Aphria Inc (TSX:APHA)(NYSE:APHA) and Aurora Cannabis Inc (TSX:ACB)(NYSE:ACB) have been very active when it comes to international expansion. And now, the two companies will be able to compete head-on in the German cannabis market. The German government selected three companies to grow and distribute medical marijuana in the country. Two of the companies were Aurora and Aphria, who are already rivals in the Canadian market and among the largest in the industry.
Of the 13 lots that were available to be awarded, both Aphria and Aurora captured five of them. Each lot has an annual supply capacity of at least 200 kg, giving each company 1,000 kg a year. For Aurora, the company did especially well as the concept that it submitted for the German market received the highest marks. A total of 79 companies submitted bids.
Having the highest rated concept is a strong validation of the Aurora Standard cultivation philosophy, as well as of our track record in the delivery of safe and high-quality medical cannabis products to the German system
– Neil Belot, Chief Global Business Development Officer of Aurora Cannabis
A Big Win for Both Companies
Winning a bid with a government is always going to help add credibility to a company. Aurora and Aphria have both been very focused on the medical marijuana market and getting a vote of confidence from a major European country will help with further any expansion efforts. Especially when it comes to medical marijuana where safety is a big concern for patients, having a proven track record and the trust of high-ranking officials and countries will go a long way in gaining more customers.
What Does This Mean for Investors?
With Aurora up just 3% in trading on Friday and Aphria rising by 1%, it’s clear that investors weren’t really all that excited about the news, and rightfully so. While the German market might be a big one in Europe, it’s still a fairly small one overall.
According to Brightfield Group, the medical marijuana market in Germany was estimated at $73 million this past year. By 2023, that number is expected to rise to $2.7 billion.
If we look at the big picture then certainly we can say there’s a lot more value here than just the immediate revenue that can be achieved. Longer term, there could be significantly more growth to be attained not only in Germany but in other parts of Europe and the world, thanks to deals like this and early expansion. And with more than 80 million people, Germany is significantly bigger than Canada. The question, however, is whether its marijuana market will be bigger.
One area for concern, however, is that winning the bid could encourage Aurora and Aphria to be more aggressive in their approach to international expansion, which I’m not convinced is the right strategy today. There are significant costs that come along with expanding and clearly not a lot of revenue to be gained if the German market is any indication. The net effect could be a whole lot more losses being incurred by companies that are already struggling to stay out of the red.