canada leads the global cannabis paradigm shiftfishn.ca/invest/58341.pdf · resources to invest in...

May 2018

This report was prepared by an analyst(s) employed by BMO Nesbitt Burns Inc., and who is (are) not registered as a research analyst(s) under FINRA rules. For disclosure statements, including Analyst’s Certification, please refer to pages 50 to 53. 16:00 ET~

This report is intended for Canadian & EU distribution only. Unauthorized reproduction, transmission orpublication without the prior written consent of BMO Capital Markets is strictly prohibited.

Tamy Chen, CFACannabis Analyst BMO Nesbitt Burns Inc.(416) [email protected]

Peter Sklar, CPA, CARetailing/Consumer Analyst BMO Nesbitt Burns Inc.(416) [email protected]

Initiating Aphria and Canopy at Outperform

Canada Leads the Global Cannabis Paradigm Shift

Table of Contents

Initiating BMO Cannabis Coverage ................................................................................................................... 2

Executive Summary .......................................................................................................................................... 4

Legal Environment Favours Canadian LPs ........................................................................................................ 6

Initial Recreational Market Outlook ................................................................................................................. 7

Current Medical Market in Canada: Opaque .................................................................................................. 13

Near-Term International Medical Opportunity: Germany ............................................................................. 15

Long-Term Industry Outlook ........................................................................................................................... 16

Company Snapshot: Our Current Coverage Universe ..................................................................................... 24

Company Coverage: Aphria ............................................................................................................................ 25

Company Coverage: Canopy ........................................................................................................................... 35

Comparable Companies - Cannabis ................................................................................................................ 46

Comparable Companies – Alcohol & Tobacco ................................................................................................ 47

Glossary ........................................................................................................................................................... 48

Cannabis | Page 1 May 28, 2018This

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Initiating BMO Cannabis Coverage

Aphria: We are initiating coverage of Aphria (APH-TSX) with an Outperform rating.

First Mover Advantage: We believe Aphria will be one of the few licensed producers (LPs) with sufficient

product to supply the initial recreational demand and we believe such a “first mover” advantage should

enable the company to quickly capture significant share and generate attractive unit economics in an

undersupplied market.

Leading Low-Cost Producer: We believe Aphria could emerge as a leading low-cost cannabis producer

given the significant commercial-scale greenhouse cultivation expertise held by the management team,

and the infrastructure and greenhouse culture that is inherent in the Leamington, Ontario community.

Scale Is Critical to Long-Term Growth: We believe Aphria’s scale will facilitate meaningful investment in

long-term growth opportunities such as brand development, value-add format manufacturing, the

gradual legalization of international medical markets, and advanced pharmaceutical applications.

Valuation: Our target price of $17 is based on a projected enterprise value that is about 17x our Base

Case fiscal 2020 EBITDA estimate. We note that our Base Case fiscal 2020 EBITDA estimate assumes that

Aphria’s facility expansions are only at 65% of full ramp potential versus management’s expectation

that the facilities will be close to 100% ramp by that time. If these facilities were to reach full ramp by

fiscal 2020 and Aphria experiences firmer selling prices, our implied target multiple would be in the

high-single-digit range. See Aphria company section for details.

Canopy: We are initiating coverage of Canopy (WEED-TSX) with an Outperform rating.

First Mover Advantage: We believe Canopy will be one of the few LPs with sufficient product to supply

the initial recreational demand and we believe such a “first mover” advantage should enable the

company to quickly capture significant share and generate attractive unit economics in an undersupplied

market.

Head Start in International: We consider the company’s current international operations to be more

advanced versus most other players, and Canopy appears to be laying the groundwork in markets where

medical is not yet legalized, but may soon be. The approach to develop cultivation in “hub” regions like

Denmark for export to Germany and eventually Australia for export to the Asia-Pacific region provides

the company longer-term access to these markets.

Long-Term Global Branded Leader: Canopy could emerge as a leader over the long term given that the

company’s scale will facilitate meaningful investment in long-term growth opportunities such as brand

development, value-add format manufacturing, the gradual legalization of international medical

markets, and advanced pharmaceutical applications. We believe Canopy’s strategic alliance with

Constellation Brands (STZ-NYSE; US$216.81; Outperform rated by Amit Sharma, BMO Capital Markets

Corp.) could prove to be a significant advantage as the industry evolves into value-add formats, and

particularly, into cannabis-infused beverages.

Valuation: Our target price of $45 is based on a projected enterprise value that is about 20x our Base

Case fiscal 2020 EBITDA estimate. Our target multiple reflects our view that Canopy has a relative head

start in brand development and international expansion, and could emerge as a leading global-branded

company in the long term. We note that our Base Case fiscal 2020 EBITDA estimate assumes that

Canopy’s facility expansions are only at 65% of full ramp potential versus management’s expectation

that the facilities will be close to 100% ramp by that time. If these facilities were to reach full ramp by

fiscal 2020 and Canopy experiences firmer selling prices, our implied target multiple would be 11x. See

Canopy company section for details.


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https://bmo.bluematrix.com/sellside/DocViewer?encrypt=d8c9e5e7-fb06-42b9-a86e-a395784163fb&mime=PDF

https://bmo.bluematrix.com/sellside/DocViewer?encrypt=8031294e-3969-4d94-9ca5-856ee0b30052&mime=PDF

Relative Positioning

• Potential to gain “first

mover” advantage in

initial recreational

market

• Scale should facilitate

meaningful investment

in long-term

opportunities

• Could emerge as a large,

branded player

• Strategic alliance with

Constellation Brands could prove

to be a significant advantage as

the industry evolves into value-

add formats

• Current international operations

appear more advanced versus

other LPs; strategy to develop

cultivation hubs abroad for

international export could

provide longer-term market

access

• Could emerge as a leading low-

cost contract cultivator

• Continues to establish strategic

relationships in international

markets, but appears slightly

behind compared to Canopy

• Supply agreement with

Shoppers Drug Mart broadens

medical distribution reach

• Pressure on the stock following

controversy with Nuuvera

acquisition, resulting in lower

valuation vs. other LPs and

provides better return

opportunity

Source: BMO Capital Markets.

Canopy Growth Aphria


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d.

Executive Summary

Near-Term Outlook

First Mover Advantage for Larger LPs: Initially, demand/supply dynamics will favour the larger

LPs. Anticipated demand from the initial recreational market in Canada is expected to

considerably exceed industry production as only a handful of the larger LPs will have sufficient

cannabis output at that time to meaningfully fill the distribution channels. As a result, this “first

mover” advantage should enable the larger LPs to benefit from the favourable pricing

dynamics expected in an initially undersupplied market. See Exhibit 3.

In addition, this “first mover” advantage should enable the larger LPs to initially dominate

retail shelf space in the recreational market, which would provide a head start for brand

development.

Value-Add Formats Will Mitigate Dried Flower Price Compression: We anticipate in year two of

our forecast that supply will begin to catch up to demand, which will result in some pricing

pressure on dried flower. However, our Base Case projections anticipate that in year two,

federal regulators will begin legalizing value-add product formats, which should carry much

higher pricing on a grams-equivalent basis and mitigate the pricing pressure that arises in

dried flower (see Exhibits 3 and 4).

Our Base Case forecast assumes that the industry growth rate for medical patient acquisition

slows when the recreational market is legalized. Some existing medical patients, and potential

future patients, could prefer the recreational market when legalized. However, this may be

more than offset if more employers begin to include medicinal cannabis under insurance

coverage plans.

Near-Term International Opportunity Favours Larger LPs: For the international export

opportunity, we expect that only a handful of the larger LPs will be able to secure the licensing

and certification requirements, and develop the necessary distribution infrastructure in those

regions.

Longer-Term Outlook

Supply Catches Up in Year Two of Recreational Legalization: We project that dried flower supply

will begin to catch up with demand in year two, and potentially exceed demand in the third or

fourth year following recreational legalization in Canada.

It is not clear if this projected supply/demand imbalance will weigh on the cannabis prices

realized by the LPs as there will be the opportunity to export increasing volumes of medical

cannabis to international markets, and the introduction of additional value-add product formats

should provide higher pricing to compensate for price compression in dried flower.

Evolution Into Either Branded Players or Low-Cost Cultivators: As dried flower prices continue to

settle, we believe the Canadian market will rationalize into a handful of larger, branded

players and a handful of low-cost contract cultivators. Beyond the branded companies and low-

cost contract growers, it is not clear to us how the many other LPs, outside of niche brands,

will survive under this pricing environment.


