Aurora Cannabis Inc. is the latest marijuana stock to whip up investor frenzy, climbing nearly 60 per cent in the past three trading days and more than doubling since the start of the month amid speculation about its position in the pullulating cannabis sector.
Analysts say the supplier of medical marijuana has one of the fastest-growing patient counts in the Canadian industry, is well poised to grow production and sales at home and abroad, is diversifying through investments in cannabis extracts and is raising money for expansion. The bigger-picture benefit is that Aurora could be the next marijuana producer to score a major deal with a large investor in the alcohol, tobacco or pharmaceutical sector, following in the footsteps of industry leader Canopy Growth Corp.
Analysts say companies in these industries are looking to grab a share of the growing cannabis market ahead of legalization for recreational use in Canada, which is set for July, 2018.
Aurora is one of the biggest players behind Canopy and "people are thinking it may be the start of an investment trend where other multinationals will start taking a look to position themselves," says Mackie Research Capital analyst Greg McLeish.
It has been a volatile few days for Aurora, which is now the second-largest pot stock by market capitalization. The stock hit a new high of $6.90 early on Tuesday, an increase of about 230 per cent from a year ago. Shares were briefly halted in mid-morning trading on Tuesday (market regulators say a stock is halted when there's a "significant and unexplained short-term price movement"), then fell 12 per cent from Monday's close to $5.26 before rebounding and finishing the day up more than 7 per cent to $6.41.
An Aurora executive cancelled an interview that The Globe and Mail scheduled with chief executive officer Terry Booth for mid-Tuesday afternoon, citing in an e-mail "some key time-sensitive issues that must take precedence."
Then, after markets closed on Tuesday, Aurora announced it has submitted a proposal to buy CanniMed Therapeutics Inc. in an all-share deal. The proposal values CanniMed at $24 per share, which it said is a 57-per-cent premium to its closing price on Tuesday.
Aurora said the proposal was delivered to the CanniMed board on Monday and that it is "seeking to pursue a mutually agreed upon combination with CanniMed."
It said CanniMed hasn't engaged in active discussions with Aurora and has given the board until Friday at 5 pm Vancouver time to respond. Then, Aurora said intends to start a formal takeover bid for the company. Aurora said it has "irrevocable lock-up agreements" with shareholders representing about 38 per cent of CanniMed.
Mr. McLeish said Aurora was likely attracted to CanniMed for its strong presence in the medical market. Saskatoon-based CanniMed was the first government-licensed medical-marijuana producer and the sole supplier to Health Canada under the former medical-marijuana system for 13 years.
"Additionally, CanniMed's new gel capsules should position the company better for international growth," McLeish said in an email late Tuesday.
Aurora's stock, which graduated to the TSX in July, has blown past analyst price targets, which currently range from $4.45 to $5. All four analysts that cover the company have a buy recommendation, with some pointing to Aurora's diversifying business model and status as one of the market leaders.
Aurora has licensed facilities in Alberta and Quebec and is making investments in an extract-technology company Radient Technologies Inc. and hemp seed foods company Hempco Food and Fiber Inc. Earlier this year, Aurora bought a nearly 20-per-cent stake in Cann Group Ltd., Australia's first medical cannabis licensed producer and acquired Pedanios, Germany's largest medical cannabis distributor. The company has said it's "actively pursuing further international opportunities."
"I do believe that international opportunities are key to their growth and that they are well positioned in this market," Mr. McLeish says.
Investors have been bullish on the company's potential to make acquisitions in a sector expected to see more consolidation, as well as its prospects for potentially luring a major investor. Last month, U.S. alcohol giant Constellation Brands Inc. bought a nearly 10-per-cent stake in Canopy for $245-million. The agreement was considered the first of its kind in the cannabis sector, with more expected.
"There has been a lot of speculation about who will also have a similar investment come in," says PI Financial analyst Jason Zandberg. "Aurora is one of those names that make sense, but they're not the only name."
Aurora's stock is likely surging on a handful of factors, including rising revenue and patient counts, says Bruce Campbell, a portfolio manager at StoneCastle Investment Management.
In its latest earnings report, Aurora said it had 19,280 active registered patients at the end of the first quarter ended Sept. 30, up from 8,200 for the same quarter last year. Aurora reported first-quarter revenue of $8.3-million, which beat expectations and was up from $3.1-million a year earlier. Net income was a penny per share as compared to a loss of 3 cents for the same quarter in the prior year.
Mr. Campbell owns a handful of marijuana stocks, but not Aurora. While he has "warmed up" to the company, given its recent investment activities, he doesn't plan to buy the stock at this level.
"At this point in time we wouldn't step into Aurora, but with all of the pieces they've put in place, if it pulls back, it would certainly be one that we would give more thought to," he says.