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Grizzle Aphria Conviction Call Report Nov 1 2018
Grizzle Aphria Conviction Call Report Nov 1 2018
APHRIA INC.
GRIZZLE CONVICTION SERIES
visit
Aphria is a ‘conviction call’ core holding for Grizzle in the cannabis sector, with an industry GRIZZLE.COM
for more investment
leading cost structure, compelling valuation, and top-quality management team.
research
The company has positioned itself to be one of the largest, most profitable producers of
cannabis globally, an industry that has the potential to be worth in excess of $200 billion.
Additionally, the stock’s inexpensive valuation provides a margin-of-safety for investors, a
truly unique characteristic in a sector comprised of companies that are unprofitable and
greatly overpriced.
Aphria ticks all the right boxes for Grizzle: attractive valuation, low-cost production, M&A
target, and best in class management team.
Aphria becomes a global leader in many future growth areas of cannabis such
as prescription drugs, beauty, supplements, alcoholic beverages, and global
recreational cannabis. Aphria captures 1% market share in these cannabis
verticals by 2035.
WHY APHRIA? 5
ASSET REVIEW 16
PRODUCTION FORECAST 25
REVENUE FORECAST 28
CONCLUSION 38
Canada is the epicentre of the global shift in societal perception of cannabis in both the
medical and recreational context. This very forward and liberal stance has afforded the
Canadian cannabis industry a meaningful head start globally. The largest companies in the
sector (Canopy Growth, Aurora Cannabis, and Aphria) have raised significant capital and
are taking a global strategic perspective to long-term growth.
A lineup outside a Ste-Catherine Street cannabis store in Montreal, QC | Source: Charles Contant/CBC
The opioid crisis plaguing America is in Grizzle’s view one of the most pressing reasons
to legalize cannabis at the federal level in the United States. Opioids are threatening the
economic competitiveness of America, resulting in workers dropping out of the labour
force. American states with legal medical cannabis have 25% lower death rates from opioids
(JAMA Internal Medicine, 2014).
12
100,000 POPULATION
DEATHS PER
0
2000 2008 2016
YEAR
Diageo, Coca-Cola, and Altria are all rumoured to be considering deals in the sector.
Consumer companies interested in participating in the cannabis sector in a meaningful
way don’t have the luxury of waiting a year or two; a veritable lifetime in branding and
product development.
We believe it is for this reason that cannabis investors should maintain core holding in
high-quality companies that are targets for M&A. There is no way to know when these
deals will happen so it makes sense to maintain a foothold in the sector. These core
high-quality holdings currently trade at valuation multiples below that of potential
acquirers — specifically Spirits, Pharma, Tobacco, and Beer companies.
Aphria has a management team with decades of experience in the following critical areas
that will determine success in the emerging cannabis industry.
• Production and quality assurance of highly regulated consumer health products
• Cultivation of produce and construction of greenhouse assets at scale
• Domestic and global distribution of consumer health products
• Creation and management of global consumer brands
On valuation alone Aphria provides that margin of safety, trading at a 60% discount to the
group average and at less than half the multiple of the most expensive names like Canopy
Growth, Tilray and Aurora Cannabis, even though Aphria will be the first-or second-largest
licensed producer globally by 2019.
Additionally, Aphria is trading at a multiple below that of Spirits, Tobacco, and Beer
companies. By definition the growth upside is significantly higher in cannabis than other
recreational consumption categories.
45x
40x
35x
30x
25x
20x
15x
10x
5x
0x
Average
With a presence in countries like Colombia, Germany and Denmark, who are seeing the most
rapid regulatory change, Aphria’s global footprint is as solid as it comes in cannabis. Early on
management identified countries seeing the most political change and Aphria has operations
that service 90% of these countries.
Aphria has shown they can build greenhouses largely on time and on budget while also
keeping the focus on the quality of the product to gain consumer trust. Management has
not had a crop loss and have chosen to destroy plants past the optimal harvest period
instead of compromise product quality.