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Near-Term International Export Opportunity Is Temporary: We believe the current international

opportunity for Canadian LPs, which is the ability to export products into other markets at

favourable economics, will prove to be transitory. As a result, we believe the long-term global

opportunity for Canadian LPs is developing intellectual property and brands.

Long-Term Medical Market Opportunity in Pharmaceutical Applications: We believe the

distribution model for medical cannabis in Canada will eventually expand beyond the current

channel of direct-to-patient. In addition, we consider that Canadian LPs could eventually be in

a position to make efficacy claims that are supported by clinical trials. At that point, medical

cannabis could qualify for a Drug Identification Number, which we believe would be a

significant catalyst to accelerate growth of the medical market.

Scale Is Critical to Long-Term Growth: Over the long term, we anticipate that only a handful of

LPs will be attributed a premium valuation. These long-term industry leaders will be those that

capture sizable shares of the near-term recreational market, and possess the scale and

resources to invest in the long-term opportunities such as brand development, value-add

format manufacturing, the gradual legalization of international medical markets, and advanced

pharmaceutical applications.

It is also possible that these LPs could ultimately be acquired by large CPG players in the

beverage and tobacco industries or pharmaceutical companies given the potential disruption

cannabis-infused products could present.

The Blue Sky Scenario Beyond Our Forecasts: An additional long-term upside would be if other

jurisdictions consider recreational legalization, and we understand that Malta is currently

drafting legislation to legalize recreational use. If Malta establishes and implements a

framework legalizing the recreational market, we believe this could set a precedent that

encourages potential recreational legalization in other European countries. Under such a

scenario, Canadian LPs would have to establish cultivation in those markets in order to

participate as UN treaties prevent international trade of cannabis for non-medical purposes.


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d.

Legal Environment Favours Canadian LPs

In Canada, medical cannabis was legalized in 2001, following court decisions, with the Marihuana

Medical Access Regulations (MMAR). Under this framework, approved individuals could grow cannabis or

appoint a designated person to grow for them. The MMAR framework was replaced by the Marihuana

for Medical Purposes Regulation (MMPR), which only permitted Health Canada approved commercial

licensed producers (LPs) to grow cannabis. Following a court ruling in 2016, the MMPR was replaced by

the Access to Cannabis for Medical Purposes Regulation (ACMPR), which is the current regulation

governing Canada’s medical market. The ACMPR framework allows patients to either purchase medical

cannabis from LPs or grow a limited amount on their own.

Following the election of the Trudeau government in 2015 and the report of the McLellan Task Force on

Legalization in December 2016, Bill C-45 was drafted as the proposed regulatory framework to legalize

recreational cannabis. On June 7, 2018, the Senate is scheduled to hold a final vote on Bill C-45.

However, there are a number of issues that could delay legalization. Provincial governments will receive

a period of eight to twelve weeks following the effective date of Bill C-45 in order to secure supply and

establish retail locations. In addition, some members of the Senate are recommending the federal

government delay Bill C-45 for up to a year to address concerns related to Indigenous communities,

although Prime Minister Trudeau has indicated that there will be no delay. We believe it is unlikely that

the recreational market will be legalized before the fall.

In the U.S., cannabis is considered by the federal government as a Schedule 1 narcotic, although several

states have legalized medical and recreational use. This federal-state conflict exists, in part, as a result

of the Ogden and Cole memoranda issued by the U.S. Department of Justice during the Obama

administration that deprioritized enforcement of the U.S. federal cannabis prohibition in certain

instances. These memoranda were rescinded pursuant to a memorandum issued by Attorney General

Jeff Sessions on January 4, 2018. As a result of the federal status of cannabis, U.S. cannabis companies in

legalized states are unable to supply international markets.

The international flow of cannabis, which is considered a controlled substance, is governed by three

United Nations treaties, and only permitted for medical purposes by countries with a legal federal

framework. Several countries have legalized medical cannabis, including Germany, Denmark,

Netherlands, Italy, and Australia, and more countries are expected to progress towards medical

legalization over the next several years. However, we note that Canada is the only developed country

with a comprehensive regulatory framework, permitting both medical consumption and domestic

cultivation. The lack of domestic production in many countries with legalized medical use has created

the opportunity for Canadian LPs to supply international markets.

Sizing Up the Industry in Canada

No. of Licenses1 104

Industry production in 20171 81k kg

Industry revenue in 20171 $239 mm

Prices in medical market4 $8 to $9 / g

Prices in illicit market4 $7 to $9 / g

Avg. annual yield for indoor3 100 to 300 g / sq. ft. / yr.

Avg. annual yield for greenhouse3 60 to 120 g / sq. ft. / yr.

Cost of production5 $1 to $2 / g

Note (1): Statistics Canada.

Note (2): Deloitte.

Note (3): BMO Capital Markets.

Note (4): Statistics Canada, company filings.

Note (5): Company filings. Excludes shipping & packaging.


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d.

Exhibit 1: Top 10 Publicly Traded Companies (by Market Capitalization)

Note: BMO Capital Markets is restricted on Aurora Cannabis

Initial Recreational Market Outlook

We believe initial demand in the legal recreational market will likely be below many industry estimates.

This is based on our view that several factors will initially temper the level of illicit market displacement

(see Exhibit 2 below). For example, several provinces are only establishing a modest number of retail

stores in the first year of legalization, and it is not clear to us how prevalent e-commerce sales will be

initially. In addition, we are concerned that many of these stores will be situated in locations that are

too far from convenient urban centres (i.e., Ontario’s first four sites). Finally, we note that initial

recreational legalization will only permit three product formats: dried flower, oils, and gel capsules,

which is relatively limited compared to the breadth of categories available in the illicit market.

We believe meaningful displacement of the illicit market will take several years, but over the long term,

we expect consumers will participate in the recreational market due to the legality, safety, and

convenience of product formats that will be offered.

Exhibit 2: Key Factors Influencing Illicit Market Conversion


Company Ticker

Market Cap.

C$ mm Overview

Canopy Growth WEED $8,697 Facilities across Canada and a portfolio of medical and recreational targeted brands.

Aurora Cannabis ACB $4,793Constructing three hybrid facilities in Alberta and Northern Europe.

Announced acquisition of MedReleaf.

Aphria APH $3,198 Operating greenhouses in Leamington, focused on becoming a leading low cost producer.

MedReleaf LEAF $2,809 A premium-branded medical supplier. Announced it will be acquired by Aurora.

Cronos CRON $1,673 Indoor facilities in Ontario, recently established facility in Israel.

Hydropothecary THCX $1,179 Quebec-based, signed 5-yr Quebec supply agreement.

The Green Organic Dutchman TGOD $1,040Early-stage. Developing first facility to grow organic cannabis.

Signed uptake agreement with Aurora.

CannTrust TRST $877 Licensed producer. A leading player in the medical market.

Organigram OGI $788 NB-based, has a partnership with Colorado-based The Green Solution.

Cannabis Wheaton CBW $716Cannabis investment company.

Provides LPs with resources in exchange for financial or product uptake.

Source: BMO Capital Markets, company filings, FactSet.

The uptake in demand from existing illicit market users could be lower than expected if:

-There is an insufficient number of stores initially

-Stores are in inconvenient locations (such as the first four sites in Ontario)

-Other formats in the illicit market (edibles, concentrates) will not be permitted initially

-If retail prices are not competitive with the illicit market

Slower illicit market displacement could be countered by:

-New users who did not want to participate in the illicit market

-The migration of some medical patients whose underlying use was recreational


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d.

We have developed three forecast scenarios for initial recreational market demand: Base, Upside, and

Downside cases. Our demand forecast is based on detailed assumptions and demographic data

regarding the size of the illicit market by province (as provided by StatsCan). For year one of recreational

legalization, our Base, Upside, and Downside scenarios assume 40%, 50%, and 20% illicit market

displacement to the legal market, respectively. In year two, our Base, Upside, and Downside scenarios

assume 60%, 80%, and 35% illicit market displacement, respectively. We have made assumptions

regarding the frequency of cannabis occasions and typical per-occasion cannabis consumption levels

based on a number of factors, including the type of user (existing illicit market user versus new

participant) and the scenario we are considering (Base, Upside, and Downside). For example, in year

two of recreational legalization, for a user displaced from the illicit market, we are assuming two and a

half occasions per week and one gram per occasion on average. See Exhibit 3 below.

