Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) likely has a first-mover advantage over its competitors in the international markets
John Brooker | June 13, 2019 | SmallCapPower: Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) is a Canadian cannabis stock and is the second-largest Canadian cultivator by market cap. The Company has invested a significant amount of money into innovation and efficiency, which makes them attractive as an investment. In a recent article published on May 24, 2019, we discussed how Aurora Cannabis has a medical cannabis market edge, and, on June 5, 2019, we discussed why Aurora Cannabis Inc’s innovation makes it appealing. Today, we take a look at the international strategy of Aurora Cannabis and why the Company has a first-mover advantage over its competitors in the international markets.
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Aurora Cannabis is one of the largest and fastest-growing cannabis companies globally, with a current annual production capacity of ~150,000 kg. ACB is vertically integrated and horizontally diversified across many verticals in the cannabis value chain. The segments of Aurora Cannabis include:
- Facility Engineering
- Cannabis Breeding
- Genetics Research
- Production, Derivatives
- High Value-add Product Development
- Home Cultivation, Wholesale
- Retail Distribution
Additionally, the Company’s products include:
- Dried cannabis & cannabis oil
- Vegan cannabis oil capsules
- Hemp products
- Vaporizers & vaporizer accessories
- Herb mills
Aurora’s strategic acquisitions and investments have positioned it as an expert in greenhouse construction and cultivation, with a strong & broad cultivation footprint, and extraction expertise.
Aurora Cannabis’ International Strategy Sets It Up for Large-Cap Status in the Future
As cannabis becomes de-regulated as a Schedule I substance outside Canada, Canadian cannabis companies are expected to take advantage of foreign markets. Aurora Cannabis already has a head start over its competitors, as it has an extensive presence outside Canada compared with other Canadian cultivators.
The estimated size of the global medical cannabis market is between $30B to $150B. The international market is a significant opportunity primarily because the price of medical cannabis globally is 25%-50% higher than in Canada (e.g. the landed price for Germany is approximately $10-$12/gram (Source: Jefferies Financial Group), compared with $7-$8 in Canada (Source: Ubika)).
The U.S. is currently the world’s biggest cannabis market. Currently, Canadian cannabis companies have a first-mover advantage due to more progressive regulations, however a strong U.S. presence is necessary for Canadian cultivators to reach large-cap status. The U.S. makes up 34% of the total addressable global cannabis market (illegal + legal market), while Canada only makes up approximately 3% of the total addressable global cannabis market.
Projected Growth of the U.S. Legal Cannabis Market
Aurora’s investment arm is listed on the Canadian Securities Exchange (CSE) and is called Australis. Australis’ mandate is specifically focused on U.S. investments. Due to regulatory restrictions, Aurora doesn’t currently own any shares in Australis, but has warrants to purchase ownership within 10 years should U.S. federal regulations change. This would allow Aurora to acquire 20% of the issued and outstanding shares at approximately $0.20 per share and give them the option to purchase an additional 20% at the prevailing market rate at the time of exercise. This is expected to give Aurora Cannabis a strategic advantage as:
- The Company has locked in the price of expanding into the U.S., as the cost of expanding into the U.S. would likely skyrocket given federal legalization. As a result, the return on an investment into the U.S. for Aurora Cannabis would likely be high due to the low relative cost of expansion if the Company chooses to exercise its option to purchase the warrants.
- Aurora has access to knowledge and unique intellectual property without assuming any of the risk themselves. ACB has the option to purchase these warrants only if the Company deems it beneficial.
Aurora Cannabis, in addition to its planned push into the U.S. market, has also taken initiatives to expand into international markets. Outside of Canada, Aurora sells or has distribution agreements with numerous foreign markets. These markets include:
Aurora’s international expansion strategy consists of strategic acquisitions and agreements that allows it to penetrate markets globally. Examples include acquiring Farmacias Magistrales, which is Mexico’s first federally-licensed importer of medical cannabis with over 1% THC. Aurora Cannabis has also signed an agreement to become the largest supplier of medical cannabis products to Cannamedical Pharma GMBH, an independent medical cannabis distributor to 1,800 pharmacies in Germany.
The downside of Aurora’s M&A strategy is it has been funding a large portion of it by issuing equity, diluting its equity holders. Between its ~$340M in Cash and ~$230M in Short-Term Investment, the Company should have well over $500M in capital at its disposal (as of March 2019). This cash balance puts the Company in an ideal position to carry out its acquisition strategy with a low probability of share dilution.
Aurora Cannabis stock currently trades at a market cap of $10.5 Billion.
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