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HIGHLIGHTS
  1. Heritage will provide cannabis oil for Cronos vaporizers in a two-year deal worth up to $34-million a year.
  2. Deal comes after Heritage’s pivot towards extraction last December with Purefarma acquisition.
  3. Heritage intends to source most of its oil input from other producers.

In the latest sign that Canadian companies are trying to move beyond the vertically integrated model that dominated the medical cannabis space, Heritage Cannabis Holdings Corp.’s signed its first major contract manufacturing deal last Friday with Cronos Group Inc., seven months after pivoting towards extraction.

With companies now eager to specialize, white-label manufacturing is starting to emerge as a viable business strategy, particularly ahead of the next round of legalization this coming fall, which will introduce value-added products such as vaporizers and edibles.

The two-year white-label deal will see Heritage provide oil for Cronos’ Spinach and Peace Naturals branded vaporizers, as well as providing cartridge filling and packing services. Vancouver-based Heritage projects that the deal could be worth up to $35-million a year, although that is “subject to increase or decrease as a result of market demand factors,” the company said in a news release.

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Heritage owns two licensed cultivators, CannaCure Corp. and Voyage Cannabis Corp. (previously called PhyeinMed Inc.), which were licensed for cultivation in 2018. The company’s key move, however, came last December when Heritage acquired Kelowna-based extraction firm Purefarma Solutions Inc. for roughly $6.4-million worth of shares and a royalty agreement with Purefarma’s owners.

Heritage now expects to derive as much as 75 per cent of its income contract manufacturing deals done by Purefarma, said CEO Clint Sharples in an interview. The focus will be on vape-ready oil.

"There's a big difference between extracting for bulk resin and being able to do vape-able winterized oil," said Mr. Sharples, referring to the process of removing fatty acids from cannabis oil, which would otherwise end up burning on the vape pen heating coil.

"Purepharma has the ability to essentially put cannabis in one side of the extraction machine and then through one process, come out with winterized, vape-able oil. So the oil coming out of the extraction machine is just about ready to put into vape cartridge, it just needs some minor lab work,” Mr. Sharples said.

Heritage will continue to grow cannabis for in-house brands it hopes to launch later this year. For its contract with Cronos, however, most of the oil will be derived from wholesale cannabis biomass sourced from other producers, Mr. Sharples said.

Heritage expects to spend as much as $12-million a year sourcing product to meet its extraction obligations to Cronos. The company has already signed a supply deal with Zenabis Global Inc.

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