Exhibit 3: BMO’s Forecast of Initial Recreational & Ongoing Medical Demand


Despite Our Conservative Demand Outlook, We Still Expect a Supply Shortage in the Near Term

We note there is significant execution risk across the industry as LPs have never cultivated cannabis on a

mass commercial scale. We understand that all the phases of the cultivation process cannot be initiated

in a new facility at the same time and that there is a natural ramp schedule that will take at least a

number of months before the entire facility is up and running. In addition, based on our recent visits to

most of the larger Canadian LPs’ facilities, we have determined that ramping an indoor or greenhouse

(see Glossary for definitions) cultivation facility is a highly sophisticated process. Areas of complexity

include securing the genetics and appropriate soils and fertilizers, developing a suitable nutrient and

water delivery system, establishing a robust climate (heat, lighting, humidity, carbon dioxide, etc.) to

optimize the plant’s development, and processing the plant materials post-harvest (drying, trimming, oil

extraction). At the same time, these environments are highly susceptible to contamination from mould,

Year 1 of Rec. Legalization Year 2 of Rec. Legalization

Base Upside Downside Base Upside Downside

Medical Market in Canada

# of Patients 325,000 350,000 250,000 375,000 390,000 300,000

Avg. Grams per Patient per yr. 240 240 240 240 240 240

Annual Demand (kg) 78,000 84,000 60,000 90,000 93,600 72,000

vs. Current

# of Patients 269,502

Volume Sold in Apr. to Dec. 2017 (kg) 41,280

Recreational Market in Canada

Est. Illicit Market Users in Canada (mm) 5.6 5.6 5.6 5.6 5.6 5.6

Illicit Market Displacement140% 50% 20% 60% 80% 35%

Est. New Market Participants in Canada (mm) 0.8 1.4 0.3 1.4 2.0 0.8

Total Participants in Legal Market (mm) 3.1 4.2 1.4 4.8 6.5 2.8

Annual Demand (kg)2259,402 477,278 95,456 477,278 749,085 185,247

Vs. Deloitte Forecast (kg) 600,000

Vs. Govt of Canada Forecast (kg) 378,000 to 1,000,000

Total Canadian Demand (kg) 337,402 561,278 155,456 567,278 842,685 257,247

BMO's Production Outlook - Base Case

"Big Three" (kg)3~125,000 ~540,000

We believe the other 100+ LPs will contribute minimal production in year one and a modest amount in year two.

Pricing Scenarios

Oversupply of Dried Flower? No No No No No Yes

More Product Formats Legal? No No No Yes Yes No

New Formats Share of Market Modest Modest None

Flower + Oil Share of Market Majority Majority All

Net Effect on Pricing from Year 1 - - -

Blended Wholesale Price for LPs ($/g)4$4.50 - 4.75 $5.00 $4.00 - 4.40 $5.50 $6.00 $4.00 - 4.40


Note (1): The percentage of the illicit market that will transition to the legal market.

Note (2): See section immediately preceding this chart for details regarding usage assumptions for participants.

Note (3): Aphria, Aurora and Canopy. Assumes MedReleaf is acquired by Aurora.

Note (4): See Exhibit 4 following.


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mildew, and bugs. As a result, we believe the majority of LPs, many of which are still developing their

facilities or waiting for licenses, will not have the inventory or production capacity to meaningfully

supply the initial recreational market.

Notwithstanding that our projection for demand is lower than other industry expectations, we would

expect that provincial governments will seek to fill the retail channel with a meaningful inventory level,

and on balance, we believe the initial recreational market will experience a supply shortage. We are

also concerned that some LPs that have been awarded supply contracts could experience difficulties

meeting their supply obligations in the near term. As a result, our view anticipates that the select few

LPs with sufficient inventory will be able to sell all that they can produce in the near term.

After the initial fulfillment of the provincial retail channels, our industry supply and demand outlook for

both medical and recreational markets indicate that total domestic demand will still exceed industry

supply in the second year post recreational legalization. As a result, we believe the LPs should be able to

continue to sell all that they can produce and pricing should be firm. We anticipate in year two of our

forecast that industry supply will begin to catch up to demand, which will result in some pricing pressure

on dried flower. However, our Base Case projections anticipate that federal regulators will begin to

legalize expanded product formats, such as vape pens, edibles, and beverages, which should carry much

higher pricing on a grams-equivalent basis. As a result, our Base Case scenario projects that blended

pricing per gram for the LPs will improve modestly in the second year of our forecast period (see Exhibit

4 below).

Exhibit 4: Product Mix on Blended Pricing

Provincial & Territorial Supply Contracts Are Critical to Participate in the Recreational Market

Overseeing the distribution of recreational cannabis will be the responsibility of the provincial/territorial

governments. Most provincial/territorial governments will purchase cannabis from LPs on a wholesale

basis to distribute into the retail channel, which includes both e-commerce and physical stores. As a

result of this regulated supply chain, securing provincial/territorial supply contracts will be critical for LPs

to access recreational markets.

We understand that there will be two typical avenues for LPs to access the provinces/territories: either

with a direct supply agreement with the province/territory, or by wholesaling to another LP that has a

provincial/territorial supply contract. We would assume that wholesaling to another LP generates lower

economics relative to a direct supply agreement, but we believe the majority of LPs will ultimately need

to wholesale to other LPs in order to participate in the provinces’/territories’ recreational markets. This

is based on our view that in the near term, provincial/territorial governments are primarily focused on

securing sufficient inventory and scope of product offerings to meet initial demand, a criterion that

should favour the larger LPs. We also believe the contractual wholesale price in these

provincial/territorial supply agreements could vary among the signed LPs as we understand that pricing

is determined through a negotiated process.

Dried

Flower

Oil & Gel

Capsules

Other Value-add

Formats Blended

Year 1 of Rec. Legalization

% of Market 90% 10% Not Legal 100%

Est. Wholesale Price (per gram) $4.50 $6.00 Not Legal $4.65

BMO Base Case from Exhibit 3 $4.50 - 4.75

Year 2 of Rec. Legalization

% of Market 70% 20% 10% 100%

Est. Wholesale Price (per gram) $4.00 $6.00 $15.00 $5.50

BMO Base Case from Exhibit 3 $5.50



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d.

Certain regional LPs could also be well positioned to secure direct supply agreements in their home

province/territory as a result of the economic development created from their operations. However,

these regional LPs may be challenged to secure direct supply contracts in other provinces/territories,

which would limit their ability to grow on a national scale. The announced LP suppliers for Quebec,

Newfoundland & Labrador, New Brunswick, Prince Edward Island (PEI), and Yukon appear to support our

view that the LPs best positioned to secure direct supply agreements with the remaining

provinces/territories are likely to be the ones that can demonstrate an ability to supply a significant

amount of volume and/or are contributing to economic development in that province/territory. See

Exhibit 5 following.

The largest recreational markets should be Ontario and Quebec given the significant population in these

two provinces. However, we believe the opportunity to access the Quebec market through a direct

supply contract is now unavailable over the next few years for LPs other than the six that have entered

into agreements with the province: Aphria, Aurora (Restricted), Canopy, Hydropothecary, MedReleaf,

and Tilray. Only Hydropothecary has disclosed additional details of its supply agreement (see Exhibit 6

following). We also note that only Hydropothecary has a five-year contractual term to supply the

province, with an optional sixth year renewal at the government’s discretion.

Exhibit 5: Hydropothecary’s Expected Economics in Quebec

Unlike other provinces, the Ontario Cannabis Store (OCS) will secure supply through periodic product

calls, whereby the OCS will select LPs to purchase SKUs under contractual terms. On April 11, the OCS

announced the commencement of its first product call process. Selected LPs will be eligible to

participate in the OCS’s product calls over a contractual two-year term, but the OCS will not make any

volume commitments. Pricing will be set at a predetermined amount for the term.

Term 5-year

Frequency of purchases 4 orders / year

Product Offering Full range1

SKUs 63 initially

Expected Product Mix - initial 80% flower

Expected Product Mix - Later 30% flower

Per Gram Economics

Wholesale price2 $5.40

Less excise tax (1.00)

Revenue to Hydropothecary $4.40

All-in Cost - now $2.60 Margin

Est. EBITDA - now $1.80 41%

All-in-Cost - mgmt's outlook $2.00

Est. EBITDA - mgmt's outlook $2.40 55%

Source: Company press release.

Note (1): Dried flower, oils, Elixir spray product, capsules.

Note (2): Weighted average by product mix. Pricing could

change in later years depending on demand.


