The marijuana extraction sector in Canada is nonetheless in “the early innings” and poised for considerable development immediately after the federal government legalizes concentrates and edibles later this year, according to a industry analyst.

“What we like about extractors is that there is a lengthy runway of development ahead,” GMP Securities analyst Martin Landry told Marijuana Company Everyday.

“Demand for extracted solutions is going to explode this fall with the arrival of vape pens and infused solutions.”

In a report to investors, Landry wrote that the upcoming regulations will open the floodgates for a enormous new segment of the cannabis industry.

The new regulations, to be enacted by Oct. 17, will pave the way for the production and sale of cannabis extracts, topicals and edibles – but it will most likely take months immediately after Oct. 17 for these solutions to attain shelves as corporations construct up inventory and set up sales infrastructure.

Market moving toward vaping

The GMP report foresees extracts sooner or later accounting for half of Canada’s industry for cannabis.

Vape pens will lead with 20% of the extracts sector, followed up edibles (15%), beverages (10%) and other (five%).

Cannabis extraction is a important step in the production of worth-added solutions such as cannabis oils, gel caps, vape-in a position solutions, cannabis-infused meals, topicals and infused beverages,” according to Landry’s report.

In the fourth quarter of 2018, Canada’s healthcare and recreational markets had been dominated by dried flower solutions, although extracts represented about 13% of gram-equivalents sold, Landry estimated.

That low penetration can be attributed to the restricted offerings from extracts, which so far have been oils, capsules and sprays.

The new regulations “will let for the sale of far more complicated extract solutions like vape-ables, topicals, edibles, beverages and other concentrates,” Landry stated.

“All of these new solutions need cannabis extraction, which positions Canadian extractors nicely, in our view, offering sustained demand for extraction solutions for the coming years.”

Primarily based on far more created markets in some U.S. states, the GMP analyst estimated extract solutions could represent about 50% of sales in the Canadian industry more than time.

Landry also stated extractors could come to be “indispensable” to licensed cannabis corporations.

White label possibilities

Although some of the bigger cultivators are performing extraction internally, other individuals are outsourcing some of the procedure so they can use internal sources and capital elsewhere.

And some are performing a bit of each.

Canopy Development, for instance, inked a multiyear processing and extraction agreement with HollyWeed Manufacturing and Extracts.

“Right now, they’re outsourcing extraction, but the prize (for extractors) is to present white label solutions,” Landry stated.

“To be in a position to take the dried flower, turn it into a vape pen, brand it (for a main licensed celebration) – for instance – package it and ship it straight to the provinces devoid of (that LP) getting involved at all. When these extractors get to that point, you are speaking about margin expansion,” Landry stated.

“You’re speaking about getting a crucial supplier to your clients. That is a lengthy runway to income development and margin expansion.”

In the report, Landry wrote that “unprecedented growth” by most LPs “is critically stretching their sources offered their infrastructure is not completely constructed however.”

“As such,” he continued, “extractors have the chance to come to be indispensable white label partners and unload some of the burden and expanding discomfort that LPs are presently experiencing.”

GMP initiated coverage of 3 Canadian cannabis extractors:

  • Barrie, Ontario-primarily based MediPharm, which trades on the TSX Venture Exchange as LABS.
  • Toronto-primarily based Valens Groworks, which trades on the Canadian Securities Exchange as VGW.
  • Laval, Quebec-primarily based Neptune Wellness Options, which trades on the Toronto Stock Exchange as NEPT.

Matt Lamers can be reached at [email protected]