Aphria is a category leader operationally with the lowest growing costs in the industry
and the highest gross margin per gram even before reaching full-scale. A low growing cost
makes above average profitability very likely.
VALUE
Once companies have identified profitable and diversified assets plus a top-ranked
management team, they are looking to get good value for their money.
For its size Aphria represents the best value in cannabis, trading at a 60% discount to
similar-sized peers Aurora Cannabis and Canopy Growth.
Management maintains its cost lead through operational excellence, a measured approach
to hiring and a focus on keeping input costs low. The company is continually looking for
ways to grow and process cannabis faster and save money on input costs such as fertilizer,
lighting, and heating.
$6
$5
$4
$3
$2
$1
$0
$/gram Average
Source: SEDAR
While other licensed producers are running into operational issues that temporarily
decrease growing capacity or licensing problems that have caused complete crop loss in
some cases, Aphria has been expanding capacity smoothly to adequately supply Canada’s
growing recreational sales post-legalization.
Commodity producers are therefore well positioned from a profitability perspective if they
are one of the lowest cost producers.
8,000
US$/t (Log Scale)
4,000
2,000
1,000
500
Jan-85
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Sep-86
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Mar-89
Jan-90
Nov-90
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Mar-99
Jan-00
Nov-00
Sep-01
Jul-02
May-03
Mar-04
Jan-05
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10
Nov-10
Sep-11
Jul-12
May-13
Mar-14
Jan-15
Nov-15
Sep-16
Jul-17
To explain why a company’s place on the cost curve matters let’s use the iron ore market as
an example.
The price of iron ore, the blue line, most often tracks the cost of production for the 10% of
companies with the highest mining costs. This is because the market needs to keep the
high cost companies in business, so they can supply the last bit of iron ore demanded by
the market.
However sometimes supply exceeds demand and when this happens the price of iron ore
falls below the price needed to keep all producers in business. The high cost miners go
bankrupt, taking their supply out of the market until the point where lower supply again
meets demand and the price stabilizes back at the high end of the cost curve.
To fully understand why being the low cost producer of cannabis gives Aphria a competitive
advantage, we need to look no further than BHP Billiton, the mining company against
which all other commodity producers are judged.
For some background, BHP is the world’s largest miner of bulk commodities such as Iron
Ore, Copper, and Coal and has consistently been the most profitable for over a decade.
BHP manages to remain profitable year in and year out even when the selling price of the
products it mines are down by double digits. BHP does this by making sure it can mine any
commodity for cheaper than anyone else.
When iron ore prices fell 70% from 2011-2014, high cost miners went out of business as
they were now selling iron ore for less than it cost them to take it out of the ground.
BHP on the other hand continued to generate excess cash and was able to buy high-quality
mines from struggling competitors and take on additional clients so cashflow would
continue to grow, especially once the market rebalanced and pricing improved.
$140 12
$120
10
$100
8
$80
6
$60
4
$40
2
$20
$0 0
13
13
14
14
15
15
16
16
17
17
18
14
15
16
17
18
n-
c-
20
n-
c-
n-
c-
20
n-
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20
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c-
n-
20
20
De
De
De
De
De
Ju
Ju
Ju
Ju
Ju
Ju
FY
FY
FY
FY
FY
Source: Market Index.com and BHP Billiton Annual Report
One example of the automation at work is Aphria’s integration of robot arms into the
transplanting process. Historically, an experienced human grower can plant 400 cuttings
per hour. Aphria has introduced planting robots that can handle 2,200 cuttings an hour and
these robots work nonstop with no breaks over an eight-hour workday.
With these robots, Aphria can support their entire greenhouse facilities with only 5
employees as opposed to 22, saving significant money on labour costs and speeding up
the planting process.
Aphria has installed computer-controlled trays to move plants around the greenhouses.
When a tray of plants is ready for harvest a computer moves it along a track system directly
to the point of harvest where the flowers are separated from the leaves.
The remaining trays are then reshuffled automatically, and a new tray is inserted to keep
the greenhouse full. This computer system allows harvests to happen on a massive scale
with no confusion, maximizing efficiency.