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Exhibit 6: Supply Chain for Recreational Market by Province/Territory

Source: Government websites. Note: BMO Capital Markets is restricted on Aurora Cannabis

Distribution

Announced Suppliers

Retail

Online

Stores

New Brunswick Nova Scotia PEI Yukon North West Nunavut

Govt (NB Liquor) Govt (NSLC) Govt (PEI LCC) Govt. Govt. Only NWTLC. No info yet.

Aphria, Canopy,

Hydropothecary,

Organigram (NB-based),

Zenabis (NB-based)

None announced

Canada's Island Garden

(PEI-based), Canopy,

Organigram

Canopy, Tilray None announced None announced

Govt. Govt. Govt. Govt. Govt. Will have online platform.

Govt. All 20 initial

locations have been

announced.

Govt. Allow co-location

with alcohol. 9 sites in

urban hubs announced.

More stores possible in

future.

Govt. 4 sites only.

At least 1 govt-run

location. May allow

private.

Govt. Initially inside

existing liquor stores.

Stand-alone stores are

possible in the future.

Govt and private. No

physical stores expected

in 2018.

British Columbia Alberta Manitoba Saskatchewan Ontario Quebec Newfoundland

Distribution Govt (BC LDB) Govt (AGLC) Govt (LGA)Private. Regulated by

govt (SLGA).

Govt (OCS) via product

calls.Govt (SAQ)

Private. LPs will sell

directly to stores.

Announced Suppliers None announced None announced None announced None announcedFirst product call

process under way

Aphria, Aurora, Canopy,

Hydropothecary (QC-

based), MedReleaf,

Tilray

Canopy

Retail

Online Govt. Govt. Private. Private.Govt. Partnered with

Shopify.Govt. Govt.

Stores

Govt and private.

Unlimited private

licenses.

Private. 250 licenses

expected in the first

year.

Private.

Private. Licenses issued

lottery-style. Only 51

licenses in 32

municipalities, which can

opt-out (5 have).

Govt. 150 stores by

2020. 40 openings in

2018, 40 in 2019.

Announced first 4

locations.

Govt. Initially 15 stores.Private. Announced 41

licenses.


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d.

Read-Throughs From Quebec and Ontario Supply Arrangements

In the near term, we believe the retail price (pre-HST) for dried flower will generally range

between $7 and $9 per gram and the wholesale price to LPs will range between $4 and $5 per

gram.

We believe the provinces will need to make several significant adjustments over the near term

in the quantity and type of products they purchase as they develop a better understanding of

consumer preferences as a result of actual point-of-sale purchases. This presents a risk to LPs if

demand for their product SKUs is materially lower than anticipated.

Who Will Win in the Near Term? Will Branding Help?

Heading into the recreational market, we note that the strategy being adopted by most LPs is to

establish brands through “lifestyle” associations to experiences such as the outdoors, health and

wellness, music, art, or to specific celebrities. There is a view among LPs that branding, particularly if

communicated to consumers before legalization, will create brand recognition and encourage in-store

purchase when the market is legal.

However, we believe federal regulations will restrict the marketing reach of products intended for the

recreational market. For example, we note that MedReleaf cancelled the Quebec launch of its San Rafael

’71 brand in April 2018 following concerns from the provincial government that the brand’s lifestyle

positioning may be in violation of proposed Bill C-45 regulations. In addition, recent proposals from

Health Canada, if enforced, would materially impair the LPs’ ability to convey their brand in-store via

packaging (see Exhibit 7 below). Finally, federal regulations will limit the ability to advertise brands via

various media platforms.

Exhibit 7: Health Canada’s Proposed Packaging Format

If there is limited product packaging differentiation in-store and limitations on marketing initially,

having more shelf space may be the key driver to gaining a greater share of the initial demand and to

establish a head start in brand development. As a result, we believe the LPs that have adequate

inventory and production will be best positioned to generate significant revenue and earnings by

participating in an undersupplied market at favourable unit economics. There would be further potential

upside for these LPs if others are unable to meet the volume commitments stated in their

provincial/territorial supply agreements.

Source: Health Canada.


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d.

It is also likely that restrictions on marketing and packaging could cause a large portion of consumers to

simply seek the highest-potency strains (i.e., high in THC and/or CBD). In this scenario, LPs with more

product offerings in high-potency strains could be better positioned to capture more demand. If

Canadian consumers focus on specific strains, the recreational market will be comparable to Colorado,

where dried flower branding is at the strain level and differentiation is based on qualities of that strain,

including efficacy, potency, and consistency. We note that popular strains in those states are able to

command premium pricing. If differentiation in the Canadian recreational market is based on strains, it

could undermine the branding strategies of many LPs.

On the other hand, there is a view that strain-level branding is unique to Colorado due to the state’s

fragmented landscape of regional producers specializing in specific strains and regulations that facilitate

a “deli-style” retail environment. Dried flower is not pre-packaged and instead, is placed in containers

for customers to purchase, much like a deli counter. In Washington, where dried flower is pre-packaged,

there are company-level brands, similar to ones being developed by Canadian LPs. As well, we believe

strain-level branding will become less relevant as value-add products with cannabis extracts, such as

vape pens and consumables, are introduced.

Branding Power May Be Limited In-Store; Can Budtenders Bridge the Gap?

While brands could develop consumer awareness and influence in-store purchasing, we believe

branding power may be limited if it is not communicated or promoted by the in-store sales staff (also

known as budtenders). When we visited cannabis dispensaries in Denver and LA, we found that

budtenders play a crucial role in consumer education and product recommendations, which are based on

personal experiences and third-party user feedback.

Specific to Canada, where packaging designs could be limited and consumers may be focused on specific

strains, it would be the budtender’s role to differentiate the products, and in particular, highlight the

variances of otherwise genetically similar strains grown by different LPs. We note that several LPs could

be cultivating the same strain for the recreational market and while the strain’s core genetic profile is

the same, qualities such as potency, efficacy, and consistency may differ as a result of the particularly

environment it is grown in (also known as the plant’s phenotype).

We are concerned that initially, budtenders may not have sufficient knowledge to effectively

communicate the differences between products and segment them based on perceived quality. In

addition, we believe there is a risk that provinces/territories could limit the channels in which LPs can

establish partnerships with the sales staff. For example, we understand that Ontario’s regulations will

prohibit budtenders from making brand recommendations, although they will be permitted to provide

factual information about the product such as the terpene profile and potency level. As a result of the

restrictive regulations on marketing, branding, and budtenders, we believe the initial successful LPs will

be companies with sufficient products to fill the retail channel and maximize shelf space.

Current Medical Market in Canada: Opaque

According to Statistics Canada, there are currently 269,500 registered medical cannabis patients in the

country. A widely disclosed metric by LPs is the number of patients they have onboarded as there is a

perception that the number of patients registered with an LP is indicative of the company’s share of the

Canadian medical market. However, we believe this metric alone is a misleading measure for market

share as patients can register with more than one LP, a patient may be registered with the LP but not

actively ordering products, or a LP could have fewer registered patients but higher average consumption

per patient. In addition, we believe there is currently no standardized definition of an “active” patient.


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d.

As a result, we believe it is important to consider the volume sold, reported revenues, number of

registered patients, and implied average consumption per patient (see Exhibit 8 below).

Exhibit 8: Key Publicly Traded Players in the Canadian Medical Cannabis Market


We find the current Canadian medical market to be opaque with respect to patient acquisition and

churn. Physicians can either directly prescribe their patients for medical cannabis or refer them to a

cannabis clinic. In the former, the physician will prescribe a specific dosage, and can also provide product

recommendations. Alternatively, the physician can refer the patient to a cannabis clinic where the

patient can access further information about which products would be most suitable for their needs.

We understand that both prescribing physicians and cannabis clinics are typically receiving “education

fees” from LPs. This may prove to be an inappropriate payment that will eventually be addressed by

medical regulators. The challenge in assessing the prevalence of this fee is the lack of disclosure,

including the amount typically charged by clinics and physicians. Our view is that since cannabis is closer

to an alternative natural health product than a pharmaceutical drug and has no clinical trials, the primary

channel for LPs to acquire patients is to encourage physicians through strategic partnerships and

cannabis clinics. As a result, we believe these education fees likely represent significant patient

acquisition costs for LPs and we have heard anecdotally that they can represent about 15% of the LP’s

selling price.

We also consider churn to be a key metric in assessing the competitive dynamics of the medical market.

However, there is a lack of disclosure by LPs on this measure and any approximation is challenged by

the continued growth in the overall Canadian medical market. Based on our understanding of the

industry, we believe churn could be quite high as cannabis products have a wide range of efficacy

depending on the individual, and it is likely that patients are trialing numerous LPs’ products to

determine the best one(s) for their needs.

