Emblem (EMC.V) debuts Monday morning, will be a monster

Emblem Cannabis (EMC.V) hasn’t had to be loud about it. The Canadian investor base has been calling and pleading and goading and pushing to get in on its pre-listing financing for months now. Most have failed to get a piece. Those that got in, got in with everything they could.

When Emblem decided to raise money, money raged in the door at them. $23 million crashed in, in a handful of days. If they hadn’t shoved that door closed, like a family defending the homestead from the tornado outside, who knows what might have ended up in the bank.

Kindcann, as it used to be called, had reportedly spent $11 million to get itself through the Health Canada MMPR gauntlet back in the day, and managed to come out the other side with a license. It was a major victory at the time, when a license was generally considered to be worth around $25 million, and with thousands of other applicants standing by their mailbox waiting for their turn.

Enter Saber Capital, a capital pool corporation that becomes Emblem Cannabis on Friday after Kindcann RTOed into it.

Those new Emblem shares will, in my opinion, fly, because an operation the size of Emblem, in today’s market, could bring an initial valuation north of $200 million without any trouble. Indeed, the pre-IPO valuation of the company was pegged at $63 million, or $90 million fully diluted, but that was before the market started cranking out random cannabis multiples across the board. PI Financial has set a 12-month price target of $3.25, and doesn’t include the pharma potential, which we’ll go into in detail below.

Where will it open? Anyone’s guess, but it will be substantial. The market is looking for the next big weed deal, the next Mettrum or Aphria or Organigram, and this is it.

So what are you buying if you buy Emblem?

The company’s production facility currently cranks out up to 60 kgs of dried flower every month as it stretches its early muscles. The focus is on a high-quality, higher-margin product, and the facility is comprised of three buildings on 4 acres in Paris, Ontario.

Room to expand? There’s another 3x the currently-used space ready to be expanded into in the already built facility. The company will bring phase two online in February 2017, which puts the revenue potential of the operation at a whopping $17 million a year.

A planned third phase of development, which has the potential to take Emblem to almost 12,000 kg per year (16 times the current product grow rate), only takes up half of that property, so the upside on this thing is crazy.

At full phase 2 production, Emblem says growing costs are $2.08 per gram, with average sales expected to be $8.50 per gram, which is nice margin, and allows the company to do a roaring trade in the wholesale business, selling at as low as $3.50 to other LPs while still making a profit.

Added to Emblem’s asset base is 50% of the GrowWise patient education clinic chain, with outlets across Ontario. That’s nice, and there’s money to be made there, with plans afoot to grow to an additional 22 clinics, but the real pep in the step of Emblem isn’t the grow facility, or the clinics, which are still navigating a tricky regulatory landscape. It’s the people.

Or person. The head of Emblem Pharmaceuticals, the brand’s pharma division, is John Stewart, and he has been almost as talked about as the company he’ll be steering this past week, after a Globe and Mail article over the weekend highlighted his time running the giant pharmaceuticals company, Purdue Pharma.

Purdue, for the uninitiated, rolled out one of the great drug success stories (in financial terms and otherwise) of all time in Oxycontin, with over $30 billion in sales. Modern surgery relies on Oxycontin to do it’s thing. It, as a product and a brand, became an industry unto itself.

Emblem Pharmaceuticals, a subset of Emblem Cannabis, is set to launch a cannabinoid-based medication push to develop products with precise dosages, including liquids, oral sprays, inhalers, gel caps, and pills. For mine, this is the single most important part not only of Emblem’s business, but of the marijuana industry in general.

This is the area that will bring doctors on board. It’s the space that will see insurance companies embrace cannabis-related treatments. It’s the sub-sector that moves away from the leaf, and the stigma that follows it, and into the laboratory, where the promise of CBDs will move beyond the marijuana sector and into pharma, retail, food processing, beverages, wholesale products and beyond.

Emblem invested $1 million in oil extraction technology earlier in 2016, which will be put to good use by that pharma division, and beyond as rules and licensing allows.

Stewart told The Money Show recently, “We are also looking at making long-acting or sustained release capsules and I have a lot of experience in that from my previous pharmaceutical company experience. Other formulations such as nasal sprays would be appropriate for patients who need a more rapid onset of action.”

If recreational marijuana in Canada, in it’s smoked and vaped form, is a $7 billion a year industry, as is often touted, the worldwide pain and sleep medication markets will crank that number by many zeroes. Derivatives will be in your breakfast cereal like protein and hemp seeds are now.

And if you’re preparing to go to war with a pharma division, there’s simply nobody better qualified for that task than the guy Emblem signed.

Stewart’s Big Pharma experience is necessary in the Big Cannabis world, now more than ever. With doctors still hedging on prescribing cannabis as medicine (some 98% of doctors in Canada still refuse to prescribe, despite law changes allowing it as a treatment), with large mergers now taking place, such as in last week’s Canopy-Mettrum $430m deal, and with rules changing quickly that will likely see institutional investment in the weed space as it sheds its illegal persona, having a legit pharma boss at the helm of the Emblem Pharma division will make that company an attractive target for bigger fish, and a likely revenue winner.

If you were designing a weed company from scratch in Canada, I defy anyone to tell me who would be a better pick for a pharma CEO than a man who had been President and CEO of a multi-billion dollar pharma company that exploded in revenues under his leadership and launched 11 new products, including one of the most successful medicines in modern history. In terms of dealing with doctor acceptance, clinical trials, handling regulators, and generating profits, I can’t think of a more qualified option.

A master grower? Nope.

A capital markets guy? No sir.

A bog standard logistics guy? Come on now.

No, in a perfect world, you’d sign the pharma division CEO that Emblem already signed. And you’d be going to market right now, just before recreational use lands, right as valuations are soaring, with a war chest filled with cash.

Emblem’s emergence Friday is akin to a slow building tsunami. You can see the wave is building, and it’s going to destroy. You’re either going to be on the wave, or you’re under it.

— Chris Parry

FULL DISCLOSURE: Emblem Marijuana is an Equity.Guru marketing client.

NOTE: Due to the vagaries of Canada’s financial data networks, a new ticker symbol sometimes takes a few days to get to online trading platforms. If you want in on Emblem at the open, call your broker beforehand to make sure you get some without delays.

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