Medical Marijuana
Sunniva Inc: Meet the “Canopy of California”
By Marc Davis
It’s the biggest cannabis story you’ve never heard of — until now.
Having operated in a pre-IPO stealth mode until now, Vancouver-based Sunniva Inc. is preparing to trade on the Canadian Stock Exchange (CSE) imminently under the symbol SNN.
Frankly, Sunniva’s story is about as good as it gets in a fast-growing, multi-billion-dollar North American market for high-margin medicinal cannabis products.
In fact, this future industry heavyweight already has considerable gravitas in the cannabis industry. This explains why Sunniva has raised over $50 million to date and has recently completed its last brokered private equity financing at CDN $6.75 per special warrant.
So what’s all the fuss about? I believe I can offer some useful insights. After all, I have been covering cannabis stocks in the Financial Post, the Huffington Post, and other well-known media outlets since 2015 — which ironically makes me something of an industry veteran in this rapidly evolving business.
Fortunately, my experience with charting the fortunes of hundreds of enterprising starts-ups in a diversity of business sectors goes back a lot farther than 2015. Over the past 30 years, I have worked as a CBC Evening News business reporter, investment industry research analyst, and even a floor trader.
Additionally, my writing as a financial journalist and stock market commentator has been syndicated to dozens of online business publications, including various major news agencies.
I therefore have some deep knowledge of the high stakes world of venture capital, especially how it applies to such a dynamically transformative industry as medicinal cannabis.
So do I believe Sunniva warrants a high valuation? Yes I do.
I’ll delve into the company’s winning dynamics in a moment. But before I do, it’s worth mentioning that I am fortunate enough to have a good track record for identifying winners in the making. They include Aurora Cannabis (TSX: ACB).
I first identified Aurora as being both undervalued and a future standout performer when it was at around CDN $0.40. It has recently traded as high as CDN $14.88. And even in its current CDN $13 range, it boasts a market capitalization of around CDN $6.0 billion.
Of all the big cannabis growers in Canada, only Canopy Growth (TSX: WEED) can top this valuation at CDN $6.4 billion, which is due to its first-mover advantage and industry-leading status.
In fact, there are only several companies in the world that can compete with Aurora and Canopy in terms of their huge projected growing capacities and the sophistication of their business operations.
Sunniva is worthy of inclusion in this tiny elite. This much I can assure you.
In particular, Sunniva already mirrors Aurora in two key regards. First, both companies have similarly aggressive strategies to be dominant forces in North America’s biggest medicinal cannabis marketplaces.
Second, Sunniva is committed to cultivating cannabis to the very highest industry standards while intending to be the lowest-cost producer, much like Aurora intends to do. Consequently, both companies believe in the imperative to provide patients/clients with cannabis products that are free of pesticides and/or other contaminants.
Indeed, this one value driver alone promises to be a huge competitive advantage in Sunniva’s biggest marketplace, California.
The Art of De-Risking a Multi-Billion-Dollar Enterprise
Truth be told, Sunniva has already accomplished something quite remarkable prior to going public. It has virtually de-risked its business model.
This involves leveraging strategic commercial real estate and merchant banking relationships to grow at full capacity a total of 100,000 kilograms of medicinal cannabis in California and 125,000 kilograms in Canada.
Significantly, this can be achieved without incurring any meaningful capital expenditure costs. Instead, Sunniva will only be obliged to finance ongoing operating costs, as well as commit to long-term leases or mortgages for its news facilities.
Additionally, the company is negotiating long-term sales agreements with high-volume retailers and distributors of cannabis products in both Canada and California. These contracts are expected to be worth hundreds of millions of dollars annually in each of the world’s two biggest marketplaces.
This de-risking formula has worked extremely well before for Sunniva’s co-founder Dr. Anthony Holler. A former physician, Dr. Holler was also founder and former CEO of ID Biomedical Corp and he brings with him key IDB management to Sunniva’s team.
This comparable Canadian start-up quickly became North America’s dominant low-cost, high-quality scalable manufacturer of influenza vaccines. IDB pre-sold the majority of its supply via long-term contracts prior to commencing production. It was acquired by GlaxoSmithKline PLC in 2005 for CDN $1.7 billion
Dr. Holler is now a very hands-on CEO and Chairman of the Board at Sunniva. His mandate is to make Sunniva what some people are referring to as “the Canopy of California” (a comparison to Canada’s dominant cannabis grower, Canopy Growth).
On the domestic front, Sunniva is on-track to become one of Canada’s largest and most diversified vertically-integrated growers of low-cost, pharmaceutical-grade cannabis products.
Ultimately, Sunniva is poised to earn significant market share in the world’s two largest cannabis marketplaces, involving several diverse big-dollar revenue streams. This will assuredly make Sunniva a dominant industry heavyweight.
Becoming California’s Dominant Medicinal Cannabis Cultivator
Sunniva’s flagship business venture gives it an extraordinary first-mover advantage in California’s medical cannabis market. This involves building a total of 489,000 square-feet of state-of-the-art greenhouse production facilities in Cathedral City, near Palm Springs.
This entails a two-phase build-out. Ground was broken for Phase 1 in early November, which will involve 324,000 square feet of growing space (with the first harvest scheduled for Q3 of this year). The second phase will involve an additional 165,000 square feet.
Together, both purpose-built facilities will produce up to 100,000 kilograms of premium dried cannabis flower annually, as well as 30,000 kilograms of other plant material for conversion into cannabis oil.
