Article by Erik Heinrich, Globe and Mail
From the outside, MediPharm Labs’ production facility looks like another non-descript warehouse in an industrial park. The interior of the facility in Barrie, Ont., however, is a beehive of employees in white lab coats and polypropylene hair nets working inside brightly lit glass cubes. They hover over high-tech machinery with pedals and metal cylinders that turn cannabis flower into concentrate using a technique known as supercritical carbon dioxide extraction. It’s not unlike making espresso coffee, with a few important distinctions. Some of these custom-made machines cost $1 million, and a single litre of the cannabis resin is worth as much as $100,000..MediPharm Labs Corp. is not as widely known as market leaders like Canopy Growth, Aurora Cannabis or Tilray—but it’s catching up fast. It’s been overlooked so far as a niche player without a multibillion dollar valuation. Unlike other cannabis companies, the firm isn’t trying to manage an entire supply chain from farming to processing to marketing. Instead, as the name suggests, it’s a pharmaceutical maker focused on doing one thing really well. MediPharm buys high-quality cannabis flowers from more than 20 carefully vetted suppliers, then converts them for use in recreational and medical products. “We’ve adopted a Swiss perspective. We work with many suppliers and sell to many customers,” says Pat McCutcheon, co-founder and CEO of MediPharm Labs. In other words, they’re neutral—not passive. On the day of this interview, McCutcheon wears a dark suit with a tartan pattern and a navy tie with tiny skulls and bones, hinting at a rebellious streak..The next chapter of pot legalization, dubbed Cannabis 2.0, will introduce new products—such as edibles, beverages, vape pens and creams—by mid-December of this year, all of which will be fuelled by the kind of cannabinoid-based extracts produced by MediPharm Labs. In effect, the company aims to be to cannabis what Frank Stronach’s Magna International is to the global car business—a strategic supplier of critical components that go into nearly everything its industry makes. That position in the middle of the supply chain has allowed MediPharm Labs to emerge as the biggest contract manufacturer of cannabis oil not only in Canada, but quite possibly North America and the world. Under the deal signed last month with Mississauga’s TerrAscend, a seller of prescription cannabinoids, McCutcheon’s firm will supply distillate worth $27 million over two years, with a potential to balloon to $192 million over three years. An agreement with the Cronos Group to supply high-quality cannabis concentrate is worth $30 million over 18 months, with the potential to double. Strategic partnerships like these have turned MediPharm Labs into the most profitable cannabis company in the country and the fourth-biggest by revenue after Canopy, Aurora and Aphria..MediPharm’s upward climb through industry ranks comes as the hype surrounding the first phase of cannabis legalization in Canada has been dampened by a few sobering realities. Virtually everyone in the industry is losing money, the threat of writedowns looms large, and the recent health controversy over vape products has caused the valuation of cannabis stocks to take a significant hit. But MediPharm reported net income of $4.1 million on revenue of $31.5 million in its latest quarter. Maybe its low-key, focused approach is exactly what the industry needs. “We don’t sell mystery,” explains McCutcheon, 39, noting his company’s market cap is $442.8 million. The company recently switched its public listing to the TSX from the more speculative TSX Venture Exchange. “We sell fundamentals and execution.”.McCutcheon worked in the medical industry for 15 years before launching his cannabis firm in 2015 with company president Keith Strachan. His last stint was at Johnson & Johnson, where he led a hospital division focused on kidney and mental health drugs. He’s the company strategist, keeping an eye on the global picture. While producing resins and distillates for edibles and beverages seems lucrative today, increased competition will likely squeeze margins. McCutcheon’s plan is to shift the company’s focus to producing 99.9% pure ingredients for the health care market, helping to create drugs to combat everything from chronic pain to cancer..By contrast Strachan, 34, is the regulatory brains. His background in hospital procurement and government contracts enabled his firm to land the first-ever cannabis oil production licence in Canada granted to a non-cultivator. McCutcheon and Strachan met at the Royal Victoria Regional Health Centre in Barrie, and soon recognized they had similar ambitions. Their shared pharma experience has created opportunities, including participation in a ground-breaking clinical trial for developing a non-addictive medication for opioid addiction at New York’s Mount Sinai Hospital. “I like MediPharm’s management team because they come from a pharmaceutical background,” says analyst Scott Fortune with Roth Capital Partners in Newport Beach, Calif. “If you start from a high scientific level, it’s easy to transfer that knowledge to everyday consumer products.”.And a wave of consumer products is on its way. The next wave of legalization will bring branded offerings with high margins: cannabis-infused edibles like cookies and gummy worms, beverages, topical creams and vape dispensers. Conservative estimates place the value of the Canadian cannabis industry at about $6 billion by 2021 while these new products are expected to be worth about $2.7 billion, according to a recent Deloitte study. And they might also help address some of the challenges that have bedevilled the industry so far..The sale of legal cannabis products in this country has so far been stymied by myriad factors, including the slow rollout of dispensaries in most provinces. This, in turn, has fuelled an unregulated online market for cannabis products that largely escapes enforcement. Meanwhile, licensed retailers are carefully scrutinized for compliance. “It’s hard for the regulated market to compete, with all the restrictions on packaging and advertising, when the black market is allowed to operate outside the law,” says Louis Barre, principal at Ottawa-based consultancy Cannab Intel. The situation is compounded by the premium paid by Canadians for legal cannabis bud—as much as 80% above unregulated and untaxed prices. “A premium of no more than 20% is needed for the legal market to thrive,” says John Kagia, chief knowledge officer at New Frontier Data in Washington, D.C..The illegal market will have a tough time competing with the new offerings coming with Cannabis 2.0. “The next generation of products will be more effective at combating the black market because quality will be much higher,” says McCutcheon. Consumers have criticized the quality of the legal bud now available at licensed dispensaries, leading them to see advantages to partaking in unlicensed options. But it’s unlikely that illegal operators will be able to make the technological investment to produce these new products. MediPharm Labs’ equipment was designed by biotech specialists, including GMP Engineering of Newmarket, Ont., whose clients include Pfizer, GlaxoSmithKline and Bayer. MediPharm has spent $30 million on its Barrie facility so far, and plans to spend a further $15 million to $20 million over the next 18 months..In addition, every batch of legal cannabis oil made in this country must be analyzed by third-party labs that check for undesirable compounds including heavy metals, pesticides and residual solvents. A company must also prove that its emulsification or mixing process is sufficiently robust to distribute active ingredients evenly in, say, an edible or beverage before a product is greenlit by Health Canada.