Seeking alpha Aphria Inc. (OTC:APHQF) is in the drug business, plain and simple, and business is good. Especially when you are a publicly traded company trading in 2 different countries and operating in the only nationally legalized marijuana framework in North America. As Aphria likes to put it, it is "in the business of producing and supplying medical marijuana pursuant to the Marihuana for Medical Purposes Regulations (the "MMPR")" (sic). The MMPR was the set of legislation that allowed Canadian corporations and individuals exemptions to marijuana prohibition laws for medical purposes. On August 11, 2016, the MMPR was replaced with the ACMPR (Access to Cannabis for Medical Purposes Regulations), but it holds largely the same place in Canadian law. Though medical marijuana has been legal in some form or another since 2001 in Canada, Aphria was only incorporated in June 2011 and has been "growing" ever since (pun partially intended). Though Aphria is a relative newcomer to the marijuana industry in Canada, and it IS very much an industry, it has amassed a market cap in the range of $170 million since its 2012 listing, positioning it as the 2nd largest marijuana company in Canada, comprising about a quarter of the total market cap for Canadian marijuana producers.
Although Aphria is traded on the OTC pink sheets in the United States, in Canada it is listed on the Toronto Stock Exchange's Venture Exchange. Though, like all exchanges at some point, the TSX Venture has had cases of penny stocks gone wrong, it is by and large a stable exchange operating with demanding requirements for reporting and transparency in the most secure and stable banking system in the world, so get the notion out of your head that this is simply a "penny stock".
The CEO of Aphria is Vic Neufeld. While Vic might not be a known name to a lot of American investors, he is certainly a known quantity in Canada. In a past life, Mr. Nuefeld was the CEO of Jamieson Laboratories, the largest manufacturer and distributor of vitamins and nutritional supplements in Canada. In the 21 years he was leading Jamieson, the company grew from $20 million in annual sales to over $250 million in yearly sales. The rest of the executive team, with equally impressive backgrounds, leaves me with little doubt that Aphria could not have a better board of directors to lead its growth.
With Mr. Neufeld at the helm, it is no surprise that Aphria is tackling the medical marijuana space with tact and the air of true medical professionals. Its current business operations include the production, preparation and sale of marijuana and marijuana-based medical products. Given that marijuana itself is a plant material, it is not restricted by the same requirements that other prescription medication are. This means less Health Canada (read: Canadian FDA) safety and approval studies to bring a product to market. If Aphria wants to market a new strain of marijuana, it don't need to go through new clinical trials like when a company develops a new chemical medication. But this benefit is twofold, because of the lack of deaths or other harmful effects directly attributable to their product, as well as the perceived inherent safety of marijuana, the effects of legal actions and lawsuits are somewhat mitigated. In the Biotech sector, this puts the company at a distinct advantage, being less exposed to a litigious society and needing less to put less money into the development and approval of new products. Like most healthcare items, Aphria is also slightly insulated from the normal business cycle. During economic downturns, healthcare items are some of the last things to be cut when customers start to tighten their belts, so to speak.
Though the downside of having a product that needs to be grown is that Aphria is exposed to loss of biological assets due to insects and pests, technical challenges and disease. These risks, however, can be mitigated, thanks in part to the advancements of agricultural science since the use of commercial greenhouses has blossomed. The last and biggest risk the company faces is in the implementation of the legalization of marijuana. Though things look positive if the same model that is used for alcohol is used for the sale of marijuana, excessive taxes or other restrictions, such as quantity limits, could hamper the growth of Aphria over the coming years.
Taking a look at the year-end results that were announced a few weeks ago, there are some great signs for this little company. First and foremost is two consecutive quarters of profitability. Though a seemingly small achievement, it is a great forbearer for what is ultimately the most important part of a company becoming truly successful. Blow by blow, the other highlights include a 17% increase in patient base, a 31% decrease in production costs, gross margin increase from 59.3% to 74.5% and a 23% increase in EBITDA just from the previous quarter, all of which lead to a Q4 revenue increase of 556% y/y. Taking a look at Aphria's balance sheet reveals a large quantity of cash and receivables as well as a quick ratio large enough to leave no doubt that the company will be able to service its debts and continue to grow. By using bought deal financing and paying cash for most of its capital expenditures, the company has been able to keep the liabilities on its balance sheet low.
All of this would have us bullish on Aphria alone, but the approximately 1,200 kg (2640 lbs) of marijuana it sold in FY2016 is just a fraction of the company's FY2017 projected production capacity of 7,500 kg (16,500 lbs). However, it won't be utilizing that production capacity solely for medical patients. Please welcome the Liberal Party of Canada, which was elected and has set into motion its plan to legalize marijuana for recreational use. The government plan for legalization of recreational marijuana has been scheduled tentatively for the first half of 2017, after the legislation is done being drafted and passed, with regulations and sales taking effect a short time later. Aphria plans to capitalize on the legalization of marijuana in Canada by being positioned as one of the largest legal producers even before the transition to a legal recreational market occurs.
Part of Aphria's growth plan has included multiple increases in the size of its production facilities over the past year. The company has closed on 36 acres from CF Farms and entered into a purchase agreement for another 11 acres from Diniro Farms, with both plots of land to be absorbed by its current civic address, which prevents the need for any new permitting. These acquisitions will bring Aphria's total greenhouse space to well over half a million square feet when it is brought into full production, nearly 10 times more than was being used for marijuana production in 2015. Putting all of that greenhouse space to use, the company has received licensing from the government of Canada to produce and sell extracts as well as regular marijuana plant material. Due to large production volumes, the company can offer cannabis extracts that sell for 50% of what competitive products sell for, while still maintaining its profit margins. This strategy has continued to lead Aphria into having the second-largest chunk of market share in the Canadian medical marijuana industry.