Why Marijuana Stock Neptune Wellness Solutions Is Up More Than 30% in 2018

Brian Orelli, The Motley Fool - finance.yahoo.com Posted 5 years ago
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Neptune Wellness Solutions (NASDAQ: NEPT), which recently changed its name from Neptune Technologies & Bioressources, is up about 32% this year as the company transitions from nutraceuticals (foods with medical benefits) to focusing on extracting compounds from marijuana.

Some of the increase can likely be tied to the fact that most marijuana stocks are doing well this year with the opening of Canada's recreational market, but Neptune Wellness Solutions has made plenty of news for itself as well.

Marijuana lying on small Canadian flags.

Image source: Getty Images.

Can't go it alone

This year, Neptune Wellness Solutions has cemented a pair of partnerships to help growers transform marijuana into refined products.

In February, Neptune signed a deal with Tetra Bio Pharma to develop and sell purified cannabinoid oil-based products for pain and inflammation in humans and pets. The announcement was light on the details, but it's clear Neptune is trying to stay within its area of expertise around extraction and leave the clinical trials to a company like Tetra Bio Pharma, which has more experience in drug development.

A few months later in June, Neptune did a multiyear deal with one of the bigger players in the cannabis space, Canopy Growth (NYSE: CGC). Rather than a development partnership like with Tetra, this deal is more of a business-to-business deal in which Canopy Growth is contracting with Neptune to supplement its own extraction capabilities. Like the Tetra deal, the announcement was light on the details, so valuing it is difficult, but Neptune did mention there are minimum amounts that Canopy is required to order each year, and it expects the volume will be higher than that.

Increasing capacity

Neptune is in the process of expanding its capacity in two phases. The first part was completed in April, with the second phase expected to be complete by March of next year. The second phase will bring capacity from 30 metric tons to 200 metric tons of cannabis and add additional purification and isolation capabilities. Eventually Neptune hopes to get up to 6,000 metric tons of capacity if the global market can support it.

The company is ready to start producing, but it's waiting for a processing license from Health Canada. In September, Neptune received its Confirmation of Readiness letter from the agency and submitted its evidence package, which is the final step of the application process. While the approval has taken awhile -- which shouldn't come as much of a surprise for a new government process -- on a conference call earlier this month, Jim Hamilton, Neptune's president and CEO, said he's "very, very, very happy with how things are progressing," so hopefully an approval is around the corner.

Still a good buy?

While Neptune's investors have been handsomely rewarded this year, it's hard to know whether the trend will continue. It's very hard to value Neptune with so few details about the deals with Tetra Bio Pharma and Canopy Growth.

If the legalization in Canada leads to substantial use of products with cannabis extracts, Neptune is likely to benefit, but it's hard to know how big the market will end up being and how much pricing pressure there might be from competition.

Given the unknowns, an investment in Neptune is most appropriate in a basket of marijuana stocks that's a small percentage of an investor's overall portfolio.

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Brian Orelli has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.