Seeking Alpha
Long/short equity, value, event-driven, long only
Profile| Send Message|
( followers)  

Summary

  • BreedIT is a new entrant to the medical marijuana space, but it is more advanced than other public marijuana companies.
  • BreedIT addresses a growing demand for marijuana strains to be optimized to their environment and purpose.
  • BreedIT's core technology is an algorithmic seed breeding tool developed and utilized for over 20 years at Israel's top university.
  • BreedIT's expertise in natural, non-genetically modified seed breeding is likely to be unrivaled even by agri-multinationals like Monsanto and DuPont.
  • BreedIT has already signed a joint venture agreement to develop novel marijuana seeds, and has already received an $800,000 investment gaining access to 80-acre growing facilities in Colorado.

Medical marijuana stocks have outperformed the market by a whopping 300% over the past year, and with cannabis investing still promising, albeit steadily more serious, medical marijuana trade enthusiasts are on the lookout for the next CBIS or GWPH.

Most analysts agree that the cannabis market remains poised for massive growth, with a reported 64% spike in 2013-2014 U.S. sales. Marijuana is now approved for medicinal use in 21 U.S. states, and for recreational use in 2 states. A recent report by ArcView predicts that 14 more states are likely to legalize marijuana by 2018, spiking sales to $10.8 billion a year.

One player in this sector which has recently popped up on many investors' radars is BreedIT Corp. (OTCQB:BRDT) - an Israeli company established just a year ago with the aim of providing novel breeding technologies to marijuana growers.

BreedIT boasts an impressive team with decades of experience in agronomy, horticulture and plant genomics, whose members include Prof. Haim Rabinowitch- the inventor of the cherry tomato found on most supermarket shelves today, and Dr. Ben Zion Weiner - the ex-chief research officer of Teva Pharmaceuticals. BreedIT continues to make valuable additions to its core team and advisory board, with the latest being the celebrity Dr. Alan Shackelford - one of the pioneering Colorado-based medical marijuana physicians.

BreedIT's IDSS Technology

The technology at the heart of BreedIT is its "Intelligent Decision Support System" (IDSS) software many of the researchers on the company's team have utilized internally at Israel's top university for over 20 years. Through BreedIT, IDSS will be making the lab-to-market transition for the first time.

IDSS is a sophisticated algorithmic breeding tool capable of significantly reducing the cost and the time it takes to naturally produce a plant with desired traits. According to BreedIT's investor presentation, it can take around 5 years and cost around $3 million to develop a certain optimized seed.

IDSS will be offered as part of various licensing programs for industrial or commercial cannabis breeders, but BreedIT's real goal will be to custom-breed marijuana seeds for growers, based on necessary medicinal compounds, location, climate, and other parameters.

BreedIT plans to embark on joint venture agreements to develop novel cannabis seeds and profit from royalties on sales of the seeds and/or products. BreedIT has already secured its first client in April '14: one of Israel's top eight medical marijuana suppliers, Sheifa Le'Haim, signed a 50/50 joint venture agreement with BreedIT focused on developing novel cannabis seeds.

In the general seed market, BreedIT predicts its potential customer base to be around 50,000 companies globally.

Why BreedIT is actually an elite stock in the cannabis market:

Although BreedIT is a company in very early stages of inception and with limited proof of concept, its idea makes it decidedly more solid than many hyped-up marijuana stocks. Here is why:

1. BreedIT has inimitable assets.

Other than the blatant shells profiting from the recent marijuana boom, for the most part stellar marijuana stocks are either straightforward suppliers, developers of products derived from existing Cannabis sativa or indica strains, or companies accommodating the niche with logistics - like facilities, equipment, and distribution tools (see breakdown of medical marijuana companies by type here).

BreedIT, on the other hand, belongs with a handful of high-caliber companies who are actively innovating in the cannabis-related pharmaceutical or agricultural fields. In the latter, BreedIT has virtually no competition, which is great news considering that cannabis strain optimization is very likely to become a key driver of growth in the industry.

