Aurora Cannabis Shoppers Drug Mart Deal Could Signal Cutthroat Competition Ahead

Agreement strengthens Aurora Cannabis Inc. (TSX:ACB) domestic distribution and complements its strong international network

SmallCapPower | February 28, 2018: Aurora Cannabis Inc. (TSX:ACB) announced on Tuesday that it has inked a supply deal with Shoppers Drug Mart, Canada’s largest pharmacy chain with over 1,300 retail stores nationwide. As per the agreement, Aurora Cannabis will supply Shoppers Drug Mart with Aurora-branded medical cannabis products. Conditional on Health Canada approving Shoppers Drug Mart parent’s (Loblaw Companies Ltd – TSX:L) application (filed in October 2016), the pharmacy chain will be able to sell products online only, as current regulations prohibit the sale of medical cannabis in retail pharmacies. The deal strengthens Aurora’s domestic distribution and complements its strong international network. Aurora supplies cannabis to over 2,000 pharmacies in Germany through its wholly-owned subsidiary, Pedanios.

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Shoppers Drug Mart has inked similar supply deals with other licensed cannabis producers including Aphria, MedReleaf and Tilray. Other pharmacy chains have also signed deals with cannabis producers, notable among them being CanniMed Therapeutics-PharmaChoice and Maricann Group- Lovell Drugs. Although the supply deal strengthens Aurora’s distribution network within Canada, it does not offer any competitive advantage as the agreement is non-exclusive. Additionally, the deal covers only online sales of cannabis and does not cover the larger recreational opportunity. Impact of the announcement on the market was lukewarm at best, as shares of Aurora Cannabis slipped 3% to close at $9.89 Tuesday on the TSX, as investor enthusiasm for cannabis stock seems to be waning – at least in the short term.

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Aurora Cannabis is the second-largest market capitalization cannabis company in Canada, behind Canopy Growth, with a market cap of $4.9 billion. Similar to other large players, Aurora Cannabis is planning a massive production expansion (over 100,000 kgs annually by 2019) to capture a portion of the large recreational opportunity opening up in mid-2018. Aurora Cannabis currently trades at price to TTM sales of 156x and price to book of 8.46x.

Disclosure: Neither the author nor his family own shares in the company mentioned above.

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