Supply & Demand in the Medical Market When Recreational Is Legal

We believe there could be some material changes in both the level of supply and demand in the

medical market when the recreational market is legalized. Some existing patients, and potential future

patients, could prefer the recreational market given that the latter provides relatively easier access to

cannabis than the medical prescription process. However, this may be more than offset if more

employers begin to include medicinal cannabis under insurance coverage plans. In addition, medical

expenses are tax deductible above a certain threshold. Overall, our Base Case forecast assumes that the

industry growth rate for medical patient acquisition slows when the recreational market is legalized. On

the supply side, we believe there will likely be a tighter market for medical cannabis in the near term as

we expect that most LPs will prioritize their inventory to gain a share of the recreational market.

Last Quarter Last Quarter

Volume Sold

(kg)

Share of

Volume # Patients

Share of

Patients

Grams per

patient

Avg. Selling

Price ($ / g)

Canada 15,616 269,502 58

Canopy 2,330 15% 69,919 26% 33 $8.30

Aurora 1,353 9% 45,776 17% 30 $7.99

MedReleaf 1,263 8% n.a. n.a. $8.64

Aphria1~1,000 6% ~40,000 15% 25 $8.30

CannTrust 982 6% 40,000 15% 25 $7.63

Source: Company filings.

Note (1): Excludes wholesale to other LPs.


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d.

Near-Term International Medical Opportunity: Germany

There is considerable focus on the international opportunity for Canadian LPs as the country’s tenured

federal medical framework, expected national legalization of the recreational market, large number of

LPs with cultivation experience, and access to capital markets puts Canada at the forefront of the global

cannabis opportunity.

In the near term, we believe Germany’s medical market is the primary international opportunity for the

Canadian LPs due to its medical legalization, size of population, and a favourable insurance coverage

outlook. In a recent report by Prohibition Partners, a cannabis-focused market intelligence firm, the

long-term German medical cannabis market opportunity was estimated at €10 billion.

We understand that prior to medical legalization there were only about 1,000 German citizens with

permission to use cannabis for serious medical conditions. Since medical legalization in 2017, the

country’s three large insurance companies disclosed that there have been 20,000 medical cannabis

claims, of which 13,000 were approved for reimbursement. In addition to these claims, there are also

private cannabis prescriptions where the patient covers the expense. We understand that German law

requires health insurance coverage for medical cannabis, although we have heard that the associated

paperwork is onerous and often a grounds for a patient to not qualify for coverage.

Germany’s current medical cannabis framework does not permit domestic cultivation. As a result, the

country relies on imports to meet demand. Initially, Germany imported exclusively from a Dutch

producer called Bedrocan, but a few Canadian LPs are now focusing on the country. Canadian LPs must

wholesale their exports to the pharmacy distributors as only pharmacies are permitted to dispense

medical cannabis prescriptions. Currently, retail and wholesale prices (the price shared by distributors

and Canadian LPs) in Germany can be as high as $25 and $15 per gram, respectively, due to the supply

shortage from a lack of domestic cultivation and prior administrative issues that delayed international

companies from being able to import into the country. As a result, Canadian LPs exporting into Germany

are receiving much higher wholesale prices than they are receiving in the Canadian medical market. See

Exhibit 9 below for LPs that have secured the licenses, Good Manufacturing Process (GMP) certification

and distribution partners, and are either already or will begin exporting into Germany.

Exhibit 9: Current Players in the German Medical Market


Canadian LPs

Dutch LP

Distributors

Dutch Government

GmbH

Source: Company filings. Note: Aphria is awaiting GMP certification.

Paesel + Lorei

Aurora

Tilray

CannaMedical

Pedanios

MedReleaf

Maricann

SpektrumCannabisCanopy Growth

Cronos Group Pohl Boskamp

Maricann GmbH

Noweda

Bedrocan


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d.

Asterisks Behind the German Opportunity

Notwithstanding these favourable dynamics, we believe the German market opportunity for Canadian

LPs should be evaluated carefully. We expect only a handful of the larger LPs will be able to secure the

licensing and certifications requirements, and develop the necessary distribution infrastructure in the

country. Canadian LPs need an export license from Health Canada, be GMP-certified, and have a

distributor partner to supply the fragmented German pharmacy landscape.

We note that achieving GMP certification is a significant undertaking for an LP. In addition, there are

varying forms of the GMP standards, some of which may not be recognized in certain jurisdictions. We

believe the challenges associated with GMP certification represent a significant hurdle in terms of capital

and other investments for the smaller LPs to meet.

We also understand that unlike the Canadian medical market, cannabis producers and distributors are

not permitted to communicate directly with patients and education fees are prohibited. In Germany, the

prescribing doctor has sole discretion in selecting the LP for the patient, and pharmacies cannot

substitute for another producer’s product when dispensing the prescription. As a result, we consider the

focus by some Canadian LPs on the number of German pharmacies their distributor partner has

relationships with is somewhat misleading as these distributors can supply to any German pharmacy,

and it is the doctor who ultimately determines which LP’s product will be prescribed. We believe

establishing relationships with doctors is critical in order to become a meaningful player in the German

medical market, and such an investment presents another hurdle for the smaller LPs. We understand

that there are about 100,000 doctors and 27,000 pharmacies in Germany.

Finally, it appears that favourable economics from German sales have yet to materially contribute to

earnings for the participating Canadian LPs. Current exports into the German medical market only

represent a modest portion of sales for the handful of Canadian LPs that are able to sell products there.

Long-Term Industry Outlook

Oversupply Expected in the Long Term but Impact on Pricing for LPs Is Uncertain

Based on our outlook for industry demand in Exhibit 3 and our forecast for production output by the Big

Three LPs, which we believe will represent the majority of industry supply, we project that supply will

catch up with demand in year two and potentially begin to significantly exceed demand likely in the

third or fourth year following recreational legalization. It is not clear if this projected supply/demand

imbalance will weigh on the cannabis prices realized by the LPs as by then there will be the opportunity

to export increasing volumes to international markets, such as Germany, and the introduction of

additional product formats (such as vape pens, edibles, and beverages) should provide higher pricing

and margins per gram equivalent to compensate for price compression in dried flower.

The analysis in Exhibit 10 following outlines our view that in the long term, the Canadian market will

shift from a supply shortage to significant oversupply of dried flower as Canadian LPs complete their

facility build-outs. Exhibit 10 highlights that just the production capacity currently being developed by

the Big Three LPs will account for eight million of the estimated 11 million square feet of production

space required to satisfy total Canadian demand. We note that the eight million square feet does not

consider the facility expansions of the other LPs, many of which we understand are also undertaking

significant facility developments.


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d.

Exhibit 10: Long-Term Oversupply


Over the very long term, as dried flower prices continue to settle, and as margins are eroded from the

agricultural growing aspect of cannabis, we believe the Canadian market will rationalize into the

handful of larger, branded players capable of generating earnings and cash flow through strong brands

and quality value-add product formats. In addition, as the industry rationalizes, we believe a number of

low-cost producers will evolve into contract cultivation and will supply the large, branded companies.

Beyond the large, branded players and low-cost contract cultivators, it is not clear to us how the many

other LPs, outside of niche brands, will survive under this pricing environment.

In terms of the types of grow facilities, our view is that indoor cultivation will be challenged in a long-

run environment with significant pricing headwinds in dried flower. We understand from our industry

discussions that both capital and operating costs of a greenhouse could be substantially less than those

of indoor facilities.

Further Long-Term Scenarios

Over the long term, we believe consumers will develop a better understanding of cannabis and be able

to segment products based on perceived quality. As a result, although a strong brand may encourage

initial trial, there must be perceived product quality and a consistent user experience to validate the

brand and generate repeat purchases.

Although we believe the majority of the dried flower category will become a commodity, we highlight

some potential industry developments over the long term that we believe could mitigate some of the

pricing headwind from an oversupply of dried flower:

If many LPs experience challenges in ramping their facilities, it would delay the onset of an

industry oversupply and enable LPs participating in the early recreational market to continue

earning favourable unit economics for a longer period of time.

If LPs are able to establish strong brands and consumers perceive their products to be high

quality, these LPs could potentially have some leverage on pricing.

The eventual legalization of value-add formats such as vape pens, edibles, and beverages

would create areas for more product differentiation. In addition, additional formats could

appeal to new cannabis users and expand the size of the recreational market. See “New

Product Formats” section following.

