3 global cannabis companies investors need to be watching

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The final installment in our recent series of articles covering the Canadian cannabis industry, we will be discussing the international cannabis opportunity and will highlight 3 Canadian Licensed Producers (LPs) that are highly focused on this side of the business.

One of the biggest pushbacks faced by the Canadian cannabis industry is related to the potential size of this market. California has a larger population than the entire country and for this reason, we believe that the international cannabis opportunity will make or break Canadian LPs over the long-term.

Cannabis is legal in more than 20 countries across five continents and represents an emerging opportunity. Several of these international markets will be issuing a limited number of licenses and this represent a significant opportunity for companies to gain an early mover advantage in these markets.

Another exciting aspect associated with the international opportunity is related to the economic impact that it will have on Canadian LPs. By focusing on legal markets in Latin America, companies can cultivate cannabis for a fraction of the cost (as compared to Canada) and we are bullish on the potential impact this type of leverage can have. The cannabis that is cultivated in markets like Latin America will be processed and turned into cannabis oil.

Demand for cannabis oil, especially high cannabinol (CBD) oil, continues to increase and this is a trend we expect to continue as researchers continue to learn more about the therapeutic value that cannabinoids provide. By focusing on strategic international markets, Canadian LPs can enhance their ability to capitalize on the cannabis oil opportunity and we are favorable on this.

Over the next year, we expect to see continued deregulation all over the globe and will monitor how Canadian LPs continue to work to capitalize on this opportunity. Having a first mover advantage can go a long way in the cannabis industry and you only need to look to Canopy Growth (WEED.TO) (CGC) or Aurora Cannabis (ACB.TO) (ACB) to justify this. We believe that the companies that we have highlighted in this article are opportunities to be watching and will be monitoring how they continue to execute.

Aleafia Health: An Emerging International Opportunity

Aleafia Health (ALEF.TO) (ALEAF) is another Canadian LP that is poised to benefit from a change in the types of cannabis products that are approved by Health Canada. A few months ago, the company acquired Emblem, a Canadian LP that has been highly focused on developing cannabis derivative products. The combined company will benefit from the changing landscape of the Canadian cannabis industry and this opportunity has been flying under the radar.

In late June, Aleafia Health surged higher following several significant developments that are related to the completion of a $40 million private placement, increased coverage from Canadian broker dealers, and the outdoor cultivation opportunity. Following this move higher, Aleafia Health has come under pressure and we are bullish on the growth prospects associated with this opportunity.

A few weeks ago, Aleafia Health was granted multiple export permits from Health Canada which will allow the company to start shipping cannabis to international markets. We expect the international side of the business to become a major revenue driver for the overall business and this is an initiative we will be closely following.

Over the next month, Aleafia Health expects to ship its branded medical cannabis oils and these products will be distributed by Australian Licensed Producer CannaPacific. This was a strategic decision for Aleafia Health since it owns 10% of CannaPacific and we find this to be significant. Earlier this year, the company expanded on its relationship with the Australian Licensed Producer following the closing of CannaPacific’s acquisition of a 108,000 sq. ft. greenhouse facility that will be used for cannabis cultivation and for the eventual sale to medical patients and global exports.

For the first time, Aleafia Health will be able to sell high-margin, value-added cannabis products across international borders and we believe that this is just the start of something big. The acquisition of Emblem has had a significant impact on the company’s leverage to the international cannabis opportunity as it provided access to the German medical cannabis market through a joint venture with pharmaceutical wholesaler Acnos Pharma GmbH.

The German medical cannabis market has been gaining significant traction and several leading Canadian LPs are focused on this opportunity. Through the joint venture with Acnos, Aleafia Health has the potential to expand into new markets across Europe and we are bullish on the growth prospects associated with this relationship. With a population that is more than twice the size of the US and Canada combined, the European cannabis market represents an attractive opportunity and we will continue to monitor how the team executes from here.

Earlier this month, the Canadian cannabis producer raised more than $40 million through a private placement and this capital will solidify and accelerate the company’s expansion in Canada, and abroad. From a production capacity standpoint, Aleafia Health is in the middle of a major expansion and we are bullish on the amount of revenue that can be generated once the business is operating at full capacity.

Aleafia Health is trading at a significant discount to the $3 price target issued by Eight Capital and has significant catalysts for growth. Over the next year, we expect the international side of the business to evolve into something much more significant and we are excited about this aspect of the story. When compared to its peers, the company is trading at a discount and this is an opportunity to be watching.

Khiron Life Sciences: A Latin American Cannabis Leader

Over the last year, the Latin American cannabis market has become an area of major interest and Khiron Life Sciences (KHRN.V) (KHRNF) has been a leader in this space. During the last quarter, the shares have been under signficaint pressure and momentum has been in a decline. We believe that this is an opportunity to be watching and want to provide an update after the recent pullback.

Last week, Khiron received approval for the commercialization of 17 stains of cannabis and this brings the total number of registered strains to 22. This development positions the company to commercialize and distribute cannabis that is high in CBD that is in the process of being cultivated. This development firmly positions the company to commercialize its medical cannabis product sales in the third quarter and we are excited about this opportunity.

Khiron is a company of first and was the first to introduce CBD skin care products to the Colombian market. Since the initial exclusive launch of the product with Colombian retailer Farmatodo, the company has secured distribution arrangements with many of the largest retailers in the Colombian market. Collectively, these retailers represent over 176 points of sale and this is significant.

By the end of the year, Khiron expects to reach 700 points of distribution in Colombia and we are bullish on the growth prospects associated with this level of distribution. The company has already launched six pop-up stores in key retail malls within four priority cities and plans to have 20 pop-up stores by the end of 2019.

Khiron has established cultivation activities within Colombia, Uruguay and Chile. Over the next year, the company’s production capacity is expected to significantly increase and we are bullish on this. From an expansion standpoint, the company plans to enter markets in North America, Europe, and additional Latin American countries outside Colombia.

The recent pullback has made Khiron a company to be watching and we will be monitoring how the story continues to advance from here. The company is highly focused on expanding its product line and we are bullish on the number of avenues for growth. From an economics standpoint, Khiron represents an attractive long-term opportunity and this is an opportunity that we will continue to closely monitor.

Aurora Cannabis: A Global Leader to be Watching

When we are talking about the international cannabis opportunity, it is hard to not mention Aurora Cannabis (ACB.TO) (ACB) which has been nothing short of an execution story when it comes to this side of the business. From Europe to Latin America, the company has attractive leverage to some of the most exciting markets and has made several acquisitions to advance this side of the business.

Earlier this week, the Canadian LP came under pressure after Bank of America downgraded the company due to concerns regarding its capital needs. According to the broker-dealer, the company will need to raise capital in order to execute on its growth strategy and we are not surprised by this.

Aurora Cannabis has spent billions of dollars over the last few years, acquiring large-scale Canadian LPs and leading international cannabis companies. The company has been constructing massive facilities across Canada and has already spent hundreds of millions of dollars on this. According to Bank of America, these facilities will require a couple hundred million dollars more and this is something to be aware of.

We are not concerned by the cash needs as Aurora Cannabis has been able to raise money over-and-over again. The only concern that we have is that the recent weakness will require the company to raise capital at a significant discount to the previous financing and we will be monitoring this aspect of the story.

One of the issues that investors have had with Aurora Cannabis is related to the share count and additional financings will not be the solution for this. Over the next year, we expect to see some changes when it comes to the company’s capital structure and this is an opportunity that we continue to monitor.

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