Where Is Aurora Cannabis Stock Heading With Each of These Acquisitions?

Where Is Aurora Cannabis Stock Heading With Each of These Acquisitions?
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Aurora Cannabis Inc Stock 2019

Aurora Cannabis Inc (NYSE:ACB) has made a number of blockbuster acquisitions since 2018, snapping up CanniMed Therapeutics Inc., MedReleaf Corp., ICC Labs Inc., and Farmacias Magistrales S.A. de C.V.

Most recently, on January 14, the company announced that it was acquiring Whistler Medical Marijuana Corporation, an organic cultivator located in Whistler, British Columbia. The all-stock deal is worth up to $132.0 million.

Why the flurry of acquisitions? And what will this do for Aurora stock in 2019?

The cannabis sector is still in its infancy. It’s going to be worth billions of dollars, and right now, there is a chronic shortage of legal cannabis in Canada, and that situation is expected to drag on for years.

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If Aurora Cannabis wants to remain one of the world’s biggest and best pot companies, it needs to secure market share and build brand awareness.

Aurora stock is currently down about 50% from its October 12, 2018 high of $12.53. That tumble had more to do with the broader market meltdown than anything bad going on at Aurora Cannabis. The company’s share price has been bullish since providing solid second-quarter revenue guidance on January 8, 2019.

A 2019 price target of $12.50 certainly isn’t out of the question, especially when you look at the company’s acquisition and growth strategy.

Aurora Acquisitions

Before recreational adult-use cannabis became legal in Canada on October 17, 2018, analysts were predicting there would be a shortage of marijuana in the first year of legalization.

Those projections were a little conservative. It is now thought that the shortage of legal weed in Canada could drag on for years, until 2022. Not only is there not enough cannabis being grown, but the legalization of edible pot and new products will lead to higher demand.

Aurora Cannabis, like many other of the big names in Canada’s legal marijuana industry, is trying to bridge that gap by adding capacity. Millions of square feet of greenhouse capacity have been built since the summer of 2018.

That’s not enough, though. The medical cannabis market is growing at about five percent per month. Right now, approximately 300,000 Canadians rely on medical marijuana, and international exports are ramping up.

That’s nothing compared to the demand that is expected to come from edible cannabis products. And “edible” also means drinkable.

Cannabis-infused drinks and food are going to be a big seller. One report found that almost half (46%) of Canadians would try cannabis-infused food products. (Source: “Nearly half of Canadians want to try edible marijuana products: study,” CTV News, September 26, 2017.)

For cannabis-strapped weed companies, the easiest way to add additional capacity, build out products, and meet demand is to acquire the competition.

Edmonton, Alberta-based Aurora Cannabis is not exactly tiny. With a market cap of $6.2 billion, it has 11 facilities worldwide; eight are functional and three are under construction. At full capacity, Aurora’s network will have a funded capacity in excess of 500,000 kilograms (1.10 million pounds) per year. (Source: “Corporate Profile,” Aurora Cannabis Inc, last accessed January 23, 2019.)

Recreational cannabis being legal in Canada and Uruguay is just the beginning. Aurora Cannabis knows that the dominos will start to fall, and that recreational cannabis will soon be legalized by major economies around the globe. To that end, the company has sales and operations in over 22 countries, across five continents.

Aurora’s products include dried cannabis and cannabis oil, vegan capsules, and hemp products. It also sells vaporizers, vaporizer accessories, and herb mills. It has partnership agreements with a number of drug retail chains for the distribution, sale, and marketing of medical cannabis products.

The company also operates CanvasRx Inc., a network of counseling centers for marijuana medical treatment.

Aurora Cannabis is one of the largest cannabis companies in the world, and its management team knows that it needs to get bigger if it wants to stay on top.

CanniMed Therapeutics Acquisition

In late January 2018, Aurora Cannabis announced a friendly takeover of CanniMed Therapeutics in a $1.1-billion cash-and-stock deal. It was, at the time, the largest merger in Canada’s burgeoning cannabis industry. (Source: “Aurora Cannabis and CanniMed Therapeutics Agree to Terms on Friendly Transaction,” Aurora Cannabis Inc, January 24, 2018.)

