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One of the big mistakes we are seeing is that some analysts and market participants are treating all revenue as if it is equal. Among the largest Canadian LPs, Aphria, Canopy Growth and Tilray have substantial non-cannabis revenue. While it’s not necessarily the case that it should be valued less than revenue derived by the sale of cannabis, we think in each of these cases it should be.
Aphria purchased a European pharmaceutical distribution business in early 2019, one of the last efforts of former CEO Vic Neufeld, who stepped down literally two days after the deal closed. The deal was intended to capitalize on the nascent German medical cannabis market by leveraging the CC Pharma relationships. Aphria paid just 42.42 million euros for the business, including up-front cash and an earnout paid in August, which was just 16% of sales and only 4X 2018 EBITDA. In the quarter ending in February, distribution revenue represented 61% of net revenue and 69% of net revenue through the first three quarters. This mature business earned only C$319K in profit in the first three quarters of the fiscal year. Clearly investors should be careful in analyzing Aphria, breaking its core cannabis business apart from this non-core business, valuing each separately, to arrive at an overall valuation. This is an analysis tool known as “sum-of-the-parts.”
Canopy Growth acquired Cannabinoid Compound Company (C3), also in Europe, in April 2019, paying C$343 million for a company that derives most if not all of its revenue from the sale of synthetic THC. During fiscal 2020, C3 revenue of C$53.8 million accounted for 13.5% of net revenue for the entire company. Note that Canopy also has a large ancillary business built by acquisitions over the past 18 months that accounted for 24% of revenue in fiscal 2020. This is another example of a company where investors need to dig a bit deeper into the sources of revenue.
Tilray purchased Manitoba Harvest in February 2019 for up to $419 million at the time, including cash of $150 million, stock valued at $127.5 million and a potential earnout of $50 million cash and $42.5 in stock that wasn’t ultimately paid. The unit had revenue of $21.3 million in Q1, or 41% of total revenue. Manitoba Harvest had traded in 2015 at C$132.5 million, or 3X trailing sales. Investors need to value the hemp business differently, in our view, than the cannabis business.
The out-of-industry revenue isn’t as big a deal in the U.S, but one good example is Scotts Miracle-Gro, which has a majority of revenue and profits derived from its traditional lawn business (a different kind of grass) but an increasing presence in the ancillary cannabis business through its Hawthorne Gardening division. In fiscal 2019, Hawthorne represented 21% of revenue and 9% of segment profit. Based on its revised forecast, Hawthorne could achieve $1 billion in revenue in fiscal 2020 and account for approximately 27% of overall revenue. This is clearly a case where valuing the non-cannabis business differently from the cannabis-related business is necessary.
TILT Holdings is another example of a company where investors need to look deeper than just the reported revenue, as this is a business with primarily ancillary revenue but also some direct cannabis operations. Similarly, evaluating Greenlane Holdings has always been a challenge due to the presence of substantial JUUL revenue, though this has become much less of an issue due to the decline in those sales and expansion in the balance of Greenlane’s remaining business.
The takeaway, in our view, is that investors need to dig deeper than just overall revenue. We have been including only in-industry revenue in the New Cannabis Ventures Public Cannabis Company Revenue & Income Tracker in order to help our readers better understand this dynamic. Employing a valuation process like sum-of-the-parts is necessary in many cases.
Vireo Health International is a physician-led cannabis company focused on select markets where it has achieved critical mass. Vireo has since doubled down on building a strong intellectual property portfolio and sees IP as its biggest potential upside beyond the company’s multi-state operations. The company manufactures pharmaceutical-grade cannabis products and distributes its products through its growing network of Green Goods™ retail dispensaries and third-party locations.
Get up to speed by visiting the Vireo Health Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.
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Alan & Joel