Well that didn’t take long.
Just a day after we wrote an article excoriating Emblem Canabis (EMC.V) for sitting on their hands with news for the last year, new CEO Nick Dean has dropped a big one.
Emblem Corp. has entered into an agreement to become a medical cannabis supplier to Shoppers Drug Mart.
Well hello, Mr Dean.
Subject to Health Canada’s approval of Shoppers Drug Mart’s application to be a licensed producer, under the terms of the agreement the company will supply Shoppers Drug Mart with Emblem branded medical cannabis products. It is expected the products will be sold on-line, as Canadian regulations currently restrict the sale of medical cannabis in retail pharmacies.
Nick Dean, chief executive officer of Emblem, says the deal is an important milestone for Emblem. “From the very beginning we’ve been very focused on being a leader in the medical cannabis space, not only from the production side, but also when it comes to physician and patient education,” says Mr. Dean. “Today’s deal with Shoppers Drug Mart helps to solidify that and positions us well to be a world leader of cannabis for medical purposes.”
Nicely done, and good for a near 10% jump in EMC stock.
But wait.. only 10%?
This stock has been oppressed and kicked around for a year plus. It’s one of the lowest market caps of any major LP. It’s come the furthest down of any major LP.
And this news is, on the face of it, big.
There are a few things missing from this announcement that lead me to think the pressure coming from my piece, and several others (The Wolf of Weed Street has been yelling at management for weeks) led them to post this news before it was fully baked, or at least a bit earlier than they intended.
The first indicator is its brevity. That bit I posted from the news release up top? That’s the whole thing. One paragraph about the deal, one quote from the boss. That’s it.
The second indicator is there’s no details of the deal included. No talk of how much they’ll be buying, for how long, what sort of discount they’ll offer, and whether it’ll be under the Emblem brand, whether it’s an exclusive deal or whether every LP will be getting the same agreement.
(Psst: Aurora said their deal was for five years and will involve supplying four strains of flower and four types of oil, so it’s likely Emblem has something similar)
Cannimed (CMED.T – soon to be an Aurora joint) has a deal signed with PharmaChoice, and Maricann (MARI.C) has one with Lovell’s Drugs, but you can pretty much ignore those deals because they aren’t legal now and won’t be legal when the rules change soon. Pharmacies won’t be allowed to sell marijuana products, as things stand.
What makes the Shoppers deals interesting is that company has applied for a growers license, and will probably get it.
That will allow them to sell online, which will allow them to use their rather large online presence to sell weed and compete directly with – you guessed it – Aphria, Aurora, Tilray, Medreleaf, and Emblem.
That might not be such a great deal for those suppliers, as when the adult use market largely goes through provincial liquor boards, their online sales for current and future medical patients may be a real financial lifeline. The liquor boards will not be offering top dollar for product, and online sales currently go for a decent premium.
If Shoppers starts taking a big share of that online market, the LPs may feel it – especially if they’re selling at wholesale prices to make it happen.
Added to which, while Shoppers is applying for a grow license, I doubt they’ll do a whole lot of growing.
We’re seeing a few plays more recently go for, and get, grow licenses because it allows them to buy cannabis from other suppliers, rebrand, and sell at a markup. The grow operation is almost an annoyance, a loophole that allows the company to deal in weed from elsewhere but that drains company coffers when actually operating for their own supply.
HIKU Brands (HIKU.C), as an example, has a relatively small grow facility, and no sales license, but big plans on the retail and branding side that have it’s market cap at $250m plus.
To be sure, sitting on a 7k square foot grow and buying/reselling is far less risky, and costly to operate, than building a million square feet of greenhouse by an airport in Edmonton.
We’ve heard from some license applicants that were just fine with delays in getting Health Canada approval because, in one case, “It’s saved us from two years of losses – we didn’t have to pay for a level 9 vault that is no longer necessary, and we were saved from actually growing something for a market you can’t advertise in.”
In fact, we suspect Emerald Health (EMH.V) only grows enough weed to keep its license in good standing, and buys whatever else it needs for whatever sales come in the door from other suppliers, a suspicion drawn from the fact they don’t talk about grow numbers on any company documents we’ve seen, nor will they answer emails about that topic. That makes us wonder about whether their plans for 4 million square feet of greenhouse are real or market fodder, especially as they’re only doing low six figures in sales per quarter currently.
Back at Emblem home base, it’s certainly not a terrible thing to have struck a supply deal, especially one with a large retail chain with stores across Canada. If they can grow cheap, make a profit selling to Shoppers, and Shoppers can make a further profit at the end of that chain, may god be with you all in your quest.
But we’re going to need to see more before we give the all clear on Emblem turning a corner on shareholder communication. Solid move, Mr Dean, we see you. Keep it coming.
Emblem remains undervalued, even after today’s rise.
— Chris Parry
FULL DISCLOSURE: Don’t own it, don’t have a commercial relationship with them, though we did at one time. Matter of fact, if Emblem wants to drop us a note, we’d be happy to resume our old marketing program, which the company really didn’t use as it slumped downwards, to help them get back to where they need to be. No fee. We’re in the corner of the bagholder.