MGC Pharmaceuticals Ltd shares plunge 9% lower

The MGC Pharmaceuticals Ltd (ASX:MXC) share price has come under pressure today. Here's what you need to know…

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The MGC Pharmaceuticals Ltd (ASX: MXC) share price has been amongst the worst performers on the market today.

At the time of writing the medical and cosmetic cannabis company's shares are down 9% to 6.3 cents.

Despite today's decline, though, its shares are up a whopping 66% in just the last five trading sessions.

Why are its shares in the red today?

With its shares up sharply since its major announcement last week, I suspect today's decline is related to profit taking from day traders.

On Friday the MGC Pharmaceuticals share price doubled in value after it announced the signing of a binding terms and conditions supply agreement with South Korea-based cosmetics company Varm Cosmo.

That agreement will see MGC's Derma division supply five of its cannabidiol cosmetic products in white-label form to be sold to consumers as part of Varm Cosmo's cosmetics range.

As the agreement includes a minimum agreed purchase quantity of 15,000kg per month, management expects it to generate approximately $40 million in annual revenue for the MGC Derma division.

As MGC Derma is a 51:49 joint venture the deal is worth approximately $20.4 million to MGC Pharmaceuticals. While this isn't as great as the headline number, it is a significant leap from the $120,000 of revenue it generated in FY 2017.

It may even have the potential to make the company profitable. In FY 2017 the company posted a loss of $8.1 million.

Should you buy the dip?

Whilst this is clearly a big development, it is still early days and no products have been shipped yet.

I would suggest investors hold off for the meantime and wait to see how these products sell. If demand is strong and repeat orders come flooding in, then MGC Pharmaceuticals could prove to be a great investment.

But until then, I would keep it on your watchlist along with Auscann Group Holdings Ltd (ASX: AC8) and Cann Group Ltd (ASX: CAN).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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