Demand from international markets could alleviate some, and potentially all, of the anticipated

oversupply in Canada. Several EU countries with a legal medical framework are already

importing products from Canada. In addition, there are other jurisdictions progressing towards

legalizing cannabis for medical use. See “The Path to Global Legalization…” section following.

Potential long-term demand in Canada1 (kg) 1,000,000

Avg. Annual Yield from Greenhouse1 (g / sq.ft.) 90

Industry Production Capacity Needed (mm sq. ft.) 11

Big Three Production Capacity2 (mm sq. ft.) 8

(not incl. other 100+ LPs)


Note (1): Long-term estimates. Long-term demand includes recreational and medical.

Note (2): Estimated cultivation space (excludes corporate space). Assumes

Aurora acquires MedReleaf.


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d.

New Product Formats

In Washington, for example, while dried flower still remains a sizable portion of the market in terms of

sales, the value-add product formats (derived from cannabis extracts) have experienced notable growth

and are capturing a greater share of industry sales (see Exhibit 11 below). There is a view that current

product mix in U.S. states may not fully reflect the potential of the future Canadian market as many

value-add formats in the U.S. are generally considered poor quality, which may be limiting uptake.

Exhibit 11: Product Mix in Washington (% of Sales)

We believe the Canadian industry’s investment in large-scale greenhouses is both a strategy to reduce

production costs and also a belief that consumer demand will shift significantly from dried flower to

value-add formats derived from cannabis extracted oils. If these product derivatives ultimately capture a

sizable of the market, most dried flower will be extracted and under such a scenario, the aesthetic

features of dried bud would become less important, and cannabis cultivation in greenhouses would be

more cost effective than indoor.

An opportunity from legalizing these formats is the potential for a significant expansion in the user base

of the recreational market. We note that vape pens have become a fast-growing category in U.S.

markets as novice and first-time users prefer the product for its discrete and easy-to-use format. As well,

there could be a further broadening of the recreational market to non-users of the traditional flower

format if mainstream product mediums, such as cannabis-infused beverages, are legalized.

Value-add formats could also potentially offset the decline in dried flower pricing on LPs’ profitability by

allowing more market segmentation and premium branding, and those with perceived better quality

could command premium pricing, which we found to be the case in Denver and LA. We believe this

price differential arises from the level of processing know-how and innovation required to manufacture

these formats and the resulting ability to develop stronger brands.

However, we note there are some risk factors associated with the value-add product categories:

If Canadian regulatory delays preclude these formats from the recreational market for longer

than expected, it would exacerbate the scope of dried flower oversupply as LPs would be

unable to divert excess dried flower to be extracted and processed into these other formats.

Relative to the proliferation of formats in the U.S. markets, the legal Canadian market has only

been permitted to produce and sell dried flower and oils. As a result, we believe there is a risk

that the level of expertise and technology possessed by Canadian LPs to develop quality value-

add formats is limited, which could result in poorly made formats that discourage consumer

adoption for some time.

Source: Analysis of WA LCB seed-to-sale. Carnegie Mellon University Heinz College.


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d.

We observed in Denver and LA that packaging was a key branding tool for companies to

differentiate their value-add product formats. We believe Health Canada’s proposals, if

enforced, would materially impair Canadian LPs’ ability to communicate their branding and

their products’ features to consumers.

The Path to Global Legalization and Potential Impact for Canada

Currently, the international flow of controlled substances is governed by three United Nations treaties:

the Single Convention on Narcotic Drugs, the Convention on Psychotropic Substances, and the

Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. As a result of these

treaties, international trade of cannabis is only permitted for medical purposes and countries must have

a legal federal framework in order to participate. Countries that legalize recreational use must satisfy

demand with domestic production.

Although the pace for global legalization is unclear, there is a view that medical legalization will

continue to take place across various jurisdictions, particularly in the European Union. Some industry

forecasts have sized the global cannabis market opportunity at about $55 billion by 2025. We

understand that in addition to Germany, other European countries with a legalized medical framework

implemented are Denmark, Italy, the Netherlands, and Poland. However, only a few European countries

such as Denmark and the Netherlands have permitted domestic production and exporting under certain

circumstances. Outside of Europe, we note that Israel has a significant history in cannabis research and

cultivation, but the Israeli government has not yet permitted exports from the country.

We believe the current international opportunity for Canadian LPs, which is the ability to export products

into other markets at favourable economics, will prove to be transitory. Over the medium term,

countries where Canadian LPs are currently exporting to could establish domestic cultivation. We note

that Germany recently undertook a tender process to issue cultivation licenses and we understand that a

number of Canadian LPs were involved in the process. However, on March 28, a German court

temporarily halted the process. In the interim, Canadian LPs can continue to export products into the

German medical market without the potential for displacement from domestic production. However, a

negative read-through from the German court ruling is that a new tender process could favour German

companies over Canadian LPs. If a new tender process results in most or all of the licenses being

awarded to German LPs, we believe there could still be an opportunity for Canadian LPs as strategic

partners given that German companies would have limited experience in cannabis cultivation and

processing. This partnership approach may become the avenue in which Canadian LPs participate in the

growth of domestic production in international markets given their significant expertise in cultivation,

processing, etc.

Over the long term, we believe there will be countries with favourable climates and lower wage rates

(such as Colombia, Jamaica, and Israel) that emerge as the low-cost growers of dried flower for medical

export. The potential for Israel to become a competitor to Canada in the international export market

could be a near-term risk if the Israeli government permits exports from the country. As a result, we

believe the long-term global opportunity for Canadian LPs is developing intellectual property in areas

such as the development of new strains through genetic modification, cannabinoid isolation and

formulation for advanced medical applications, and new technological innovations for value-add

formats. As well, the current environment is providing Canadian LPs with the unique opportunity to

develop the first global brands.

Although there are several state-level medical and recreational markets, the classification of cannabis as

a Schedule 1 drug by the U.S. federal government confines the operations of U.S. cannabis companies

within their state. As a result, U.S. cannabis companies lack scale and are restricted from participating in

international markets, all of which have created a favourable competitive environment for Canadian LPs.

We believe there would be significant disruption to Canadian LPs if the U.S. legalizes cannabis on a


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federal level. Such a scenario would see increased competition to supply international markets. In

addition, we believe this scenario would exacerbate Canada’s domestic oversupply issue and LP margins

would erode further if Canada was to permit imports of dried flower from the U.S., where wholesale

prices are as low as $2 per gram.

Finally, we note that our discussion only considers the global medical market. The additional long-term

upside would be if other jurisdictions consider recreational legalization and we understand that Malta is

currently drafting legislation to legalize recreational use. If Malta establishes and implements a

framework legalizing the recreational market, we believe this could set a precedent that encourages

potential recreational legalization in other European countries. Should other countries legalize

recreational cannabis, Canadian LPs must establish cultivation in those markets in order to participate as

suppliers as the UN treaties prevent international trade of cannabis for non-medical purposes.

Evolution of the Canadian Medical Market

Over the long term, we believe the Canadian distribution model for medical cannabis will expand

beyond the current channel where LPs ship product directly to the patient. We note the industry

generally expects that regulations will eventually permit pharmacies to dispense medical prescriptions.

Pharmacy chains including Shoppers Drug Mart and Pharmasave have already signed supply agreements

with several LPs (see Exhibit 12 below).

Exhibit 12: Notable LP Supply Agreements With Pharmacies

Shoppers Drug Mart Pharmasave

Aphria

Aurora

MedReleaf

Tilray

CanniMed

Delta 9 Cannabis

Tilray

Zenabis

Source: Company Press Releases


If pharmacies are permitted to dispense prescriptions, we believe the potential uplift to Shoppers’

same-store sales (SSS) could be significant as a result of higher pricing for medical cannabis relative to

other prescriptions. For medical cannabis, average retail pricing is around $7.50 per gram for dried

flower with average daily consumption of just under a gram, compared to generic drug prescriptions

where prices per day can be as low as the pennies range. We believe there is also potential upside for

Shoppers’ front-of-store sales as a result of increased traffic from medical cannabis patients. The

following Exhibit 13 illustrates our scenario on the potential impact to Shoppers.

However, we believe the same pricing headwind that will ultimately pressure the recreational market

due to anticipated oversupply will also impact the medical market. Based on this consideration, our

analysis of the financial impact to Shoppers may be overstated if prices decline by the time regulations

allow pharmacies to dispense prescriptions.