Aphria is also introducing pharmaceutical-grade packaging and filling equipment that will
dramatically speed up the number of flower and extract containers that can be filled each day.
Historically, eight human workers have been able to label and fill 900 containers over an eight-
hour workday. With the robotics Aphria is introducing into their facilities, each machine can
pack 600 containers an hour, or 5x more in a workday than eight employees.
VIC NEUFELD
President & Chief Executive Officer
Mr. Neufeld has the longest, most successful business career
among any of the cannabis CEOs. He is extremely well-rounded
with direct experience in agriculture, finance, pharmaceuticals,
vitamins, and international distribution.
Mr. Neufeld also ran Jamieson Laboratories, a provider of vitamins and health supplements,
for more than two decades, which provided him with top-shelf experience in operations,
international logistics, and navigating health regulations. He grew sales from $20 million in
1993 to $250 million by the time he left the company in 2014. His appointment to the board
of three other large companies in Canada validates his strong business reputation.
CARL MERTON
Chief Financial Officer
Mr. Merton has a long history as an accountant, with 12 years
spent with Ernst & Young LLP and KPMG LLP, two of the largest
global accounting firms.
Aphria has been one of the most prudent acquirers in the industry, which means they have
not been overpaying for assets like many peers and Mr. Merton’s valuation experience likely
played a role.
Prior to working for Aphria, Mr. Merton was the CFO of Reko International Group, a $21 million
market cap supplier of factory automation equipment. While Merton was CFO from 2007 to
2015, the stock price of the company increased by 300%, demonstrating his solid decision
making regarding mergers and acquisitions and zero problems with regulators when it came
to financial disclosures or timely filing of financial results.
JACOB RIPSHTEIN
CHIEF COMMERCIAL OFFICER
Aphria’s hiring of Mr. Ripshtein was a solid choice as he is
perhaps the most qualified sales focused employee in the entire
cannabis space. It speaks volumes about the quality of Aphria’s
management team and assets that he chose to leave his role as
CFO of Diageo North America for what was essentially a cannabis
startup at the time.
Mr. Ripshtein oversees all commercial activities at Aphria. This involves establishing new
brands as well as all sales and marketing initiatives.
He has deep commercial experience in areas such as product pricing, sales incentives, trade
terms, and business strategy.
Mr. Cervini has extensive experience in produce packaging, processing, and just in time
logistics, which will be a benefit to Aphria as it works to supply millions of Canadians now
that the recreational market is open for business.
Irradiation is used to reduce the risk of foodborne illness and extends the shelf life of a product.
The process is used extensively on food products in North America and years of testing by the
CDC, FDA, WHO, and USDA show irradiation is safe and effective.
Quality control is often overlooked by investors in favour of more flashy data like production
growth, M&A, or branding, but quality control is what keeps costs down and avoids
potentially bankrupting product recalls.
ASSET REVIEW
Source: Aphria
Throughout 2018 Aphria has been establishing a global footprint of cultivation, distribution,
retail, and research assets. The assets are in all the regions where cannabis legalization is
moving ahead at the most rapid pace.
The company is significantly diversified across the globe and can now choose to deploy
additional capital based on where cannabis demand is accelerating the most quickly.
A full list of assets and their capabilities are below to help investors judge the potential
of Aphria.
CANADA
APHRIA 1
Sq. Ft: 300,000 (current), 1,000,000 (March 2019)
Annual Output (kg): 30,000 (current), 100,000 (March 2019)
Construction Cost ($/gram): $1.65/gram
Aphria 1 is the company’s flagship greenhouse, located in Leamington, Ontario, about four
hours west of Toronto and only an hour from Detroit, Michigan.
Aphria 1 is 90% of the company’s output and is the testing ground for the cutting-edge
automation they are going to employ in all future greenhouses.
Construction costs to bring the facility up to full capacity are $1.65 per gram, 10%-20%
cheaper than competitors are building their greenhouses for.
