Tilray Inc.: Pharmaceutical Drive to Optimize on Value-Addition

Feb 26, 2021 06:10 PM ET
Tilray Inc.: Pharmaceutical Drive to Optimize on Value-Addition

Tilray’s Inc. stock declined 14% on February 18, 2021, after announcing the full fiscal year/Q4 2020 results. The stock had gained 7.79% a day later, with investors upbeat about the global marijuana market's growth. The Canadian cannabis company reported a surge in its 2020 revenue by 26% to $210 million YoY. However, this increase was outweighed by low bulk sales that saw the sale of total cannabis (in kg) decrease 54.11% to 6,901 kg in Q4 2020 from a high of 15,039 kilograms in Q4 2019. While the average net selling price (per gram) of cannabis rose to $5.97 in Q4 2020 compared to $6.15 in Q4 2019, it was balanced with an increase in average net cost per gram by 37% in the same period. Increasing costs against revenue are seen to drive the stock lower despite the market acceptance of cannabis.

Thesis

Despite the skepticism about the international cannabis market's growth, there is still optimism in the strategic partnerships between Tilray and other firms like Aphria. More research in the medical application of cannabis will change the drug's adult-use aspects seeing the product is facing backlash from conservative states. Investors need to watch Tilray's entry into Europe, mainly in Germany, France, and its expansion in Portugal. Cost reduction and yield improvement will also lower the average cost of cannabis production responsible for the high net loss in Q4 2020. This period saw a reduction of the expenses of international medical and Canadian use of cannabis by adults lower by $57 million (YoY).

International cannabis market

Shareholders are likely to see great value in the partnership between Aphria and Tilray Inc., with an estimated pro forma revenue of $685 million (C$874 million). Since the announcement of the combination on December 16, 2020, both stocks have grown in considerable value.

Tilray Inc. and Aphria Inc. prices chart

Tilray Inc. has increased by 334% since November 2020, while Aphria has surged 230.9%.  Aphria Inc., while based in Canada, has an international presence in Germany, Italy, Malta, Columbia, and Argentina. Apart from the recent entrance into Spain, Tilray cannot export cannabis to Columbia, Argentina, or Italy. This partnership, as it stands, will benefit Tilray as compared to Aphria Inc.

While countries like Colombia and Argentina are yet to legalize the use of cannabis for personal use, they have allowed medical marijuana. Aphria has made significant inroads in South America, helping to soften drug laws in the Latin world. Countries like Uruguay permitted the use of recreational marijuana in 2017. Aphria’s stock price rose by more than 1,600% from January 2017 to January 2018. Legalized trade of marijuana in 2017 soared 37% 2017, worth approximately $9.5 billion (globally). The US accounted for $8.5 billion (90% of the share), while Canada's stake was 0.6% or $0.6 billion.     

By 2025, the global market size of medical cannabis is projected to reach $52.5 billion growing at a CAGR of 15.4%. However, this increase is pegged on the rate of approval among counties taking a conservative approach to the legalization of the drug. In the African continent (as of Q4 2020), only Zambia, Lesotho, South Africa, and Zimbabwe have legalized cannabis for medical use.

Although Morocco’s cannabis industry is thriving and worth €8 billion as of 2020, its government is yet to legalize the commodity. Morocco was ranked as the leading supplier of cannabis to the European market in 2021.

 Import of medical cannabis into Germany

However, Germany, whose legal imports of cannabis into 2021 reached 10,000 kg, excluded Morocco due to its legalization status of the commodity. In 2019, the medical cannabis market in Germany grew by 100%. In Q4 2020, this growth was extended by 37%, with its domestic industry producing 2,600 kg. Germany's import of medical cannabis reached an all-time high in Q4 2020 at 3,264 kg, with the annual total standing at 9,249 kilograms. 

The combined company (Tilray + Aphria) has a strong position to grow its trade opportunities of medical cannabis primarily due to its production facilities. Aphria's production is in Germany, while Tilray is revamping its Portuguese production site, with the latter being a key supplier of Europe's medical cannabis. By 2025, Europe’s medical cannabis market size may reach $3.9 billion. Together with its strong distribution networks, the combined company’s supply chain applies the European Union Good Manufacturing Practices (EU-GMP), an essential driver of sales in Germany.  

Investors should look out for more opportunities in 2021, primarily from Tilray's partnership with World Pharma Biotech Company on February 4, 2021. This link enabled Tilray to export its first medical supplies unit from Portugal to Spain. Tilray overtook other Spanish cannabis dealers to this deal and will supply its GMP-certified products to World Pharma for testing and approval. This Spanish deal is central to solidifying Tilray’s EU market share.

Tilray also announced on January 26, 2021, that it would partner with the French food and drug institution (ANSM) to supply GMP-certified medical cannabis products. This experiment slated for commencement in Q1 2021 is expected to take 18-24 months. Tilray’s revenue sales for international medical cannabis for the fiscal year 2020 surged 153%, increasing 44% in Q4 2020 alone. The company is a leading supplier of GMP-certified medical cannabis in the EU, US, and Canada.

Health guide

The success of the sale of medical marijuana depends on evidence-based trials and recommendations from doctors and pharmacists. A recent study showed that cannabis was effective in only curing three health issues. They include

  • Chronic pain palliative care.

  • Multiple sclerosis leading to muscle spasms.

  • Extended chemotherapy that causes nausea and vomiting.

Tilray should employ its scientific team to expand the medical benefits of marijuana. As it merges with other companies, it should also incorporate the properties of cannabis to be applied to treat other diseases such as terminal illness, Alzheimer's disease, Parkinson's, or Crohn's disease. Expansion into the possible treatment of life-threatening diseases like cancer and HIV should prioritize as Tilray seeks to increase its profitability.

Financial consideration

Tilray's revenue/sales per share have increased from $0.17 in December 2016 to $1.67 as of December 2020 (a rise of more than 880% in under five years). In Q4 2020, gross profit for cannabis exceeded that of hemp by close to $6 million. Tilray worked well to reduce costs from a loss of $58.516 million in Q4 2019 to a gross profit of $11.035 million in Q4 2020. Bulk sales of cannabis have had a negative impact on Tilray's revenue, with a net loss of 98% as of December 31, 2020. The decision to discontinue bulk sales and increase cannabis 2.0 products in adult-use has paid off for Tilray. As compared to market leader Nektar Therapeutics (NKTR), with a market cap of $4.49 billion, Tilray's YTD return stands at 228.09% against Nektar’s 47.35%.

Conclusion

Tilray's decision to curtail bulk sales and focus on cannabis flower paid off in decreasing costs and maximizing revenue in Q4 2020. Better absorption of cannabis in Portugal due to GMP integration and cost reduction has also improved Tilray's standing. Tilray’s operational combination with Aphria and other partnerships with medical powerhouses like World Pharma Biotech in Spain are strategic in helping the company access lucrative markets. Many countries are yet to legalize cannabis, giving Tilray a chance to invest in research and development (R&D) to soften these states' conservative stand. At the moment, cannabis is doing better than hemp despite the latter having less THC content.


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