Tag Archives: MEDFF

Canadian Cannabis Oil Exports Quadrupled in 2017

Few industries have investors seeing green quite like legal marijuana. According to cannabis research firm ArcView, in partnership with BDS Analytics, the North American legal weed market grew by 33% in 2017 to $9.7 billion. A decade from now, we could be looking at more than $47 billion in annual North American sales.

While expansion at the state level in the U.S. is expected to play a role in boosting these sales figures, all eyes in the interim are on Canada, which is expected to become the first developed country in the world to legalize recreational cannabis this summer. Bill C-45, which is better known as the Cannabis Act, is set for vote in Canada’s Senate on June 7, and could swiftly be moved through its federal government to be signed into law shortly thereafter. Legalizing adult-use weed could lead to $5 billion in sales being added annually to Canada’s pot industry.

In anticipation of this highly-expected legalization, Canadian growers have been angling to expand their growing capacity as quickly as their balance sheets will allow. Though capacity has remained exceptionally fluid as a result of partnerships, dealmaking, and acquisitions, there are now seven growers that appear to have a pathway to 100,000 or more kilograms of dried cannabis-equivalent production by 2020 or 2021.

Vials of cannabidiol oil lined up.

Image source: Getty Images.

Cannabis oils may be the secret to investor success in the marijuana space

Yet, gross production capacity doesn’t adequately tell the tale of which cannabis growers are best positioned to succeed. Instead, I’ve opined that marijuana growers thatfocus more of their efforts on cannabis oil as opposed to cannabis flowers are more likely to see beefier margins and have a greater chance at significant profits.

If you think about it, dried cannabis has become somewhat of a commoditized market in Canada. As the number of growers and export licenses has grown, and the supply of dried cannabis has increased, prices have generally fallen over time. Even with what little data we have on this, we’ve witnessed a pretty steady decline in wholesale marijuana prices on a per-gram and per-pound basis in U.S. states like Washington, Colorado, and Oregon over time.

By comparison, cannabis oil prices have held up exceptionally well. Cannabis oil is focused on niche market customers and is considerably easier to transport or export relative to dried cannabis. Not to mention, of the more than two dozen countries that have legalized medical weed in some capacity, not all have laws that allow dried cannabis to be prescribed, as of yet. Oils, on the other hand, are more broadly accepted and tend to be preferred by physicians since the product doesn’t need to be smoked.

A vial of cannabis oil next to a cannabis leaf.

Image source: Getty Images.

Canadian cannabis oil exports are growing like a weed

Just how impressive has cannabis oil demand been? According to an April-published report from Marijuana Business Daily, Canadian cannabis oil exports grew from zero in 2015, when the Canadian parliament was run by conservative lawmakers, to 100.8 kilograms in 2016. Last year, they essentially quadrupled to 400.4 kilograms, with 114 company-based export applications on record as of 2017, up from 64 in 2016.

Where is all of this cannabis oil going? As Marijuana Business Daily’s data shows, Germany and Australia accounted for 168.7 kilograms and 145.4 kilograms, respectively. The remaining 86 kilograms was divided between Croatia (36.8 kilograms), the Cayman Islands (24.3 kilograms), and five other countries (24.8 kilograms). Considering that Canada and the Netherlands are the only two countries actively exporting any cannabis products at the moment, Canadian growers are expected to have quite the competitive advantage over any new entrants.

In cannabis oils these growers trust

Though all cannabis growers appear to be making a concerted effort to devote at least some of their production to oils, some have made significant strides to incorporate oils and extracts as a significant component of total sales.

Various legal Canadian cannabis products on display.

Image source: Getty Images.

For example, Canopy Growth Corp. (NASDAQOTH:TWMJF), which also happens to be the industry’s kingpin, reported in February that its most recent quarterly results included the sale of 2,132 liters of cannabis oil (roughly equivalent to 262 kilograms). These 2,132 liters accounted for 23% of Canopy Growth’s total sales in the third quarter, up from just 13% of total sales in the prior-year quarter. Canopy Growth is clearly focusing on its softgel capsules domestically and overseas, which should have a positive impact on the company’s average selling price on a per-gram basis, as well as its overall margin.

Another cannabis grower that’s taken the potential top- and bottom-line benefits of oils and extracts to heart is Ontario-based MedReleaf (NASDAQOTH:MEDFF). The company’s third-quarter operating results showed that MedReleaf now generates 21% of its total revenue from the sale of extracts, up from just 3% in the year-ago quarter. With extracts expected to be a key growth driver domestically and overseas, MedReleaf’s management appears to have set the company up for long-term success.