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Exhibit 13: Potential Impact on Shoppers

Currently, medical cannabis is closer to a natural health product than a pharmaceutical drug as there are

no clinical trials, only circumstantial anecdotes from patient feedback. We believe there have been

limited clinical trials thus far partly due to cannabis’ classification as a controlled narcotic substance in

most countries. In addition, although Canada has legalized the medical market for some time, the

framework that initiated the emergence of commercial-scale LPs was only implemented in mid-2013.

We also believe the classification of cannabis as a Schedule 1 substance by the U.S. federal government

has precluded the large pharmaceutical companies from entering the industry in a meaningful way up

to this point.

Over the long term, we believe Canadian LPs could eventually be in a position to make efficacy claims

that are supported by clinical trials. At that point, medical cannabis could qualify for a Drug Identification

Number (DIN), which we believe would be a significant catalyst to accelerate growth of the medical

market. We believe the current reluctance by many physicians to prescribe cannabis is the lack of clinical

evidence on efficacy, safety, etc. A DIN would transition cannabis towards becoming considered a

pharmaceutical drug and encourage more physicians to prescribe. In addition, a DIN would qualify

medical cannabis for broader insurance coverage.

The Potential Role of Hemp

Although hemp is genetically a variety of cannabis, its legal definition makes it distinct from cannabis.

Hemp is a cannabis variety with THC content below 1%; in Canada, the THC content threshold to qualify

as hemp is below 0.3%. In addition, in Canada, the cultivation of hemp is only permitted for industrial

applications, such as the manufacturing of paper, textiles, rope or twine, and construction materials.

Grain from industrial hemp can be used in food products, cosmetics, plastics, and fuel.

We believe the cultivation of hemp for CBD extraction, if legalized, could be eventually modified to yield

higher CBD potency, which could potentially disrupt the growing of cannabis for CBD. In such a scenario,

low-THC cannabis strains grown by LPs in indoor facilities or greenhouses could become uneconomic

Prescription assumptions

Canadian population (mm) 37

% with medical marijuana prescriptions 2.0%

Canadian population with marijuana prescriptions (mm) 0.7

Shoppers' current prescriptions / year (000s) 124,085

Total Canadian prescriptions / year 000s) 366,611

Implied market share 33.8%

Shoppers' share of population with marijauna prescriptions (mm) 0.25

Prescription duration (months) 9

Prescriptions per person year 1.33

Prescriptions per year (mm) 0.333

Grams per prescription 230

Selling price per gram $7.50

Selling price per prescription $1,721

Pharmacist pays to manufacturer (1,721)

Professional allowance (12.5%) 215

Mark-up at 8% of selling price 138

Dispensing fee (fixed $) $8.83

Pharmacy pays first $2 of co-pay ($2.00)

Revenue per script $2,083

Incremental marijuana revenue per year (mm) $693

Impact on SSS

Shoppers 2019E prescription revenue (mm) $6,265

Pharmacy SSS 2.5%

Marijauna revenue (mm) 693

Shoppers 2019E prescription revenue incl. marijauna (mm) $6,958

Implied pharmacy SSS 13.8%



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given the cost advantage of hemp, which can be grown outdoors at a materially lower cost.

Furthermore, if hemp cultivation for CBD extraction is legalized, we believe the products from this

channel could fall under the natural health product category. Such an opportunity could attract a

company like Jamieson Wellness (JWEL-TSX; $24.05; Outperform) into the space, whether as a producer

of such products or as a strategic partner to a LP, given the company’s leading position in the Canadian

natural health industry. However, the potential for disruption in CBD extracted from hemp may be

limited as we understand that current CBD yields from hemp are modest, which if unchanged over the

long term, would limit the scope of cannabis strains that could be displaced by the extraction of CBD

from hemp.

Evolution of Canadian LPs’ Business Model

Currently, the LP medical business model is vertically integrated from cultivation to direct-to-consumer

sale. The recreational business model will also be relatively integrated from cultivation to wholesale,

and in some provinces, LPs will also be able to own and operate retail stores.

Over the long term, we believe cannabis cultivation will become a low-margin, commoditized part of

the supply chain and will be taken up by agriculturalists. Furthermore, if cannabis is legalized on a

global basis, we would expect that there will be other countries emerging as the low-cost cultivator of

dried flower. As a result, we believe many Canadian LPs will exit the cultivation business over time.

However, it is unclear to us what the exit strategy would be as these companies have made significant

capital investments into their large cultivation facilities.

Canadian LPs have a unique opportunity to become global leaders in this evolution due to the

comprehensive legal framework for both medical and recreational cannabis in Canada, and due to LPs’

access to funding in Canadian capital markets.

We believe the Canadian LP business model will eventually evolve to focus on intellectual property and

branding. The areas for intellectual property development could include the technology and expertise in

manufacturing value-add formats, pharmaceutical innovation that could be patented and/or receive a

DIN, and genetic modification to create custom cannabinoid formulations and new strains with better

efficacy to address specific needs and ailments (see Exhibit 14).

Exhibit 14: Potential Transformation of the LP Business Model in the Long Term

Licensed Producer

Present Long-term

Extraction

Wholesale & Retail

Cultivation

Cultivation FarmingLicensed Producer

IntellectualProperty

Value-add format manufacturing

Pharmaceuticals Formulation & genetic modification

Branding



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It is also possible that the larger, branded LP companies could ultimately be acquired by large CPG

players in the beverage and tobacco industries, or pharmaceutical companies given the potential

disruption cannabis-extracted products could present for these legacy sectors.

Assessing Valuations: Are We in a Bubble?

We believe current valuations in the industry reflect three key expectations:

That the Canadian recreational market is a sizable and untapped market.

Constellation Brands’ investment in Canopy established a view that there will be significant

upside when new product formats, such as beverages, are developed and legalized and

displace incumbent industries, such as the alcohol sector. These value-add products should

have higher price points and offer the possibility of much higher margins.

That there will be a rapid legalization of medical cannabis across numerous countries and

Canadian LPs will be able to fulfill this demand through exported products.

In the near to medium term, we believe valuation multiples among the LPs could potentially expand as

all the provinces/territories announce their supply chains, LPs ramp to fill the distribution channels, and

the level of legal demand emerges. Over the long term, we anticipate that only a handful of companies

will be attributed a premium valuation. These long-term industry leaders will be the companies that win

the initial supply agreements and capture sizable shares of the near-term recreational market, and

possess the scale and resources to invest in brand development and value-add format manufacturing

and also capitalize on the gradual legalization of international medical markets.

Track Record of LPs’ Management Teams

The legalization of medical and recreational cannabis in Canada has created a new industry with many

unprecedented developments. The sizable opportunities in the industry, such as the gradual legalization

of international medical markets and a sizable domestic adult-use market, have attracted a large

number of entrepreneurs. We note that there is a wide range of background experiences among the

founders and CEOs of these LPs, from former illicit market operators, financial professionals, and small

businessmen to serial technology entrepreneurs. The entrepreneurial track records for some of the

management teams have been uneven. Although there is inherently a degree of volatility in managing

entrepreneurial ventures, we believe management track record will be a key aspect for investors to

consider when assessing the level of execution risk for these companies.


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Company Snapshot: Our Current Coverage Universe

Exhibit 15 below outlines the key metrics in which to assess LPs. However, we add the caveat that

several of the KPIs, particularly cost of production, are not as meaningful at this stage as the LPs are not

yet at scale. In addition, we note that most LPs have grown primarily in indoor facilities and are just

beginning to build out and ramp their greenhouses.

Exhibit 15: Benchmarking Analysis

Aphria3

Canopy

Production Capacity1sq. ft.

Currently Fully Ramped 126,000 560,000

Total Capacity In Future 2,055,000 3,961,600

Components of COGS - Last Q $ / g

Cash Cost to Produce Dried Cannabis2$0.96 $1.03

Depreciation Related to Cultivation $0.33 In D&A expense

Packaging

Packaging, Fulfillment $0.26

Packaging, Fulfillment, Shipping $1.50

What's in Sales & Marketing expense? Shipping None

Medical Market Share

# of Registered Patients 40,000 69,919

Last Q Volume Sold3kg 1,000 2,330

Last Q Per Patient Use g / patient 25 33

Last Q Industry Volume kg 15,616 15,616

Share of Market by Volume3% 6% 15%

Last Q Cannabis Sales3$ mm ~$8,300 $19,340

Last Q Avg. Selling Price3$ / g $8.30 $8.30

Distribution Agreements

Provinces signed so far QC, NBQC, NB, Nfld,

PEI, Yukon

Pharmacies signed so far Shoppers None

Source: BMO Capital Markets, company filings.

Note (1): BMO's estimate of total cultivation space. Excludes non-cultivation space.

