Canadian Cannabis Producer Aphria Differentiates Itself From Peers

Ontario greenhouse producer believes lower electricity consumption compared to indoor growers creates a competitive advantage

Based in Leamington, Ontario, Aphria is rapidly establishing itself as one of the leaders in Canada's MMPR system.  The company began selling in early 2015 after getting its full license in November 2014, and it is one of the three publicly-traded companies with the highest quarterly revenue, trailing only Canopy Growth and Mettrum.  In the most recent quarter ending in August, the company reported sales of $950K, with Canopy Growth reporting $1.71mm for the quarter ending in June (not including the sales of Bedrocan, which combined with Tweed in late August) and Mettrum posting sales of $1.25mm for the quarter ending in June as well.  Aphria reported serving 2221 patients as of August (and 3100 at present), while Canopy Growth claims about 5000, including Bedrocan, and Mettrum indicates 3750.

In a recent interview, CEO Vic Neufeld shared some perspective that helps to understand the company's strategy and its early success. Aphria, which grows in a greenhouse, aims to be the low-cost producer. Neufeld stated that the cost to get dried cannabis into the vault is $2.20 per gram, with packaging and shipping adding an additional $0.20 per gram to the cost.  The company reported margins of 70% in its retail operations in the most recent quarter. When the company completes its next expansion phase, it expects to drop the cost per gram to about $1.80.

According to Neufeld, one of the big drivers of the low cost of production is dramatically lower electricity consumption compared to indoor growers, with the company spending less than $100K per year.  Another factor is that Aphria is able to leverage the buying power and expertise of CF Greenhouses, the flower and produce company that spawned it.  While Aphria is still a relatively small company, it benefits from its association with a very large grower.

Aphria sells 20-25% of its product to other licensed producers, operating a wholesale model that takes advantage of its low cost of production.  While the gross margins are lower at a reported 40-43%, the strategy allows the company to benefit from bypassing many other operational expenses that retail sales incur.  The company currently has several customers, and Neufeld says that several others are in active discussions to buy its product. With the new rules permitting extracts, Aphria expects to produce its own but to also partner with companies that are more expert in extraction as their source of plant material.

One of the big surprises of the interview is that Aphria is in active discussions to expand its reach globally.  Neufeld said that other countries see the Canadian MMPR system as the most viable model and are looking to create a highly regulated system of production.  Potential operators in those countries want to hit the ground running by partnering with Aphria to use its greenhouse SOPs. Aphria expects to contribute its intellectual property as well as capital to take an ownership stake.

Neufeld believes that the recent change in the government is a huge boost for MMPR but suggests that it will be three to five years before a recreational program is rolled out.  He thinks that PM Trudeau's administration will make patient access easier with the inclusion of pharmacies as points of distribution and by expanding the types of providers who can prescribe medical cannabis.

Aphria wasn't one of the earliest MMPR licensees, but, as it celebrates its first year of being fully licensed later this month, it has established itself as an early leader.  The company is awaiting inspection from Health Canada for its recent expansion that will allow it to double its current capacity, and it is already planning another major expansion in the near future.  Neufeld hopes to become the first LP to report positive cash flow in the next few months.

Alan Brochstein, CFA runs both 420 Investor, the leading online community for investors focused on the publicly-traded cannabis stocks, and New Cannabis Ventures, a content aggregation site focused on the cannabis industry.

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