Of course, investors should also understand that nosebleed valuations and share dilution run rampant throughout the industry. With little access to traditional fundraising, Canadian cannabis companies have turned to bought-deal offerings to raise capital that can be used to expand their growing capacity and product lines. This dilution may wind up weighing down profits on a per-share basis, even if oils provide a nice boost to operating margins.

In short, cannabis oils will likely play an important role if pot stocks are to succeed, but they’re in no way a golden ticket to profits.

3 Reasons the Market Yawned at the Biggest Marijuana Stock Deal in History

Up until this week, the biggest marijuana stock deal of all time was Aurora Cannabis’ (NASDAQOTH:ACBFF) acquisition of CanniMed Therapeutics earlier this year for $852 million. Now, though, another Aurora transaction is taking the No. 1 spot.

On Monday, Aurora announced it is acquiring MedReleaf (NASDAQOTH:MEDFF) in a deal valued at close to $2.5 billion (around 3.2 billion in Canadian dollars). The news came a little over a week after the two marijuana growers announced that they were in discussions about what MedReleaf referred to in a press release as “various alternatives.”

What was the market’s reaction to the biggest marijuana stock merger in history? A big yawn. While MedReleaf stock understandably enjoyed a nice bump, Aurora Cannabis’ share price didn’t change very much on news of a deal that could make it the biggest marijuana stock on the planet. Here are three reasons the market’s response to the Aurora acquisition of MedReleaf was so subdued.

Miniature human figures pushing green jigsaw puzzle pieces together

Image source: Getty Images.

1. Investors know what’s coming

With the deal, MedReleaf shareholders will receive 3.575 shares of Aurora Cannabis for every share of MedReleaf that they own. When all is said and done, current Aurora shareholders will own roughly 61% of the combined company, with current MedReleaf shareholders owning 39%.

One key reason investors didn’t bid up the share price of Aurora is that they know what’s coming. This will be an all-stock transaction. And all the stock for the deal will come from issuing more Aurora Cannabis shares — a lot of them.

There’s good news and there’s bad news with a deal like this one. The good news is that Aurora will hold on to its cash. The bad news is that current Aurora shareholders will pay the price through dilution. With more Aurora shares issued to give to MedReleaf shareholders, the value of existing Aurora shares will decrease in value.

2. Concerns about the price tag

If investors thought Aurora Cannabis was getting a great bargain in buying MedReleaf, we probably would have seen Aurora stock move higher. That didn’t happen. I suspect it’s at least in part due to concerns about the price tag of the transaction.

Aurora is paying a premium of 34% above MedReleaf’s20-day volume-weighted average price. This level of premium isn’t ridiculously high, though. Aurora ended up paying a premium of 181% above the closing price of CanniMed prior to the announcement of its unsolicited bid for the smaller company. But MedReleaf isn’t a bargain for Aurora.

MedReleaf is on track to have an annual production capacity of 140,000 kilograms. Aurora is paying over $17,700 (or around CA$22,850) per kilogram. That’s not a cheap way to build capacity.

3. Uncertainties about the marijuana market

There’s no way to know for sure how much uncertainties about the marijuana market weighed on investors’ minds in the wake of the news about Aurora buying MedReleaf. My guess, though, is that this had some impact in the muted reaction to the deal.

Canada is on the verge of potentially legalizing recreational marijuana, opening up a big new market for Aurora Cannabis and its peers. Medical marijuana markets are also expanding across the world, particularly in Germany. So, why would investors be nervous?

One factor is that valuations of marijuana stocks already price in expectations of tremendous growth. However, it’s quite clear that the rapid expansion of production capacity by marijuana growers will far exceed even the rosiest projections of demand in the Canadian market.

Aurora Cannabis has expanded its capacity very aggressively. The company was already making a huge bet that supply won’t outstrip demand with international markets added to the domestic Canadian market. An acquisition of MedReleaf makes that bet even bigger.

A good deal?

Is the acquisition of MedReleaf a good deal for Aurora? I think the market’s reaction is probably the right one.

When news first broke about the two companies talking about a potential transaction, my thought was that it made sense in concept. A combination of Aurora and MedReleaf will provide greater economies of scale. Assuming projections for the Canadian recreational marijuana market and for international medical marijuana markets aren’t too far off, companies with greater capacity should benefit tremendously.

On the other hand, the hard math of this particular deal is that more dilution is on the way for Aurora shareholders. The price for the acquisition isn’t cheap.There’s one thing you can say for Aurora Cannabis’ executives, though: They’re not afraid to go big.