APHRIA DIAMOND
Sq. Ft: 1,300,000 (March 2019)
Annual Output (kg): 140,000 (March 2019)
Construction Cost ($/gram): $0.88
Aphria Diamond is just down the road from Aphria 1 and is a joint venture between Aphria
and Double Diamond farms, a large vegetable grower. Aphria owns 51% of the JV and is
entitled to their share of production plus the remaining 49% at wholesale rates.
Aphria will be able to keep the additional margin they generate from processing 100% of
the raw flower into value added products or from selling through retail channels.
The facility will be 1.3mm sq. ft at full capacity, but there is room for expansion with the
Double Diamond JV owning over 4mm sq. ft of land.
Construction costs of $0.88 per gram are best in class and will be 20% below similar size
greenhouses from peers.
BROKEN COAST
Sq. Ft: 45,000 (March 2018), 65,000 (January 2019)
Annual Output (kg): 4,500 (April 2018), 6,500 (January 2019)
Construction Cost ($/gram): $3.00
Aphria purchased Broken Coast in January 2018 to fill in the premium segment of their product
line. Broken Coast will remain a smaller artisanal grower of strains priced at a premium to the
market average for now, but production can be scaled up quickly as the market demands.
Liberty Health Sciences is a Florida, Massachussetts, and Ohio-based medical grower and
retailer of cannabis. Aphria sold their shares in Liberty due to Toronto Stock Exchange
requirements, but retains an option to buy back a majority of the shares at some point in
the next 5 years. Aphria owned 30% of Liberty before the divestment.
AUSTRALIA
Sq. Ft: 45,000 (Mid 2019)
Annual Output (kg): 3,000 (Mid 2019)
Construction Cost ($/gram): $3.74
Aphria owns 25% of the largest publicly traded cannabis producer in Australia, Althea Pty.
Althea is currently constructing greenhouses on 10 acres of land in Skye, Victoria with plans
to produce 3,000 kg a year of medical cannabis starting in 2019.
COLOMBIA
Sq. Ft: 500,000 (January 2019)
Annual Output (kg): 30,000 (January 2019), 50,000 (June 2020)
Construction Cost ($/gram): $0.57
Aphria is in the process of building a greenhouse in Colombia that will provide the company
with an ultra-low cost source of supply that can be sold domestically or exported to the
market with the highest selling price.
DENMARK
Sq. Ft: 30,000 (2019)
Annual Output (kg): 3,000 (2019)
Aphria owns 15% of a joint venture with Schroll Flowers, the largest grower and distributor
of hydrangeas in Europe. Aphria has an option to increase their stake to 50%.
The partnership will own a retrofitted greenhouse and EU-GMP certified processing facility
and will act as Aphria’s growing and processing hub in Europe for now.
Aphria owns 49% of Marigold Projects, a licensed producer and retailer in Jamaica. The
company is entitled to 95% of net income due to a separate royalty agreement.
AFRICA
Sq. Ft: 120,000
Annual Output (kg): 24,000
Construction Cost ($/gram): $0.10
Aphria owns 50% of Cannivest Africa, which owns 30% of Verve Dynamics, a licensed
cultivator of cannabis in the Kingdom of Lesotho. Aphria has a supply agreement with
Verve where Verve will supply up to 3,000 kg of low-cost CBD and THC extract to Aphria for
distribution into Africa or Europe.
GERMANY
Annual Output (kg): 1,040
Aphria is currently working its way through the tender process in Germany to be selected
as one of the first domestic growers. Germany will allow each winner to grow 1,040 kg a
year maximum for the next four years. A decision on the results of the tender will be made
in 2019.
Aphria is building a centre of excellence in Leamington, Ontario that will allow them to
process dry cannabis material into concentrated oils and individual plant compounds.
These extracts can then be infused into all types of high-margin products.
Edibles, infused beverages, and topical creams are three examples of retail products that
will be released in 2019 as permitted by regulations.
CANADA
GREAT NORTH DISTRIBUTORS
Aphria was the first licensed producer to realize that to effectively place your product on
retail store shelves requires a countrywide salesforce. Private retailers will sell to 70% of the
population, making them the most important sales channel.
