MediPharm Labs downgraded to “Sector Perform” at AltaCorp

MediPharm Labs (MediPharm Labs Stock Quote, Chart, News TSX:LABS) delivered an underwhelming quarter but the cannabis company is still positioned to succeed as a pharma partner of choice, says AltaCorp Capital analyst David Kideckel, who provided an update to clients on Thursday where he dropped LABS from an “Outperform” rating to “Sector Perform.”

Barrie, Ontario, extraction and derivatives operation Medipharm Labs released its first quarter 2020 results on Thursday, with revenue down 49.5 per cent sequentially to $11.1 million. Management attributed the decline to a drop in selling prices for bulk extracts along with reduced volumes sold due to less demand in the Canadian market. LABS posted a net loss before tax of $22 million, including a $12.8-million write-down of inventory, the reduced average selling prices and a share-based compensation expense of $2.8 million.

CEO Pat McCutcheon emphasized in his comments MediPharm’s ongoing move to a more diversified and international portfolio of businesses in a range of product streams.

“Our focus on innovation, a pharmaceutical approach, capital investments and the very high standards achieved through the GMP certification of our Canadian and Australian facilities will allow us to further evolve our business as we pursue medicinal and wellness markets, as well as international opportunities, so that we are not reliant on the challenged Canadian recreational market,” McCutcheon said.

The quarterly results came in below analysts’ forecasts, with the $11.1-million in revenue being under Kideckel’s $18.0-million estimate and the consensus $22.2 million, while LABS’ adjusted EBTIDA loss of $5.7 million was also well below Kideckel’s $1.0-million estimated loss and the Street’s $1.3 million loss.

Kideckel estimated LABS’ current capital position at about $44 million, after a $37.8-million private placement that occurred subsequent to the first quarter.

The analyst said that while he remains cautious on LABS’ near-term outlook due to the ongoing pricing pressure on cannabis extracts, the company’s attempts to diversify its revenue stream and move into the pharmaceutical space should make for a stronger long-term outlook.

“Since Q3/19, LABS’ revenue has been declining due to falling volumes and prices in the private label segment, which in Q1/20 comprised ~87 per cent of LABS’ total sales. We believe this pressure will continue over the near-term, compounded by the COVID-19 uncertainty,” Kideckel wrote.

“We note, however, that LABS is moving towards a higher mix of white label sales (13 per cent of total sales in Q1/20), which over the mid-to-long-term may ease pricing pressures and drive revenue growth. To date, LABS has shipped more than double the quantity of white-label products shipped in all of Q1/20, and since quarter end, the Company has launched eight additional white-label SKUs,” he wrote.

On his forecast for LABS, Kideckel said he has reduced his estimates due to pressures in LABS’ private label segment while he has increased his discount rate due to uncertainties over the company’s major revenue segment, along with the COVID-19 crisis and the timelines of revenue-generating opportunities in international medical and pharmaceutical markets.

The analyst is now calling for fiscal 2020 revenue and adjusted EBITDA of $52.2 million and negative $23.5 million, respectively.

Kideckel’s new “Sector Perform” rating comes with a reduced one-year target of $2.15 (previously $4.30), which at press time represented a projected return of 46 per cent.