Do you want the details on the good news or the bad news first? Ok, here is the good news. Aurora Cannabis (TSX: ACB) (NYSE: ACB) announced this morning that the company will continue supplying the Italian market which it has been doing for the past 15 months. Aurora reported to investors that the company has been selected as the sole winner of the Italian government’s public tender to supply medical cannabis in Italy. The new supply agreement with Italy is expected to be officially signed in September of this year.
Five companies in total bid for the coveted contract to supply three lots to the Italian market. Aurora ultimately emerged victorious in one of the most strictly regulated medical cannabis markets in the world further cementing themselves as one of the top international players.
Aurora won their first Italian supply agreement back in January of 2018. All public tender submissions from the other five competing companies were disqualified by the Italian government because they did not meet the country’s stringent requirements.
Under the terms of Aurora’s new two year deal with Italy, the company will supply a minimum of 400 kg of medical cannabis over the duration of the contract. The cannabis to fulfil their obligation will come from its Canadian EU GMP certified facilities and will be imported to Italy via its wholly-owned European subsidiary, Aurora Deutschland. Aurora’s cannabis will be sold to an agency of the Italian Ministry of Defense, Agenzia Industrie Difesa and will distributed to local pharmacies. The local pharmacies will be responsible for dispensing medical cannabis directly to the patients.
“We’re committed to building a successful, long-term medical cannabis market in Italy,” said Neil Belot, Aurora’s Chief Global Business Development Officer. “We want to continue to build our connection with patients and pharmacies in the Italian market, who have come to know and appreciate our products over most of the past two years. I’m extremely proud of our team. This win reflects our ability to navigate complex international regulations and work with governments around the world to establish ourselves as a trusted partner.”
“The well-being of our patients is our top priority and we’re dedicated to ensuring they have access to a consistent supply of safe, high-quality medical cannabis. We look forward to expanding our presence in Italy and continuing to work with other international regulators to ensure patients around the world have access to our high-quality medical cannabis,” added Axel Gille, Managing Director of Aurora Deutschland GmbH.
Burn Rate Concerns Trigger BofA Downgrade of Aurora Stock
Now for the bad news… Bank of America analyst Christopher Carey has downgraded shares of Aurora Cannabis (TSX: ACB) (NYSE: ACB) amid concerns over the company’s burn rate. The BofA analyst downgraded the stock from BUY to NEUTRAL and lowered his price target on the company by 20% from $10 to $8.
“Aurora has emerged as one of the best operators in the cannabis sector, with industry-leading scale and margins even versus other large peers, and global optionality,” Carey wrote in his note to clients. “However, despite this, and a focus on profit, (positive EBITDA target for the second quarter), it is burning cash and by our estimates could be cash negative by first quarter 2020 (absent financing), namely if a large convertible debenture due in the first quarter stays out of the money.”
In Carey’s note to clients he further explained that even if Aurora lowered the pace of its burn rate, the company would likely still need to raise additional capital at some point in the next few quarters. Aurora currently has access to roughly $100 million via a credit facility but also has $230 million in convertible debt that matures in Q1 2020 that will likely have to be paid in cash unless their stock goes on a big run.
Aurora filed a shelf registration in April allowing the company to raise up to $750 million but this was mainly done in order to attract a partner or accelerate the process of a new investment. According to Carey, Aurora’s issue is not related to them being unable to fill funding gaps.
“At this early stage of industry development, when first-mover advantage is key (be early, be big), raising capital from a defensive position rather than for untapped opportunities (like US CBD) is less ideal,” said Carey.
Aurora’s management has declared U.S. expansion as a core strategy moving forward. However, if Aurora adds more debt but does not add a partner, than the company could be forced to raise additional equity capital. This would contradict Aurora management’s goal of decreasing the dilution of its shareholders.
“Upside risk to our call is if Aurora can ink a partnership that brings with it capital,” Carey added.
The market reacted swiftly to the BofA news with shares of Aurora Cannabis closing today’s trading session at $ 9.05, down 6.5% on the day. Aurora’s stock closed at the low of the day and unfortunately dragged many of its sector peers down with it.
Today’s notable price action from industry peers included:
- Canopy Growth (TSX: WEED) (NYSE: CGC) closed trading today down 2.3% at $46.61.
- Aphria (TSX: APHA) (NYSE: APHA) closed trading today down 2.2% at $8.40.
- HEXO (TSX: HEXO) (NYSE-A: HEXO) closed trading today down 2.6% at $6.49.
- Organigram Holdings (TSXV: OGI) (NASDAQ: OGI) closed trading today down 5.8% at $8.39.
- Supreme Cannabis (TSX: FIRE) (OTCQX: SPRWF) closed trading today down 2.6% at $1.49.
- Aleafia Health (TSX: ALEF) (OTCQX: ALEAF) closed trading today down 3.4% at $1.15.
- Tilray (NASDAQ: TLRY) closed trading today down 1.9% at $43.41.
- Cronos Group (TSX: CRON) (NASDAQ: CRON) fared a little better than the group and closed trading today down 0.8% at $19.46.
- Green Organic Dutchman (TSX: TGOD) (OTCQX: TGODF) closed trading today slightly green at $3.29, up 0.3% on the day.
- CannTrust (TSX: TRST) (NYSE: CTST) has been the subject of recent controversy stemming from the company’s current Health Canada scandal. Their share price was slashed in half over the past week but was one of the few to close in the green today, up 2.7% at $3.84.
- *Prices above are from the company’s Canadian listed shares.
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