Great North is a subsidiary of Southern Glazers, the largest wine and spirits distributor
in North America. Great North already has sales teams spread all over the country to
service government and private cannabis retail post-legalization. Great North has existing
relationships with all the liquor control boards across Canada, giving Aphria an advantage
over peers as they engage with the provinces to sign initial and ongoing supply contracts.
Aphria’s decision to hire a dedicated sales team on a long-term sales contract decreases
commission costs compared to paying recurring sales commissions and may give Aphria
a leg up with shelf placement, which will be very important to build brand recognition in
retail stores.
ABP’s distribution network will allow Aphria to efficiently scale up sales in Argentina once
the government legalizes medical and recreational cannabis use.
BRAZIL
Aphria is in the process of buying 50.1% of a Brazilian entity that will be licensed to import
medical cannabis. If the deal is completed they will also have a right of first refusal to acquire
up to another 39% of the company for a total ownership of 89%. This entity will be Aphria’s
vehicle to begin selling and eventually growing cannabis in Brazil.
GERMANY
Through Nuuvera Deutschland, Aphria owns 25.1% of Berlin-based Schoneberg hospital.
This partnership is part of Aphria’s strategy to educate patients and doctors about the
therapeutic benefits of cannabis. The company also plans to build pain treatment centres
to further educate and treat cannabis patients.
On the distribution front Aphria have a signed letter of intent to import and distribute 1,200kg
per year through CC Pharma GmbH, which has access to 13,000 pharmacies in Germany.
MALTA
Malta will serve as Aphria’s European distribution hub. The company plans to import dried
flower and extracts into Malta which will then be further processed and repackaged before
being sold on to the rest of Europe.
AUSTRALIA
Aphria currently distributes all exports to Australia through Althea Pty, the largest licensed
cannabis seller in Australia. Althea will continue to source all of its product from Aphria
until its own greenhouse can be built some time in 2019.
BRANDS
APHRIA
The company’s namesake brand that is well known to
medical cannabis consumers across Canada. Aphria
products are known for being safe and providing good
value to medical consumers. Aphria already has a large
patient base familiar with the company’s brand which
should pay dividends as they look to new recreational
users for Aphria product lines.
SOLEI
The brand is described as a thoughtfully curated
assortment of strains, presented with uncomplicated
language. The marketing is focused on a younger
demographic. Solei products sold extremely well in
the first hours of legalization and were mostly sold out
across the provinces by the end of the first week.
BROKEN COAST
An award-winning craft grower, cultivated in small
batches and in single strain growing rooms to preserve
the genetics. Broken Coast is known among cannabis
connoisseurs for their exacting growing techniques
and unique genetics. Early reviews have praised the
quality of the company’s legal cannabis.
GOOD SUPPLY
This is Aphria’s value brand for cost conscious consumers
who are everyday users. Aphria will likely plan to use
their low cost structure to price Good Supply at a very
attractive price compared to peers. Low costs give the
company room to outprice competitors.
GOODFIELDS
For both current and veteran users who want a quality
product from a trusted source. Goodfields seeks to
supply some unique strains while keeping prices low
to provide consumers with the highest value for their
money possible.
JURISDICTION OF OWNERSHIP
SUBSIDIARIES
INCORPORATION INTEREST
Pure Natures Wellness Inc.
Ontario, Canada 100%
(o/a Aphria)
Arizona,
Aphria (Arizona) Inc. 100%
United States
British Columbia,
Cannan Growers Inc. 100%
Canada
British Columbia,
Broken Coast Cannabis Ltd. 99.86%
Canada
Source: Aphria
We’ve analyzed short-term sales capacity through provincial supply agreements and long-
term capacity through funded construction plans and management guidance to estimate
production for Aphria over the next 2-4 years.
In the early days of recreational cannabis sales, when demand is largely unknown, provincial
supply agreements are providing investors with a guidepost of revenue and cashflow
potential for the first 3-6 months of legalization.
