Shoppers Drug Mart’s medical marijuana move could be huge for Aphria, says Clarus

Shoppers Drug Mart and other Canadian pharmacies applying to dispense medical cannabis represents a huge opportunity for licensed producer Aphria (Aphria Stock Quote, Chart, News: TSX:APH), says Clarus Securities analyst Noel Atkinson.

Yesterday, it was widely reported that Shoppers Drug Mart submitted a Licensed Producer (LP) sales license application to Health Canada to dispense medical cannabis prescriptions, something the Loblaw subsidiary confirmed late Tuesday.

“We have applied to be a licensed producer strictly for the purposes of distributing medical marijuana,” Shoppers Drug Mart spokeswoman Tammy Smitham confirmed to CBC News. “We have no intention of producing medical marijuana, but we do want the ability to dispense medical marijuana to our patients in conjunction with counselling from a pharmacist.”

Atkinson says he expects that Shoppers Drug Mart and other large pharmacy chains such as London Drugs and Rexall will eventually be permitted to dispense medical cannabis, a development he says will mark a change from the mail order delivery mandated for Licensed Producers today.

The analyst presumes that pharmacies will request limited variants, demand a track record of consistent high quality production and a commitment to the pharmacy channel, and will negotaiate wholesale prices. He says this eliminates the vast majority of LPs, who simply cannot scale to the level required to fill the needs of pharmacies. Atkinson says there are just four to six companies that could service the wholesale pharmacy market opportunity, which he estimates could be worth $300-million annually. He says Aphria is the clear leader of this elite group.

“We see Aphria as the best-situated of the publicly-traded LPs to thrive as a wholesaler in a pharmacy dominated medical cannabis market,” he says. “The Company has the lowest known production costs per gram in the industry, has been able to scale successfully to 43,000 sq. ft. of production with zero crop failures, its management has extensive experience in selling large quantities of health products to Canadian pharmacy chains, and the company appears to be at least as focused on the medical market as the rec market. Canopy Growth is at a much larger production scale than Aphria and its Bedrocan and Tweed units have been selling into the medical market for quite a while, but it remains to be seen whether Canopy would be willing to allocate a large portion of capacity to wholesale for pharmacies when it has the largest direct-to-patient revenue of the public LPs and is so heavily investing in its recreational strategy. We know of no other public LPs producing at scale in-house. Of the privately-held LPs, only a few appear to be successfully growing at high capacity utilization in larger facilities and focused on the medical market, most notably MedReleaf, CanniMed and CannTrust.”

In a research update to clients today, Atkinson maintained his “Buy” rating and one-year price target of $5.00 on Aphria.

The analyst believes Aphria will post Adjusted EBITDA of $5.4-million on revenue of $22.7-million in fiscal 2017. He expects these numbers will improve to EBITDA of $18.9-million on a topline of $59.6-million the following year.

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