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Bedrocan Cannabis may be an "early winner" in 2015, says Dundee Capital

Bedrocan is an experienced producer of pharmaceutical grade medical marijuana, according to Dundee, with over 13 years of growing expertise through Dutch partner and shareholder Bedrocan BV. 


Bedrocan Cannabis (CVE:BED) has received bullish initial coverage from analysts at Dundee Capital Markets, which said the medical marijuana company could be an early winner this year on the back of some near term catalysts. 

Dundee analyst Aaron Salz, in a broader medical marijuana industry update, started coverage of Bedrocan with a buy rating and C$1.20 target price. The stock is currently trading at 75 Canadian cents and has nearly tripled in value over the past 12 months.

Bedrocan is an experienced producer of pharmaceutical grade medical marijuana, according to Dundee, with over 13 years of growing expertise through Dutch partner and shareholder Bedrocan BV. 

The company, through an exclusive license with its partner in Holland, is one of 15 licensed producers by Health Canada, selling medical cannabis under the new Marihuana for Medical Purposes Regulations (MMPR) regime, which came into effect last April.

It imports 240 kg per year of medical marijuana for sale via Bedrocan BV, with domestic production out of its 52,000 square foot facility in Toronto expected following a license in the first quarter. This would add another 4,000 kg per year of medical marijuana production.

Dundee said that importing from BV through the Dutch Ministry of Health has already built Bedrocan a "strong brand and 1,500 patient base" in a high growth industry with high barriers to entry.

Indeed, since the sweeping regulations came into effect last year in Canada, the country's regulatory health body has only licensed 15 producers with the ability to both harvest and sell, and eight others which are only permitted to grow. 

According to Dundee, Health Canada has received more than 1,100 applications from prospective producers, of which almost 600 have been returned as incomplete, with over 200 rejected and 35 withdrawn. As of the end of November, the department was still reviewing around 300 applications, 13 of which were awaiting a pre-approval inspection.

The surge into the industry is not difficult to understand, with Health Canada believing the medical marijuana space can grow into a $1.2 billion plus industry. It is predicting up to 450,000 licensed users by 2024, up from 17,100 now. 

"The market is still relatively unproven but given the newly implemented government framework and increasing adoption of medical marijuana as a viable medical alternative, we believe opportunities exist for investors but only a select few are worth looking at," said Salz in his report.

Bedrocan is one of these select few, with a production license expected for its Toronto facility as early as next month. First harvest is expected in May, with sales anticipated to follow in June following testing by Health Canada, Dundee said.

By the fourth quarter, Dundee believes positive EBITDA will begin, solidifying the company's valuation, which suggests further upside, according to Salz. 

"We only considered the 4,000 kg pa domestic production facility and did not model potential upside factors such as a US market entry, South America licensing fees, potential for a second domestic production facility, and wholesale MMJ revenue," he added. 

The capital markets firm also noted Bedrocan's product standardization techniques, which it said appeals to physicians, as well as the company's management expertise. The chief executive of its Dutch partner and head of research are part of the Bedrocan team as well.

Bedrocan's harvest strategy is to ensure there is no real bottleneck, with plants to be grown in a hydroponic non-soil material, with fresh crop harvested every week. Yields are expected to be even better than Bedrocan BV with climate controlled compartments and advanced technologies capable of increasing yield per square metre.

"With only a small import operation the company has managed to tally up one of the largest patient bases amongst public licensed producers with potential to double it over the near-term," wrote Salz. 

"And while Mettrum and Tweed both have two licensed facilities, BED's intensely pharmaceutical approach, relationship with Health Canada, and harvest experience are three intangibles it has over peers."

The MMPR program in Canada immediately replaced the previous Marihuana Medical Access Regulations (MMAR) regime, creating conditions for a highly regulated commercial industry with a limited amount of suppliers vetted extensively by Health Canada. 

Dundee expects that the regulatory body may soon begin cutting the new program off given the slowing of licensing already taking place, at least until demand significantly increases or until there is proof that access is not being satisfied by the current number of licensed producers.

Risks to Dundee's rating on Bedrocan include timing, as the feedback period following Health Canada's inspection at the company's Canadian facility could last several months.

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