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MediPharm Labs Corp. will supply Canopy Growth Corp. with between 450 and 900 kilograms of cannabis extract over the next 18 months, the company announced Thursday.

The deal is MediPharm’s first sales agreement since receiving a sales license in early November. It marks a significant development in the company’s strategy of using contract manufacturing to feed its own wholesale arm.

The Barrie, Ont.-based company does not grow cannabis, instead running three large CO2 extraction machines to process dried product grown by other companies into resin and oil.

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To date, MediPharm has only announced contract manufacturing deals – to process cannabis, for a fee, for other LPs – and wholesale buying contracts. The Canopy deal is MediPharm’s first sales agreement, where it will be selling product from its own vault.

MediPharm has been stockpiling product in two ways: buying dried cannabis wholesale from LPs, or taking it, instead of cash, as payment for its contract extraction services.

“Instead of just a pure-play contract manufacturer where we get paid per gram of processing, we’re actually taking payment in product from that initial supply that our partners send to us,” explained MediPharm CEO Pat McCutcheon. “So it’s a blended contract manufacturing/wholesale relationship that then positions us to work with large partners such as Canopy for this wholesale distribution on the far side.”

MediPharm is wholly reliant on supply from other growers to meet its obligations to Canopy – a daunting prospect given the current shortages throughout the industry. “We bet on a number of different cultivators, only expecting a handful to really execute on their business plan,” Mr. McCutcheon said.

That said, recent changes to regulation have increased the company’s ability to access supply that’s otherwise cut off from the market.

The new Cannabis Act regulations permit LPs with cultivation licenses but no sales licenses to sell to other LPs. That means growers that are unable to push product into the provincial distribution channels can nonetheless sell to a companies like MediPharm, which will process the product and sell it on, taking responsibility for quality control.

“On top of that, the new licenses for micro-grows as well as outdoor grows has given us a huge opportunity for large volume supply which otherwise wouldn’t be able to be sold on the shelf… [but can] be extracted and then sent into the distribution channels in concentrate form,” Mr. McCutcheon said.

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The company is “agnostic” when it comes to suppliers and genetics, he added. It will be supplying Canopy, and other wholesale buyers, with cannabinoids extracted from a number of sources and blended together.

MediPharm, which went public in October on the TSX Venture Exchange, runs two 40-litre extraction machines made by Colorado-based Extract Labs and one 30-Litre machine made by PEI-based Advanced Extraction Systems. The company says its machines are capable of processing 100,000 kilograms of dried cannabis a year. The Canopy deal will use less than 10 per cent of that capacity; to produce 900 kilos of cannabis concentrate, you need to input around 9,000 kilos of dried product, Mr. McCutcheon said.

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