MediPharm Labs is still a pass, says Roth

A proposed merger will look good on Canadian cannabis extraction company MediPharm Labs (MediPharm Labs Stock Quote, Charts, News, Analysts, Financials TSX:LABS), according to Roth Capital Partners analyst Scott Fortune, who delivered a company note to clients on Thursday. Fortune maintained a “Neutral” rating on LABS with a $0.10 per share target price, which at the time of publication represented a projected one-year return of 43 per cent.

Barrie, Ontario’s MediPharm Labs, which produces pharmaceutical-grade cannabis oil and concentrates, announced on Thursday a definitive agreement to acquire VIVO Cannabis, a medical-focused cannabis operator with cannabis brands and a clinic business with over 60,000 medical cannabis patients.

The all-equity transaction will see VIVO shareholders receive between .2110 and .4267 of a LABS share for each VIVO share held. Upon completion of the deal, existing MediPharm shareholders are expected to own between 65 and 79 per cent of the combined company, with VIVO shareholders expected to own between 35 and 21 per cent.

MediPharm CEO David Pidduck said the two companies are a good fit, as they’re both primarily medical and wellness-oriented compared to recreational-focused

“We were mutually focused on the global opportunities for Good Manufacturing Practices (GMP) facilities as international regulations evolved with ever higher quality and regulatory standards. Through this business combination, we have identified the potential for millions in cost and revenue synergies to solidify our leadership for the long term,” Pidduck said in a press release.

The combined entity is expected to generate pro forma annualized revenue of $50 million, with guidance to reach $7-$9 million in adjusted EBITDA within 12 months.

Commenting on the deal, Fortune said MediPharm Labs has been looking for M&A targets for a number of months now, with VIVO representing an option which leverages both companies’ medical cannabis focus.

“With VIVO’s EU GMP platform focused on exporting flower, we see international synergies longer term,” said Fortune in his report.

“Although dilutive, we view this transaction favourably for LABS, as it essentially doubles its annualized revenue base, accelerates Adjusted EBITDA breakeven, and adds EU-GMP flower infrastructure with international distribution inroads. Additionally, we still believe management may see incremental M&A opportunities to build off its complementary businesses targeting international medical cannabis,” he said.

Fortune said he’s holding his estimates as is for now, with a projected full 2022 revenue and EBITDA call of $22.4 million and negative $19.6 million, respectively, followed by 2023 revenue and EBITDA of $25.5 million and negative $4.6 million.