Liberty Health Sciences is a company competing in the medical cannabis sector in the U.S., operating in the state of Florida at this time, while looking to expand to other U.S. markets in the future.
Along with other pot producers, it has been scrambling to ramp up production in response to the surprising pace of acceptance of marijuana as a medical treatment in the U.S.
The company stated this as its purpose:
“Liberty was launched to acquire and operate U.S.-based companies in the medical cannabis market, with initial focus of operations in the State of Florida where it entered into an exclusive Management Agreement with Chestnut Hill Tree Farm, LLC (“Chestnut”) which grants the company all economic risk and rewards associated with the Florida-based operation. Liberty intends to continue to target, for expansion, key U.S. states that have approved medical use of marijuana and meets its stringent investment criteria….”
Liberty Health was initially launched with $25 million in funding from Aphria, with another $35 million raised by Clarus Securities Inc. in a private placement.
As of July 2017, Florida had approximately 26,000 registered medical cannabis patients. To give an idea of the pace of growth in demand, by October the number of registered medical cannabis patients in Florida surged to 38,000. That will continue to grow significantly over the next few years.
Soaring demand
It has caught a lot of people and companies by surprise in regard to the growing acceptance of marijuana in the U.S. – both medically and recreationally.
The market in Florida is projected to climb to $1.6 billion by 2020 for medical cannabis, representing about 14 percent market share for the medical market, and 7.5 percent of the entire U.S. market. Much of that has to do with the large number of retirees residing there.
That would make the Florida cannabis market only second in size to California, which in the last quarter of 2017 had 34 percent market share of legal pot sales. Colorado, Washington and Oregon had 41 percent share combined as of the same time period.
As for the entire U.S. – including legal and illegal marijuana demand – it is estimated to be in a range of $45 to $50 billion. With much of that expected to be legalized in the years ahead, it gives a sense of the massive potential of the market.
The challenge for Liberty Health Sciences
With the rapidly changing acceptance and legalization of medical and recreational pot, it’s becoming a challenge for producers to meet demand.
The problem isn’t simply finding ways to produce more pot, it’s doing so in a sustainable manner, where the future earnings of any company aren’t totally sacrificed by taking on heavy debt loads that will be difficult to pay off, or diluting existing shares by issuing more of them.
What is happening now is cannabis producers are scrambling to find ways to produce more product in order to gain share, because eventually the market will reward the larger players; it’s inevitable. That will cause many business leaders to expose their companies to higher risk. How that risk is mitigated, in my opinion, will determine the winners and losers.
With that in mind, the stronger capitalized companies will hold an advantage as long as they leverage and allocate the available capital toward meaningful and profitable projects or acquisitions.
Boosting capacity
To boost its production capacity, at the end of January 2018 Liberty Health Sciences announced it had finalized the agreement with 242 Cannabis Canada Ltd. to acquire a 387-acre parcel of land located in Gainesville, Florida. Included in the purchase was 200,000 square feet of greenhouse and processing facilities.
After retrofitting parts of the facilities, the company expects it to take a year off its projected production capacity time frame levels.
The major reason for retrofitting is to add a 16,000-square-foot processing area which will be used primarily to extract and refine cannabis oils, and to develop a variety of dosage forms for patients, including chewables, edibles, capsules and topicals, among others.
Once the changes are completed, the company will be able to produce approximately 12,000 kg of medical cannabis, making it among the market leader in the Florida market.
To give an idea of the accelerated pace of capacity and production growth, Liberty Health had 13,000-square-feet of growing space which could produce 700 kgs annually in October 2017. The overall goal is to grow capacity to 435,600 square feet with annual production of 25,000 kgs by the end of 2019.
Signed licensing deal to expand product line
In order to offer a “complementary suite of medical cannabis products to patients in Florida,” Liberty Health Sciences signed an agreement with MC Brands LLC d/b/a incredibles, to be the exclusive producer and distributor of ‘incredibles’ cannabis products in Florida.
George Scorsis, Liberty’s Director and CEO said this about the deal:
With incredibles’ large and consistently evolving product assortment, we can now offer a much wider range of medicine delivery options to patients in need.
The products will be sold through Liberty’s Cannabis Education Centers.
While cited as being complementary to its existing product line, the fuller picture to me is it will also fill an immediate need for products that the company will take time to develop at its aforementioned acquisition of the greenhouse and processing facilities.
It also adds more options for its Florida customers in relationship to how cannabis can be delivered or consumed by patients.
Conclusion
The number of rapid changes in the cannabis industry in general, and Liberty Health Sciences in particular, makes it difficult to keep up with the makeup and progress of those competing in the sector. For that reason, extra due diligence is required to get a handle on where production companies like Liberty Health stand.
Where Liberty Health is as of this writing, is it has added significant more production and processing capacity that will allow it to be one of the market leaders in the second-largest cannabis market in the U.S. at this time.
As it continues to develop and execute on its business model in Florida, it is poised to compete in other U.S. states as opportunities arise.
Within Florida itself, even if it is slow to compete in other markets, it has a lot of potential growth in that one market to continue momentum. Doctors in the state have been given more leeway to determine the needs of patients in regard to being treated with cannabis. This will cause the number of users to continue to grow for some time, as more people choose that as a treatment option.
Another factor will be the word-of-mouth results that could trigger more interest from potential patients, assuming the treatments relieve the symptoms being treated.
Liberty has a fairly robust product line and delivery options now in place. Consequently, it appears the company is ready to get more aggressive with marketing its products in Florida.
Since the company has stated it wants to expand to other markets, how it does that and at what cost will determine its future performance. I want to see a disciplined approach that doesn’t include growth at any cost, even though rising demand ensures there will be a market for most if not all medical cannabis produced in the U.S.
With some states approving recreational marijuana, it means the market for cannabis could tighten, resulting in higher prices. The full effect would depend on the margins and earnings potential from state to state in relationship to medical versus recreational pot. That could possibly be a benefit to Liberty Health.
Since Liberty Health is still in its formative phase, what it will eventually become in regard to size and scale has yet to be seen. As it stands it’s going to enjoy growth in the Florida market, and I don’t think that is fully priced into the stock at this time; specifically because of the large increase in capacity it’s going to get after its new greenhouse and processing facilities are fully functional.
With the company competing in the medical cannabis space, it won’t endure the volatility associated with recreational pot because of the taint of it being a crime at the Federal level. This removes the unpredictability coming from that negative catalyst other marijuana producers could face.
As it stands today, I think Liberty Health has some growth left in it that doesn’t include as much risk as some of its competitors. Without knowing when it’ll enter other markets, investors should make decisions based upon the Florida market alone until more visibility comes there.
Based upon that, I think, while the company is speculative, it does have a clear path that can be followed over the next couple of years, and I think it’s worth taking at least a small position in at the entry point it is now at.
That’s because it has a lot of potential to climb meaningfully in price once it gains entry into another market and presumably boosts capacity and production to serve a larger customer base.