Aphria has announced initial supply agreements with six provinces for a total of 23,000 kg
per year. Ontario, the largest province also announced a supply agreement with Aphria
but did not disclose volumes. Based on the size of the agreement signed with Quebec and
Ontario’s larger population, we think an agreement with Ontario is worth at least 20,000 kg
in the first year of legalization for a grand total of 43,250 kg contracted.
Source: Aphria
YEARLY SUPPLY
PROVINCE
(KG)
Yukon 50
B.C. 5,000
Alberta 870
Manitoba 2,700
Quebec 12,000
Ontario 20,400
Total 43,520
Most of the international growth by 2022 will come from low-cost greenhouses in
Colombia, Jamaica, Argentina, and Brazil. Greenhouses in Denmark and Germany will give
the company a local cultivation footprint in Europe, the most profitable cannabis market
in the world.
Low-cost production areas can serve as cheap raw material for processing into value added
products that will one day be sold in higher priced markets.
We believe Aphria’s focus on low costs will extend to international greenhouses allowing
them to maintain the distinction as the lowest cost licensed producer of cannabis even as
they expand away from Canada.
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
ANNUAL SUMMARY
2019 2020 2021 2022
KG/YR
Aphria 1 82,500 110,000 110,000 110,000
$0.42
$1.08
AVERAGE WHOLESALE PRICE PER GRAM
Wholesale Price = Product Price + Federal Excise Duty + Provincial Duty + GST
https://twitter.com/_deepakanand/status/1041669262887157760
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2019 2020 2021 2022
Estimates assume each country remains its own standalone market, but if cannabis
becomes a global market with low-cost supply flowing to high-cost demand, there would
be meaningful upside to our cashflow estimates.
$700
$600
$500
$400
$300
$200
$100
$0
ANNUAL REVENUE
2019 2020 2021 2022
(CAD MILLION)
Aphria 1 547 745 921 1,077
Denmark 7 12 39 36
Germany 0 3 3 2
Lesotho 8 29 32 30
Jamaica 7 11 21 20
Brazil 0 10 25 69
Australia 0 17 43 65
Argentina 17 36 60 112
10K
8K
COUNT OF LISTINGS
6K
EXTRACT
4K
2K FLOWER
0K
Source: CannStandard.ca
We think consumer demand will transition away from flower even quicker than we’ve
observed in the US because of the explosion in non-smokable products entering the
market. A wealth of funding is leading to a spike in R&D budgets across the US and Canada
and a flood of infused beverages and edible products will hit the market in 2019 when the
Canadian government legalizes additional products.
For Aphria, the transition away from dried flower sales will enable the company to
differentiate themselves from peers and grow margins. Cannabis oil and edibles
command much higher profit margins than selling the raw flower and give each
company much more room to experiment and set themselves apart with unique
products in a crowded marketplace.
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Wholesale Retail
Jamaica
Lesotho
Brazil
Argentina
Australia
Germany
Denmark
The analysis is done at the corporate level and is the EBITDA remaining after paying all
corporate costs in the case of wholesale, plus costs to run a store in the case of retail.
The bottom line is that selling your product through retail channels leads to lower corporate
level margins but higher absolute profits. Aphria can generate ~$3.60 per gram of cashflow
by selling cannabis oil through a retail channel, versus ~$2.60 per gram if the oils are sold
directly to the government distributor.
We think a hard target price that doesn’t account for different time periods and the rapid
evolution of the cannabis market provides little helpful information for investors. To get
around the lack of flexibility a target price provides, we think it makes more sense to look at
the company over the medium-term and the longer term.
In the medium-term we ran scenario analyses to come up with a base case stock value. We
also looked at what the longer term potential of Aphria will be as the company disrupts
established consumer markets.
A discounted cash flow analysis puts the stock at $40 per share.
EBITDA Margin 24% 26% 27% 28% Risk Free Rate 3.6%
Terminal
EBITDA $305 $504 $682 $843 3.0%
Growth Rate
Interest
$2 $2 $2 $2
Expense
Taking the present value of this method gives us a $40 stock price as well.