Whilst the Big 7 agro-conglomerates like Monsanto and DuPont have the internal capability to enter the medical marijuana market, it is more beneficial for them to buy into co-development or licensing agreements when it comes to seed breeding. This has been the case with the Israeli plant genome expert, Evogene (NYSE:EVGN) - a successful $413-million market-cap agri-R&D company founded in 2002 with the aim of improving plant performance through plant genomics and biotechnology. The company now provides plant genomic services to the likes of Syngenta, DuPont, Monsanto, and Bayer. In a highly tactical move, BreedIT has hired two ex-Evogene experts in May '14: a new vice president of marketing & sales and a new project manager of cannabis breeding will be transferring years of experience gained at Evogene to BreedIT.

BreedIT's non-GMO status is an additional plus in favor of its competitiveness, particularly in the case of medical crops. It is unlikely that the Big 7 can match BreedIT's 20-year expertise in seed breeding that is all-natural; and potential alliances with multinationals, similar to those Evogene has established, are plausible for BreedIT.

2. Optimized marijuana seeds are in demand.

Current regulations in the U.S. do not allow the transport of medical marijuana across state lines, which means that plants have to be grown and cultivated locally. Cannabis seeds in circulation in the U.S. originate mostly from imported strains, and are covering a drastic range of climate conditions and soil composition throughout the country.

Strains which can be optimized to specific conditions in the U.S. and Canada can potentially save breeders millions of dollars a year by cutting huge expenses on climate control, disease management, and losses from insufficient yield. When it comes to medical marijuana, there is also much room for growth in optimization of high CBD-to-THC ratio strains, and of strains with tweaked ratios of other medicinal compounds yet to be discovered.

Given that marijuana is not an easy plant to cultivate under any conditions, it is clear that better, more efficient, and compound-specific strains will be well-received by the industry.

3. BreedIT's technology is expandable beyond the marijuana market.

BreedIT's software and the combined expertise of its team yield substantial risk-lowering versatility to the company's target market. In his investor presentation, the company's CEO, Dr. Oded Sagee, makes it clear that BreedIT will not be 100% dedicated to the marijuana market, and will keep all options clear in lending expertise to other niches.

Globally, the seed market is worth $42 billion a year, and trapping even a small percentage of this market through joint venture seed development agreements can yield incredible margins in just a few years.

4. BreedIT is steadily gaining credibility in the marijuana sector.

BreedIT has only recently completed the translation of its platform software from Hebrew to English, and things have begun to move quickly for the company.

On May 15, 2014, the company announced an $800,000 investment from Colorado-based cannabinoid developer INTIVA Pharma. According to INTIVA CEO, Richard Greenberg, "We see our initial investment in BreedIT as being very strategic for both INTIVA Pharma and Global Cannabis Ventures. Our motivation for the investment was our belief in BreedIT's opportunity to become a global leader in the breeding and licensing of high quality cannabis seeds".

A wholly-owned subsidiary of Canadian-based Global Cannabis Ventures, INTIVA owns a massive 80 acres of land in Colorado, on which it is assembling greenhouses to be leased to legally licensed growers of cannabis.

The move provides capital to BreedIT to use in growing its U.S. and Canada operations, as well as provides a potential end-user for its products. Through its relationships with other companies in the space across both the U.S. and Canada, the group could also refer additional business to the company over time.

The investment is a part of a potential $800,000 investment in BreedIt, and was in the form of straight equity restricted stock at a purchase price of $0.30 per share.

BRDT poised for success

While many cannabis stocks have been trading at substantial market caps with hardly any revenue model, let alone revenue, BRDT appears to be a stock actually worth its perceived potential.

With that said, one should take into consideration that this young sector is sensitive to U.S. regulatory amendments, which can greatly affect the market performance of cannabis stocks. Also, a potential investor should acknowledge that BreedIT will require additional financing in the near future. Nevertheless, favorable financing terms can strengthen the company and help its positioning in the sector.

BRDT has followed the boom and the current slowdown of the marijuana index so synchronously that even its latest JV and investment deals have yielded a measly 2.4% bump in the company's stock.

But this is undeserved: a quick scan of the cannabis stocks flourishing on public markets can easily set BreedIT aside from the rest - by its technological prowess, its accomplishments to-date, and its potential to be the very foundation of the evolving cannabis infrastructure.

The fact that BreedIT's IDSS has yielded seeds which now constitute nearly half of the world's tomato seed supply can inspire a few skeptics.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: BreedIT - Breeding The Next Generation Of Medical Marijuana