Brent Zettl, President and CEO of CanniMed, commented:

A testament to the great team at CanniMed, this transaction clearly confirms that the company has been highly successful in becoming a preeminent global leader in the medical cannabis industry. In this leadership position, CanniMed has provided invaluable education, resources, support and relief of symptoms for thousands of patients served around the globe.

(Source: Ibid.)

CanniMed is an international biopharmaceutical company and a leader in the Canadian medical cannabis industry. The new CanniMed facility added to Aurora’s growing stable of greenhouses is in Saskatoon, Saskatchewan.

The 97,000-square-foot greenhouse has been in operation since 2004 and is currently being upgraded for the European Union’s (EU) Good Manufacturing Processes (GMP) specifications.

In 2017, CanniMed announced a $10.5-million expansion at its Saskatoon facility, allowing for the production of up to 720,000 liters of cannabinoid oil annually. (Source: “CanniMed plans $10.5 million expansion at Saskatoon plant,” Saskatoon StarPhoenix, April 19, 2017.)

MedReleaf Acquisition

On July 25, 2018, Aurora Cannabis announced that it closed its $2.5-billion acquisition of MedReleaf Corp. That was the largest marijuana deal in history.

While the acquisition provided Aurora with an established player in the medical marijuana field that had a big patient list and well-known product line, it also gave Aurora three massive greenhouses; something it desperately needed while it finished its massive grow-op in Edmonton. (Source: “Aurora Cannabis and MedReleaf Close the World’s Largest Cannabis Industry Transaction,” Markets Insider, July 25, 2018.)

The transaction provided Aurora Cannabis with a combined, funded capacity of more than 570,000 kilograms of cannabis annually.

The company’s 55,000-square-foot facility in Markham, Ontario has been operating since 2014. MedReleaf Bradford (also in Ontario) is 210,000 square feet. The facility is being expanded with annual capacity growing from 9,500 kilograms to 28,000 kilograms. MedReleaf Exeter (also in Ontario) is 210,000 square feet and is being expanded. Once complete, annual capacity will increase from 9,500 kilograms to 28,000 kilograms.

ICC Labs Acquisition

In September 2018, Aurora Cannabis acquired South American market leader ICC Labs for $290.0 million. ICC Labs has an over-70% market share in Uruguay, where cannabis has been legal since December 2013. ICC also holds licenses in Colombia for the production of medical cannabis. (Source: “Aurora Cannabis to Acquire South American Market Leader ICC Labs,” Cision, September 10, 2018.)

“ICC is an ideal partner for Aurora to establish leadership in the South American cannabis market, delivering clear first mover advantage on a continent with over 420 million people,” said Terry Booth, CEO of Aurora. (Source: Ibid.)

This acquisition gives Aurora a strong footprint in South America and a “first mover” advantage.

ICC Labs has greenhouses that are operating and a number of facilities nearing completion. The estimated production capacity will be over 450,000 kilograms annually. The two operational greenhouses cover approximately 92,000 square feet. Two facilities under construction will add 124,000 square feet of growing space in Colombia and 1,000,000 square feet in Uruguay.

ICC Labs also has three outdoor grow sites, with a potential total area of over 800 acres.

Farmacias Magistrales Acquisition

On December 10, 2018, Aurora Cannabis announced it was entering the Mexican market with the acquisition of Farmacias Magistrales.

Farmacias is Mexico’s first and only federally licensed importer of raw materials containing tetrahydrocannabinol (THC), the active ingredient in marijuana. (Source: “Aurora Cannabis to Acquire Mexico’s Farmacias Magistrales S.A.,” The Seattle Times, December 10, 2018.)

It will distribute medical cannabis products with more than one percent THC, through healthcare professionals. In 2017, Mexico approved the use of marijuana for medical purposes.

This transaction provides Aurora Cannabis with a first-mover advantage in one of the world’s most populous countries, where more than 130 million people have access to a wide range of Aurora’s medical cannabis products containing THC.

Farmacias owns and operates a 12,000-square-foot facility in Mexico City. The facility is licensed for the import of raw pharmaceutical ingredients, including THC and cannabidiol (CBD).

Products currently for sale include pharmaceuticals (kidney disease, blood pressure, and anesthetic medications), nutraceuticals (protein powders and vitamin supplements), and cosmetics (anti-aging creams, hair growth products, tanning lotions, etc.).

Farmacias’ distribution network includes approximately 80,000 retail points for the sale of CBD products and 500 pharmacies and hospitals for the distribution of THC products.