"-" Debt 39
We think there is value in putting some numbers around the future potential even if the
market evolves differently than we expect. Then at least investors can make more informed
decisions about the downside and the upside to cannabis stocks.
We analyzed many of the major markets that cannabis could reasonably disrupt over the
next 17 years and made assumptions about the market share Aphria could capture.
Examples of verticals where cannabis is already taking market share are prescription drugs,
supplements, pet medication,global beauty, soft drinks, and alcoholic beverages.
If Aphria can take even modest market share from these industries (we esitmate 1.1%), the
stock is easily worth $200 a share.
Global Recreational
204 5.0% 10.2 38.2
Cannabis
Global Alcoholic
2,612 1.5% 39.6 148.6
Beverage
GLOBAL BEAUTY
The beauty industry is already being disrupted with the emergence of cannabis-infused
topicals, both active and inactive. Cannabis is a whole new ingredient with unknown
potential and the beauty industry is already racing to incorporating cannabis into more
and more products.
The beauty industry is growing quickly and according to a forecast by Orbis Research,
beauty spending will grow 7% a year from 2018-2023, reaching $805 billion in sales.
Looking out to 2035 and assuming slowing growth the global beauty industry will be a $1.5
trillion dollar business and it is reasonable to assume a cannabis company could take half a
% of the market compared to over 20% for leading brands today.
Cannabis has also shown promise in treating conditions such as epilepsy, Parkinson’s Disease, and
depression, with many more uses to be discovered due to future advances in cannabis research.
The global pain therapy market will grow to $104 billion by 2035 according to Market
Research Engine and Technavio. The largest pharma company, Novartis A.G., owns 4.5%
of the global drug market so we expect Aphria could capture a similar market share in the
pain market as the company expands further into clinical research and pharmaceuticals.
Aphria currently controls 20% of the cannabis market in Canada and we expect a global
market share of 5% longer term is possible. Five global cigarette brands control the
adjacent cigarette market and we believe cannabis will look similar in time.
GLOBAL SUPPLEMENTS
The global supplements market is estimated to grow 9.6% a year to reach $278 billion by
2024, according to Grandview Research. Grizzle estimates the market will hit $658 billion by
2035 if slightly slower growth continues.
Vic Neufeld, CEO of Aphria, was previously the CEO of the largest vitamin and supplements
company in Canada. He knows how the supplements market operates and will be able to
leverage research on the efficacy of CBD as a supplement. We think Aphria could achieve a
1% market share through creation of assorted cannabinoid supplements.
PET MEDICINE
Demand for pet medicine is growing rapidly in North America and according to the Animal
Health Institute and Packaged Facts, drug spending was $9 billion in 2016. The market
should grow to $21 billion by 2035 and we expect Aphria to control 1% of the market for
cannabis products that treat chronic pain, anxiety, and other pet ailments.
We expect Aphria will eventually partner with a major consumer beverage company and
this partnership will allow the company to capture at least 1% of the global soft drink
market.
Aphria is deep in product development on infused beverage products that use the
psychoactive ingredient in cannabis. These products could easily replace a beer or glass of
wine for consumers who want a buzz.
Cannabis infused beverages have enormous potential and we think Aphria could
reasonably own 1.5% of the market. Beverage giants such as Coke and Diageo have market
shares between 18%-25%.
CONCLUSION
The cannabis industry presents investors with some of the best long-term structural growth
opportunities. Yet, along with the upside comes sizable risk. Management teams have not
yet been tested, companies both good and bad are being funded, and the true economics
of growing cannabis are not yet clear.
The way to mitigate these risks is to buy, as all great investors do, with a margin of safety.
Buying licensed producers trading at reasonable or deeply discounted multiples who grow
cannabis cheaper than peers and are run by an ethical and seasoned management team, is
the way to maximize your chances of making money.
Based on Grizzle’s significant experience analyzing both private and public companies in
commodity sectors we believe investors would be wise to make Aphria a core component
in a diversified cannabis portfolio.