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Emerald Health Looks to Address Canada’s Cannabis Production Shortfall

Ryan Allway

October 24th, 2017

Exclusive, News, Top Story

Canada’s cannabis industry is projected to exceed $22.6 billion in size over the coming years as the country benefits from strong domestic and export demand. Despite licensed producers rapidly scaling up production, some analysts believe that there will be a shortfall in production given the high demand. Investors may therefore want to consider licensed producers with plans to rapidly scale up production to capitalize on these economics.

Emerald Health Therapeutics (TSX-V: EMH) (OTCQX: EMHTF) represents a compelling opportunity in the space because it is off-the-radar with its modest existing production capacity, but the company is executing on plans to dramatically scale up production to market leadership levels.

Projected Industry Shortfall

The Canadian cannabis industry is projected to reach up to $22.6 billion in size over the coming years, according to Deloitte, driven by the legalization of adult-use marijuana next year. In addition to its domestic industry, the country has become a leading exporter of cannabis to medical marijuana markets around the world, since it will become the first G20 country to fully legalize medical and recreational cannabis on a national level next year.

Unfortunately, many analysts predict that demand will outstrip supply given the limited number of licensed producers of cannabis. According to PI Financial Corp. analysts, “With current production, funded capacity expansion, and potential yield improvements, we believe there is still a shortfall in production capacity of 187,885 kilograms.” The analyst projects total demand of 610,000 kilograms and supply of just 422,115 kilograms by 2019.

This is good news for many existing licensed producers that have the funding and capabilities to expand their production capacity. A shortfall in production could translate to higher prices and profit margins until new licensed producers have an opportunity to ramp up production. Many licensed producers have responded by ramping up production in the 10s of thousands of kilograms per year to capitalize on the upcoming economics.

Emerald’s Ambitious Plans

Emerald Health represents a unique opportunity in the space given its near-term abilities to scale up to 75,000 kilograms per year and long-term capabilities to build out some 5.8 million square feet of cultivation space. This compares to many existing licensed producers that are only targeting expansions of well under 50,000 kilograms per year, according to PI Financial Corp.’s estimates, with a total of just 272,405 in funded expansions.

The company’s pilot facility in British Columbia has 3,000 square feet of cultivation capacity plus another 7,000 square feet at a recently licensed nearby facility, and it has tremendous expansion potential on its 32-acre property in Metro Vancouver. According to its investor presentation, the company plans to expand to 150,000 square feet of cultivation capacity at this facility in 2018 with a $10 million capex budget, which would yield about 10,000 kilograms per year in production capacity.

Aside from this facility, the company announced a partnership with Village Farms to utilize its existing 25-acre greenhouse in Delta, British Columbia. The facility is already built and must simply be converted to initially produce approximately 75,000 kilograms per year. This partnership has the option on additional existing greenhouses to expand by a further 3.7 million square feet over time, which would yield an incremental 225,000 kilograms per year in production capacity.

The Bottom Line

Emerald Health Therapeutics (TSX-V: EMH) (OTCQX: EMHTF) is off-the-radar of many investors due to its small pilot facility that includes just 3,000 square feet of cultivation capacity. With its Village Farms agreement in place, the company is well positioned to catapult itself onto the scene with a 1.1 million square foot greenhouse capable of producing 75,000 kilograms per year. Its other projects could further expand capacity to a total of around 5.8 million square feet – which would make it a clear leader.

The company recently added to the management team. On October 2, 2017, Emerald Health announced the appointment of Chris Wagner as the new CEO.

Wagner brings additional biopharma expertise to EMH with over 25 years of pharmaceutical sector experience. Among the highlights from his resume are 10 years with Eli Lilly where he rose to Global Team Leader and obtained extensive product development and marketing experience launching products such as Cialis® and Prozac®. Included in his duties was work on 15 biologic and “small molecule” products. He also helped build Aspreva from a start-up into a billion dollar valuation in five years, consummated with a large-pharma buyout.

Unlike many reverse mergers, the company also has a clean cap structure, no debt, and represents a compelling opportunity for value investors in a space that’s often characterized by excessive valuations based on current revenue and profitability.

For more information, visit the company’s website or investor presentation.

This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.

About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.

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