Cannabis stocks are back with a vengeance in the wake of the US election, but we think there are cannabis stocks, and then there are cannabis stocks. Occasionally some extremely interesting opportunities come to the market within this sector that are worth further scrutiny. We think HempFusion [TSX:CBD.U / OTC: CBDHF] is one of these.
- Mature CBD play with broad range of products already authorised and on shelves
- Brands sold in all 50 US states and in some international markets
- Includes FDA listed OTC topicals and medical distribution through doctor/ practitioner channels
- Emphasis on compliance means Big Box US distribution underway
- Positioned for growth in expanding wellness segments like probiotics and organic pain management
- Planning to list on the TSX senior board under the symbol CBD.U
The Canadian market has been one of the busiest for cannabis and hemp stocks, but this new listing is actually more of a US play. However, the Canadian market is still the go-to market for cannabis stocks, with a solid regulatory framework implemented to accommodate companies in this sector.
Listen: Podcast with Jason Mitchell, CEO of HempFusion
Established, second wave CBD company
HempFusion is an example of an established, second wave company which is coming to the market with a diverse product set and some important regulatory approvals already signed off in the United States market. It has no debt, substantial cash reserves and exciting expansion plans that include Europe and the UK.
We like the fact that the company has a very diverse portfolio of senior products that meet a range of different demand segments in the US market: this includes products targeted to address specific needs in areas like stress and sleep management. All its products draw on its proprietary whole food panoramic full-spectrum food complex.
Of especial note is the fact that HempFusion is one of only a few companies with FDA listed OTC products: this is a major feather in its cap and requires considerable investment in time and effort to achieve. Such approval can take between 18-24 months to achieve and is no easy process. This gives HempFusion a considerable competitive ‘moat’ to protect its market.
US regulated marijuana market is opening up
HempFusion should also be able to capitalise on further liberalisation of the regulatory environment for marijuana for regulatory use in the US, which we believe is growing nearer. Makers of wellness products like HempFusion will be in a great position to diversify their offerings if this happens.
HempFusion has also developed its own brand range of Probulin probiotics and digestive enzyme products: this suite is targeted at a fast-growing market that is already estimated to be worth $7bn by 2022, with steady growth of 24% through 2024. Demand in this sector is being driven by research initiatives demonstrating links between gut flora and wider human health.
This is not a niche cannabis play: HempFusion has multiple FDA listed over-the-counter topicals, with a total portfolio of 46 products at last count, including tinctures and products distributed directly to medical practitioners (it is one of only a handful of CBD companies able to offer FDA drug listed topicals).
Sold in over 4000 retail locations in the US, including Amazon
HempFusion sells through natural/specialist stores, convenience stores and via Big Box retail outlets. Its products are currently sold in over 4000 retail locations across all 50 US states. Outlets include big brand names like the Vitamin Shoppe, Whole Foods Market, Professional Supplement Center, and oh, yes, Amazon.
The company’s Big Box distribution plan has been set back slightly due to COVID-19, but with its battery of regulatory and compliance sign offs, HempFusion has become one of the first CBD companies to be able to begin distribution into this important off-the-shelf US retail segment. It means it can start selling through major US retailers like Walmart, Publix, Kroger’s and Albertson among many others.
HempFusion also has a solid pipeline of new products in R&D: this includes OTC drug listed ingestibles and plant-based CBD gummies designed for the convenience channel and impulse point of sale purchases.
HempFusion is on the sharp end of developments within the industry and is intimately involved with a number of regulatory initiatives that are going to be essential in the further licensing and distribution of CBD products across North America and Europe. The company has invested heavily in compliance standards, is a member of the US Hemp Roundtable Executive Board, USDA Organic, NOAEL (for its topicals) and is in the process of gaining EU Novel Food Ingredient approval, for EU distribution of CBD products.
We keep coming back to this, but we think it’s important: HempFusion is not a niche CBD stock with a one-shot product; it looks much more like an established, second-wave player with scope for massive growth as the sector matures. It has a panoply of distribution relationships which many of the hot CBD stocks of 2017-18 simply lacked. With US CBD sales expected to hit $22 billion or more in 2025 (see latest data from Brightfield Group), this means HempFusion is well-positioned to reap revenues from this growth.
What we think
The case for CBD/hemp products has not gone away, and we think this market is only going to increase in value. Major European markets are only just getting started in this area, for example.
Looking at just OTC CBD-based pain products, the global market in 2025 is estimated to be about $13.3bn, which is a CAGR of 7.4% between 2018 and 2025. For personal care / anti-ageing products, that market size is going to be much bigger, with estimates putting it as high as $1 trillion in 2025.
Also worthy of note is the international distribution strategy: HempFusion is already poised for solid growth in the US (and has distribution approval for the massive Indian market), but expects to be selling into Canada in the very near term. Immediate plans are also afoot for Europe, China and Brazil.