Known as the Sunniva California Campus, the facilities are being designed to “Good Manufacturing Practice” protocols and will be largely-automated, using world-class commercial greenhouse technology. They will also enjoy major energy savings from harnessing plentiful Californian sunlight.
Along with these cost-curtailing operational efficiencies, Sunniva will be able to achieve prolific economies of scale thanks to its large-scale production. Consequently, the company believes it will be able to grow cannabis at less than US $1.00 per gram at capacity, and without compromising on quality. This would make it by far one of the lowest-cost cultivators in the world.
The Sunniva Campus also promises to be become perhaps California’s only large-scale growing facility that easily satisfies increasingly stringent safety regulations for the cultivation and sale of medicinal cannabis.
(The schematic below illustrates how this sprawling facility will appear once it is completed.)
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In fact, state legislators are scrambling to force California’s poorly-regulated growing industry to clean up its act. This comes in response to alarming media reports — ones that revealed that up to 85% of cannabis products sold in California contain excessive residues of pesticides and/or other harmful contaminants.
Accordingly, Sunniva is setting the new gold standard. Once again, it is committed to only cultivating pharmaceutical-grade cannabis that is entirely free of pesticides and other chemicals.
Thanks to its steadfast commitment to quality control and product safety in an increasingly regulated environment, this is proving to be a disruptive competitive advantage. In turn, this is allowing the company to enter into long-term wholesale contracts with well-known medical cannabis distributors in California.
Making a Big Splash in Canada
Sunniva’s expansion into California is such a big story that it almost overshadows the company’s mandate to also earn major market share in Canada’s burgeoning medicinal cannabis sector, too.
To this end, Sunniva is in final review of term sheets already for the financing of two state-of-the-art purpose-built greenhouse facilities totalling 688,000 square feet in Oliver, British Columbia.
These facilities should give Sunniva an additional 125,000 kilograms of dried flower output per annum. Sunniva aims to pre-sell 70,000 kg/year via long-term supply contracts which will provide a steady stream of cash flow over the next 2-5 years.
The third dynamic to Sunniva’s vertically integrated business model involves the company’s ownership of Natural Health Services (NHS), which already has significant revenues and serves well over 75,000 active cannabis patients.
As Canada’s largest network of medical cannabis clinics, NHS offers medical patients a speedy, streamlined process for legally accessing medicinal cannabis. In the process, NHS offers unbiased doctor/patient counselling on which physician-led therapies and delivery methods work best for a diversity of medical conditions.
What makes these clinics all the more appealing to patients is that their services are paid for by the provincial healthcare authorities, which validates the professionalism of the services offered.
But what’s the appeal to Sunniva? By owning NHS, it benefits from significant revenues, as well as access to tens of thousands of patients/prospective clients — many of whom are expected to become loyal, long-term clients.
Finally, Sunniva’s “production to prescription” business philosophy even extends to such down-stream products as delivery devices. The company now owns Vapor Connoisseur — which benefits from one of North America’s large distribution networks for safe, high-performance vaporization devices and accessories.
Investment Summary
The big takeaway here is that Sunniva offers an exceptional value proposition compared to its other big-league peers in the industrial-scale medical cannabis industry.
Here’s what I mean.
The company plans to produce as much as 225,000 kilograms of low-cost but high-quality medicinal cannabis per annum. Yet all of its build-out costs are essentially de-risked already.
It bears repeating that the company’s massive growing operations in California and Canada are being financed by big-name business interests that are content to absorb tens of millions of dollars in start-up costs.
Additionally, the company’s future operational expenditures are also being de-risked by way of the signing of long-term supply agreements to high-volume, big-brand retailers.
In other words, Sunniva is planning to pre-sell its products in both Canada and California — of which a large quantity will consist of high-margin extracts (mostly oils) — for at least three years.
Ultimately, Sunniva plans to build its reputation on delivering contaminant-free, competitively-priced and consistently high-quality medicinal products, as well as providing an optimized experience for patients in need of access to medicinal cannabis.
All told, the company already has significant revenues via ownership of NHS and VC and is gearing up to be a very big player in the medical cannabis industry in the world’s two largest marketplaces. Also, Sunniva’s ability to consistently execute on its developmental objectives and timelines attests to its ability to generate a sustained, high-impact news flow.
This all speaks to the top-tier calibre of the company’s management, especially Dr. Holler, who took ID Biomedical from inception to a CDN $1.7 billion valuation before it was acquired by Big Pharma. (Take note that the pharmaceutical industry is no doubt sizing-up future prospective takeover targets in the cannabis industry, too).
Can Dr. Holler and his team delight investors by hitting the ball out of the park a second time? Much of the stock market’s “smart money” is already betting that they can. I fully concur.
On a technical note, Sunniva has approximately 26.6 million shares outstanding and 36.9 million shares fully diluted. Such an enviably tightly-constrained share structure, when accompanied by positive news flow, typically acts as a powerful catalyst to high share price valuations.
Accordingly, Sunniva has all the right dynamics to be a stellar performer in 2018 — and beyond.
About the Author: Marc Davis has a deep background in the capital markets spanning 30 years. He is also a longstanding financial journalist, having worked for leading digital financial news agencies in North America and in London’s financial centre. He is also a former business reporter for CBC Television.
Over the years, his articles have also appeared in dozens of digital publications worldwide. They include USA Today, CBS Money Watch, Investors’ Business Daily, the Financial Post, Reuters, National Post, Google News, Barron’s, China Daily, Huffington Post and AOL.