Whistler Medical Marijuana Acquisition

Aurora Cannabis kicked off 2019 by acquiring Whistler Medical Marijuana for $175.0 million.

Founded in 2013, the Whistler, British Columbia-based company is one of Canada’s original 10 licensed producers. Furthermore, it was the first licensed producer to obtain organic certification, selling a wide range of organic certified cannabis products. (Source: “Aurora to Acquire Whistler,” Cision PR Newswire, January 14, 2019.)

Whistler Medical operates two indoor production facilities. The first is in Whistler and the second one is a 20-minute drive away in Pemberton. Once the second facility reaches full capacity (sometime this summer), the combined production capacity will be over 5,000 kilograms annually.

Whistler Medical sells medical cannabis derivatives internationally to Australia and the Cayman Islands. Aurora plans to pursue additional export opportunities with Whistler Medical.

The company’s product portfolio includes the commercialization of more than 30 flower varieties and strain-specific oil products, from a genetics bank of over 150 strains.

Whistler Medical currently has supply arrangement in British Columbia, Saskatchewan, and the Yukon, and has received product requests from Alberta, Manitoba, and Ontario.

In addition to a strong brand portfolio, a strengthened presence in Western Canada, and a growing footprint, Whistler Medical has solid fundamentals. It has achieved positive cash flow since 2015, with earnings before interest, taxes, depreciation, and amortization (EBITDA) margins in excess of 30%.

Cam Battley, Aurora’s Chief Corporate Officer, said that organic-certified marijuana is a “distinct market segment that delivers higher margins” and that Whistler Medicals “products command a significant price premium in stores.” (Source: “We talked to an executive at Aurora Cannabis about why it’s buying an organic-medical-marijuana company in the latest pot M&A tie-up,” Business Insider, January 14, 2019.)

According to Battley, Whistler Medical is “one of the last pieces of the puzzle,” in Aurora’s plan to becoming a fully integrated cannabis company. He said that Aurora will be making “fewer significant acquisitions” in Canada’s domestic marijuana market.

With the purchase of Whistler Medical, Aurora hopes to be the first major cannabis company to sell organic, Canadian-grown marijuana to overseas markets like Germany.

Aurora Cannabis Inc Financials

The company’s current production capacity is around 100,000 kilograms per year, up from 70,000 in November 2018.

Annual production capacity is expected to hit 150,000 kilograms by the end of the current quarter (March 31, 2019). Once Aurora is at full capacity, it will produce in excess of 500,000 kilograms annually.

Outside of Canopy Growth and Aphria Inc (NYSE:APHA), no one can compete with these kinds of annual production figures.

Thanks to its acquisitions, in the fourth quarter of 2018, ended June 30, 2018, the company’s revenue soared 223% to $19.1 million. The cash costs to produce each gram of dried flower dipped 11% from the prior-year period to $1.70. (Source: “Aurora Cannabis Inc. Announces Results for the Fourth Quarter and 2018 Fiscal Year,” Cision, September 24, 2018.)

In the second quarter of 2019, ended December 31, 2018, Aurora expects revenue of between $50.0 million and $55.0 million, a 327% increase over the $11.7 million reported in the same prior-year period and a 68% increase over the previous quarter. (Source: “Aurora Cannabis Provides Guidance for the Second Quarter of Fiscal 2019, Anticipating Net Revenues of $50M to $55M,” Cision, January 8, 2019.)

The company expects its products available for sale will be roughly 25,000 kilograms in the fourth quarter of 2019 (for the period ended June 30, 2019), with volume production increases in subsequent quarters.

CEO Terry Booth said:

Aurora continues to execute effectively across all market segments, as demonstrated by its revenue growth anticipated to exceed 68% as compared to last quarter, supported by continued strong performance in the Canadian adult consumer use market…Our consistent and high-quality production continues to significantly ramp up as expected, fueling even further growth.

(Source: Ibid.)

Booth added that Aurora Cannabis expects to achieve positive EBITDA within the next two quarters.

Analyst Take

Aurora Cannabis is one of the largest pure-play marijuana stocks in the world. Thanks to its aggressive acquisition strategy, both domestically and internationally, the company is expanding its footprint and opening up new opportunities.

Aurora has taken the necessary steps—including strategic acquisitions—to remain a global leader in the legal cannabis industry.