Ready or not, the marijuana industry is budding before our eyes. In the U.S., according to a report from Marijuana Business Daily entitled "Marijuana Business Factbook 2017," U.S. pot sales are expected to grow by 45% this year alone. This is likely a result of California opening its doors to recreational pot sales, as well as from organic growth in the 29 medical-legal and nine recreational-legal U.S. states. By 2021, the report projects that legal sales of weed in the U.S. will have quadrupled to approximately $17 billion since 2016.
As demand for legal cannabis has increased, so have the ambitions of marijuana companies, be they growers or cannabinoid-based drug developers. Some have even begun growing by acquisition.
Just two weeks ago, the largest marijuana acquisition in history was announced, with Aurora Cannabis (NYSE:ACB) agreeing to acquire CanniMed Therapeutics (NASDAQOTH: CMMDF) for a 181% premium over where CanniMed's shares were trading the day before Aurora first made its unsolicited bid in mid-November. The cash and stock deal works out to about $1 billion in value, and it should help push Aurora's annual production capacity, inclusive of its flagship Aurora Sky project, which is slated for completion in mid-2018, above 130,000 kilograms. The deal will also likely lower long-term production costs.
These pot stocks could be takeover candidates
Watching Aurora Cannabis go on the offensive, and seeing a handful of smaller growers scooped up in recent weeks, might be a clue to investors that we're entering a consolidation phase in the pot industry. If that is indeed the case, the following three marijuana stocks may be high-priority buyout candidates.
1. OrganiGram Holdings
One of the most logical takeover candidates following the acquisition of CanniMed is New Brunswick-based OrganiGram Holdings (NASDAQ:OGI).
Recently, OrganiGram completed a bought-deal offering (essentially a sale of common stock or debentures to an investor or institution prior to the release of a prospectus) that'll help fund a major expansion of its only producing facility at Moncton, New Brunswick. Its management team estimates that, once complete, it'll more than double its square footage to 429,000 feet, and increase its annual production to 65,000 kilograms from 20,000 kilograms. This is particularly noteworthy given that Canada appears to be on the verge of legalizing recreational cannabis by this coming July. OrganiGram's 65,000 kilogram annual output is enough to move the needle for bigger growers, but not enough to break the bank for a potential acquirer.
Furthermore, OrganiGram brings two substantial margin advantages to the table that are likely to entice buyers. First, its entire operation will be located at Moncton. Instead of spreading out to new regions, OrganiGram has chosen to minimize its expenditures by keeping all growing at one location. Additionally, it's focused on expanding its product portfolio to include extracts and oils, which are higher-priced but higher-margin products relative to dried cannabis.
OrganiGram could be of quick benefit to a potential acquirer, and thus sits high on my list of possible marijuana takeover targets.
2. Emerald Health Therapeutics
Another pot stock that could be on the radar for aggressively expanding growers is Emerald Health Therapeutics (OTC:EMHT.F). Of course, Emerald Health has ambitions of expanding quickly on its own with the help of two major grow sites.
The first, and what might very well be the flagship project for Emerald Health Therapeutics, is a 50-50 partnership with Village Farms International (NASDAQ:VFF) that'll see a 25-acre, 1.1 million-square-foot facility completely retrofitted to grow dried cannabis. This project, known as Pure Sunfarms, was viewed as a smart move by Emerald Health's management team since Village Farms already had the facility constructed. Retrofitting it, rather than building a new facility from scratch, was the smarter and less costly option. It should be noted that Pure Sunfarms has also optioned an additional 3.7 million square feet of greenhouse space in the same Delta complex in British Columbia.
The second project entails the company building its own 32-acre site from the ground up. When complete, it could claim up to 1 million square feet of growing capacity. However, guidance suggests that an aggregate of over 500,000 square feet of capacity will be ready for growing by the end of 2018.
Like OrganiGram, Emerald Health Therapeutics is also beginning to place more emphasis on higher-margin oils and extracts, too.
Without any major marketing partners, Emerald Health could face a tough uphill battle. However, its ambitious growth plans, highlighted by up to 5.8 million square feet of capacity, could be the perfect hook to lure in a buyer.
3. Cara Therapeutics
Among drug developers, Cara Therapeutics (NASDAQ:CARA) gets my nod as the likeliest buyout candidate. It should be pointed out, though, that while OrganiGram and Emerald Health are pure-play marijuana stocks, Cara is only loosely associated with the industry thanks to a preclinical pain therapeutic, CR701, that's currently being examined by the company. The bulk of its pipeline consists of a kappa opioid receptor agonist known as CR845 that has nothing to do with cannabis. CR845 is targeted at treating pain and pruritus (itching).
Cara was pulverized last year after a pain study involving CR845 mostly missed the mark. The phase 2b study tested three doses (1 mg, 2.5 mg, and 5 mg) of CR845 as a treatment of osteoarthritis (OA) of the hip or knee. Both of the lower doses failed to reach statistical significance, with the only success coming from the 5 mg dose for OA of the hip patients. Since pain is a much larger and more profitable indication than pruritus, this failure was viewed as a big blow for Cara Therapeutics.
Thankfully, a phase 3 study involving IV-administered CR845 in patients with post-operative pain was recommended to continue by an independent data monitoring committee conducting an interim analysis in June 2017. Moreover, CR845 has been successful in clinical studies for patients with chronic kidney disease-associated pruritus. And as icing on the cake, Cara could consider refocusing its efforts solely on OA of the hip in future studies and still salvage some of its sales potential.
All it would really take is one approval and a label expansion or two to put this currently experimental drug on the map, and larger drug developers know it. Though pain is a highly competitive indication, cash-rich drugmakers are looking for ways to put that cash to work. Buying Cara Therapeutics might be one such way.