, Emerald and Factors Group will collaborate on manufacturing and distributing Emerald’s current product line, but this will expand to both Emerald and Factors Group jointly developing new branded, proprietary products.

We believe the agreement with Factors Group is a patent endorsement of Emerald and its capabilities. Factors Group is widely regarded as a best-in-class organization, so our assumption is they believe Emerald to be of similar ilk. The partnership should provide the foundation upon which Emerald can create and manufacture its own branded products on a large scale.

To help supply the new manufacturing capacity with Factors Group, Emerald announced an agreement to purchase from Emerald Health Hemp Inc. about 500 acres of harvested hemp chaff. Hemp has extremely low levels of THC and higher levels of CBD. It is very cheap to grow outdoors and is an excellent plant source from which to extract CBD oil. The pieces fit nicely together in terms of having a significant source of CBD to serve the manufacture of CBD-based products at the Factors Group facility. Next year, the agreement with Emerald Health Hemp increases to 1,000 acres, which will give Emerald an even greater CBD supply.

In August, Emerald took a step forward in R&D by increasing its ownership of Northern Vine Canada Inc. to 100% from 65%. Northern Vine is a Licensed Dealer under the provisions of the Canadian Controlled Drugs and Substances Act. Licensed Dealers are allowed to import and export cannabis oils, as well as manipulate and formulate cannabis products including adding controlled substances, thus expanding Emerald’s capabilities.

Northern Vine also features a research and development facility and provides analytical testing.

The entity will be run independently of Emerald and will be able to serve other licensed producers and patient-growers in the lucrative analytical testing market to assess the potency and concentration of toxic materials. The Canadian market is estimated to exceed $1 billion in 2018 by industry analysts.

Emerald is continuing to strengthen its research beyond the Northern Vine deal. In the last week, Emerald entered into an agreement with VivaCell Biotechnologies Spain SLU to provide research services on Emerald’s proprietary formulas and dosing. In addition to product innovation, this could help Emerald further strengthen its intellectual property portfolio, providing further differentiation versus its competitors.

Emerald is also expanding its growing facilities. The company’s 50/50 joint venture with Village Farms—Pure Sunfarms—received its cultivation license amendment from Health Canada, expanding its allowable growing space in its 50/50 joint venture cannabis production facility in Delta, British Columbia, 550,000 square feet, half of the area of this 1.1 million square foot greenhouse. Emerald hopes to convert the entire facility to cannabis production by the end of the year.

The company also owns Agro-Biotech, a licensed cannabis grower that has a 75,000-square-foot indoor facility in Quebec.

In Canada, each province controls distribution and sales within its borders. To date, Emerald has signed cannabis supply agreements with the provinces of British Columbia, Ontario and Newfoundland for the adult-use market.

Together, Ontario and British Columbia comprise just over 50% of Canada’s population. Ontario is a key market, with a population of roughly 14 million people. For British Columbia alone, Emerald is allocating around 13,000 kg of product over the next 1.5 years. Supply agreements with additional provinces are expected.

Emerald Health’s shares have doubled in value since July, but with such a carefully thought-out growth plan and meticulous execution to date, the company could be poised to become a major player in the rapidly growing cannabis industry.

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Ross Silver is the CEO and founder of Sylva International. Mr. Silver is a Registered Investment Advisor with over 15 years experience in equity research, investment banking, and asset management. Mr. Silver served as a consultant for the National Institutes of Health and holds a Series 65 securities license.

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