Canadian pot producer Aurora Cannabis Inc. (NYSE:ACB) said on Thursday it had won a two-year contract to supply 400 kilograms of medical marijuana to Italy.
The Edmonton-based company will supply medical cannabis through its German subsidiary Aurora Deutschland to the Italian government, which regulates one of the strictest medical marijuana programs in the world.
Aurora said the supply contract is expected to begin in September and the cannabis will come from its EU GMP certified facilities. Five companies competed in total for the contract including Canopy Growth Corp. (TSX:WEED)(NYSE:CGC), but Aurora was the only producer that properly filed all the required paperwork in time.
The Italian market for medical cannabis was the second-largest in Europe in 2018, with sales reaching around 600 kilograms.
Aurora is not new to Italy, as the company also had secured the first tender to the country in January 2018, and it said it will continue supplying the Italians according to the contract.
Italian contract might be costly for Aurora
Winning the medical cannabis contract to supply Italy may reinforce the fact that Aurora is becoming a more reliable supplier to reach new global markets.
But MJBizDaily reports securing the bid may actually hurt Aurora’s bottom line. The cannabis-focused media outlet said the price of pot per gram in Aurora’s Italian contract is slightly above the actual cost of cultivating the cannabis, according to the company’s most recent earning reports.
The average price Aurora offered is 1.73 euros, or $2.54 in Canadian dollars, per gram of dried cannabis. However, the Alberta pot producer reported in its latest quarterly earnings it cost the company CAD$2.05 of sales per gram.
And because that average includes production from Aurora’s non-GMP growing facilities, which is cheaper to produce, it’s likely to believe that the GMP-produced cannabis it will be shipping to Italy will have a higher cost of sale per gram than the company’s average reported price per its latest quarterly report.
What also makes Aurora’s offer price even more of a head-scratcher is it was less than half the Italian’s tender reference prices.
But even if Aurora barely sees a profit with its Italian contract, or even reaches break even, being able to sell into the country’s medical market will give the licensed producer a first-mover advantage inside the EU nation if it decides to eventually legalize adult-use.
“We’re committed to building a successful, long-term medical cannabis market in Italy,” said Neil Belot, Aurora’s chief global business development officer, in a release.
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.
Aurora’s also heading outdoors
This week Aurora also announced it was awarded Health Canada outdoor growing licences for two sites in B.C. and Quebec.
Although the company will use the rest of the growing season to for cultivation research to develop new technology and improve genetics, it may eventually help it produce cannabis at a lower cost per gram as experts expect outdoor cultivation to help companies compete with the black market by offering more competitive prices.
As the cannabis industry evolves, institutional investors, analysts and large companies are getting involved and want to see companies focus more on fiscal responsibility and eventually profits.
Outdoor growing can help a cannabis company lower its costs and increase margins and move it closer to reaching profitability. It may be something else investors will start taking note as the legal market evolves in U.S. and Canada.
