After reviewing the company’s fourth quarter results, Research Capital analyst Greg McLeish has upgraded his rating on MediPharm Labs (MediPharm Labs Stock Quote, Chart, News, Analysts, Financials TSX:LABS). But the stock still isn’t a buy, according to the analyst, as the cannabis extraction company’s prospects of achieving EBITDA-positive status look challenged. In an update to clients on Thursday, McLeish took his rating from “Sell” to “Hold” while maintaining his $0.50 price target.
Barrie, Ontario’s MediPharm Labs, founded in 2015, produces purified, pharmaceutical-quality cannabis oil and concentrates and advanced derivate products, with both wholesale and white label platforms for developing and distributing cannabis extracts and cannabinoid-based products to domestic and international markets.
The company released its fourth quarter and full year 2020 results on Wednesday, showing Q4 revenue of $6.1 million versus $32 million a year earlier and compared to $4.9 million in the third quarter 2020. Adjusted EBITDA was a loss of $8.8 million compared to positive $2.7 million for Q4 2019 and negative $7.3 million for the third quarter 2020.
For the year, LABS’ revenue was $36.0 million compared to $129 million in 2019 and adjusted EBITDA was a loss of $23.9 million compared to a gain of $25 million the year before.
Commenting on the company’s progress, President and Interim CEO Keith Strachan said LABS is executing on its strategy of becoming a high-value, GMP-certified, global cannabis API provider to the medical and wellness markets.
“MediPharm demonstrated strong progress in accelerating the commercialization of our finished formulated products to diversify and drive sustainable revenues,” said Strachan. “With the recent receipt of our Cannabis Drug Licence from Health Canada and the initial ramp up of shipments to Germany now underway, we are seeing our global growth strategy come to fruition.”
MediPharm’s net loss for the quarter was $30.9 million or $0.21 per share, while for the year the loss was $67.1 million or $0.48 per share. Contributing to the Q4 loss was a $10.7-million write down of inventory to its net realizable value, a $1.6-million write down of non-current deposits, a $5.9-million incremental depreciation expense of fixed assets, a $2-million impairment on fixed assets and a $1.4-million restructuring expense.
Looking at the fourth quarter results, McLeish had been calling for revenue of $5.4 million compared to the realized $6.1 million and adjusted EBITDA of negative $7.7 million compared to the realized negative $8.8 million.
MediPharm’s share price has been dropping over the past year and a half, and unfortunately, McLeish doesn’t see any reason for a rebound as of yet.
On the one hand, McLeish said he’s not confident in management’s ability to properly forecast revenue, saying,
“We have become increasingly concerned about the company’s ability to forecast near-term revenue. On yesterday’s conference call a question was asked about international revenue prospects and again senior management failed to provide any guidance. As a result, we do not have full confidence in our revenue and earnings assumptions through 2022,” McLeish wrote.
On the other, McLeish said he’s concerned that LABS’ operational costs remain a too-high percentage of the company’s forecasted revenue.
“During 2019, Medipharm had built up its G&A to support both domestic and international growth initiatives. However, this growth has not materialized and as a result, MediPharm’s G&A expenses are too high in relation to its near-term revenue projections,” McLeish said.
The analyst has rejigged his estimates and is now calling for MediPharm to deliver 2021 revenue and EBITDA of $42.1 million and negative $16.3 million, respectively, and 2022 revenue and EBITDA of $72.6 million and $8.0 million, respectively. McLeish’s maintained $0.50 per share target stems from a 12x EV/EBITDA multiple of his 2022 estimates and represented at the time of publication a projected one-year return of 8.7 per cent.
MediPharm Labs has had a number of announced developments in recent weeks, including the closing on March 5 of a bought deal where it sold 57.5 million units comprised of one share and one purchase warrant for proceeds of $33.4 million. LABS also announced the expansion of its wellness portfolio with branded products CBD100 Ultra Formula Oil, THC30 Plus Formula Oil and CBN1:2 Nighttime Formula.
MediPharm also announced a pair of supply agreements, one via MediPharm Labs Australia which signed a Supply and Manufacturing Agreement with Cannim Australia and the other with the Société Quebecois Du Cannabis announced.
On Thursday, MediPharm announced the start of extract sales in Germany through its partnership with consumer health and generics company STADA Arzneimittel AG.
On the medical sales in Germany, Strachan wrote, “This is the beginning of a meaningful long-term partnership dedicated to bringing the unique benefits of GMP-certified medical cannabis to patients in Europe. Based on our first deliveries under this portfolio agreement, we are ramping up new products that German patients suffering from chronic pain can count on to meet their individual personalized therapeutic needs.”