Note (2): Cash cost from cultivation to trimming and drying into bulk dried flower form.

Note (3): Excludes wholesale to other LPs.


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Company Coverage: Aphria

Our Investment Thesis

We are initiating coverage of Aphria with an Outperform rating.

Near-term market leader in recreational market: In an industry where restrictive marketing and

packaging regulations may significantly limit product differentiation, we believe the key near-term

success factor for LPs will be to secure in-store shelf space for their products. However, based on our

visits to most of the larger Canadian LPs’ facilities, where many are still under construction or waiting for

licenses, we are concerned that the majority of companies will not have the inventory or production

capacity to meaningfully participate in the near-term market. Following our recent visit to the Aphria

One facility in Leamington, Ontario, we believe the company will be one of the few LPs with sufficient

product to supply the initial recreational demand and we believe such a “first mover” advantage should

enable the company to quickly capture significant share and generate attractive unit economics in an

undersupplied market.

Potential to be a leading low-cost producer: In the long term, we believe cannabis cultivation will

become a commoditized activity. We note that the majority of LPs intend to counter this through brand

development and/or an expectation that they will be the low-cost producer. Our view is that most LPs

will not be able to generate sustainable margins from cultivation at scale, but we believe Aphria could

emerge as a leading low-cost cannabis producer given the significant commercial-scale greenhouse

cultivation expertise held by the management team and the infrastructure and greenhouse culture that

is inherent in the Leamington, Ontario community. Following our recent visit to the company’s

Leamington facility, we were impressed with the level of innovation and know-how behind the

construction and design of the greenhouse, as well as the cultivation best practices being implemented.

Potential upside through participation in long-term opportunities: We believe Aphria could emerge as an

industry leader over the long term based on our view that the company’s scale will facilitate meaningful

investment in areas such as brand development, value-add formats, and the gradual legalization of

international medical markets.

Current valuation relative to peers: As a result of the perceived issues associated with Aphria’s recent

acquisition of Nuuvera, we believe there has been pressure on Aphria’s stock, resulting in a lower

valuation relative to many of the other larger LPs, and thus, provides the opportunity for a better

potential return. A further discussion of the Nuuvera transaction is found later in this report.

Our target price of $17 is based on a projected enterprise value that is about 17x our Base Case fiscal

2020 EBITDA estimate. We believe the forward multiple of 17x is appropriate based on a number of

considerations:

This is within the valuation range attributed to Canadian consumer discretionary stocks, with

Dollarama (DOL-TSX; $150.91; Market Perform) at the high end.

We note that our Base Case fiscal 2020 EBITDA estimate assumes that Aphria’s facility

expansions are only at 65% of full ramp potential versus management’s expectation that the

facilities will be close to 100% capacity by that time. In our Upside Case, we assume that the

facilities achieve 75% of full ramp and Aphria experiences firmer selling prices, and based on

that scenario, our $17 target price would represent a multiple of 12x our Upside fiscal 2020

EBITDA estimate. If the Upside scenario were to unfold, our implied target multiple would

generally be towards the lower end of the valuation range for Canadian consumer stocks.


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If these facilities reach full capacity by fiscal 2020, which is above and beyond our Upside

scenario, Aphria’s EBITDA generation would be even higher and under these circumstances, our

implied target multiple would be in the high-single-digit range.

The 17x forward multiple (based off our Base Case fiscal 2020 EBITDA estimate) is generally

higher than the valuation multiples attributed to the brewery and tobacco stocks, although in

the context of spirits companies (see “Comparable Companies – Alcohol & Tobacco”). We

believe the cannabis industry offers substantially higher growth opportunities and potentially

higher EBITDA margins as the Canadian recreational market expands, value-add product

formats are legalized, and more international jurisdictions establish medical regulatory

frameworks.

Possible Scenarios

Our forecast horizon in terms of earnings estimates consists of fiscal 2019 and fiscal 2020. We have

three scenarios: Base, Upside, and Downside. See Exhibit 16 below.

Our outlook for Aphria’s ramp over the next two fiscal years is below that of management’s

expectations as we believe all LPs will likely encounter challenges to ramp their significant grow

facilities. We believe initial aggregate demand from the Canadian medical and recreational markets will

satisfy industry supply and Aphria will be able to sell all that it can produce in the near term. Our

demand projections assume that international sales during this period are minimal; however, if

international sales were to develop at a faster rate than we anticipate, then overall demand could be

even stronger than we are forecasting.

Exhibit 16: BMO Research’s Scenarios for FY2020

Risks to Consider

In terms of risks that are common to the larger LPs, we note that Aphria is in the process of undertaking

a dramatic increase in production. In fiscal Q3/18, Aphria produced just under 1,700 kg of cannabis.

However, based on our Base Case projections, we estimate that the company’s current expansion plans

will provide Aphria with 29,000 kg of production in fiscal 2019, and 144,000 kg of production in fiscal

2020. We believe an expansion plan of this magnitude is subject to considerable execution risk, and

hence our more conservative ramp projections versus management’s expectations.

BMO Base BMO Upside Management

Production as

% of Full Ramp65% 75% 100%

Target Price $17 $17 $17

Implied Target

Multiple (off fiscal

2020 EBITDA)

17.0x 12.0x 9.0x


($ mm unless otherwise stated) Base Upside Downside

Total Production (kg) 144,075 161,625 118,250

Avg. Selling Price - Medical $8.50 $8.50 $8.50

Blended Wholesale Price - Recreational $5.00 $5.50 $4.00

Cost of Production ($ / g)

Cash cost to produce $0.85 $0.80 $1.00

Packaging + fulfillment $0.25 $0.25 $0.25

Depreciation $0.30 $0.30 $0.30

Total Revenues $740 $908 $494

Adj. EBITDA to Aphria S/Hs1

$283 $404 $147


Note (1): After deducting minority interest in Aphria Diamond.


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In addition, many LPs are establishing brands for the recreational market. At this time, the LPs (including

Aphria) have only provided limited details surrounding their brand development and marketing

strategies. In addition, we note that there is a strong possibility of significant regulatory restrictions on

the scope of marketing and branding activities that can be undertaken by the LPs. As a result, it is

difficult for us to assess which brands, including those of Aphria’s, will ultimately emerge with adequate

market share.

Overview of Aphria

Aphria is a Canadian-based licensed cannabis producer with two operational facilities in Ontario and

British Columbia. The company is currently expanding both facilities. In addition, the company has a

strategic relationship with Double Diamond Farms, a Leamington-based greenhouse grower, to operate

a 1.3mm sq. ft. greenhouse. See Exhibit 17 below.

Exhibit 17: Current and Future Production Facilities

International Operations

Exhibit 18: Overview of International Operations

Current Annual Production Future Annual Production

Facility Location Type

Total Size1

(sq. ft.)

Est. Annual

Production2

(kg)

Total Size1

(sq. ft.)

Base Case

Production in

FY20202 (kg)

Long-term

Potential Annual

Production2 (kg)

Aphria One Ontario Greenhouse 100,000 10,000 1,000,000 65,750 85,000

Aphria Diamond Ontario Greenhouse 1,300,000 71,825 110,500

Broken Coast B.C. Indoor 26,000 2,600 100,000 6,500 10,000

Source: Company filings, BMO Capital Markets.

Note (1): Total space includes both cultivation rooms and other space (such as offices, processing and shipping areas).

Note (2): BMO Capital Markets estimates for base case scenario.

Aphria's Presence

Country Legal Status of Cannabis

Corporate

Entity

Import &

Distribute

Strategic

Investment

Domestic

Production R&D Overview of Operations

Argentina Legal medical

Joint exclusivity on a supply agreement with an

Argentinan pharmaceutical importer and

distributor.

33% investment in Althea, a licensed Australian

medical producer. Althea intends to import

product from Aphria until construction of its

facility is complete.

Supply agreement with Medlab Clinical. First

Aphria shipment in October 2017. Medlab intends

to use the product for trials on oncology patients.

Supply agreement with an undisclosed company

that will conduct clinical trials focused on animal

health.

Colombia Legal medical Exclusive supply agreement with Colcanna SAS, a

pharmaceutical importer and distributor.

Germany Legal medical

Nuuvera: supply agreement to export 1,200 kg to

CC Pharma GmbH, a pharmaceutical distributor.

25% stake in Berlin-based Schöneberg Hospital.

Italy Legal medical Nuuvera: holds one of seven import licenses.

Lesotho Legal medical Nuuvera: supply agreement with Verve Dynamics

for THC and CBD isolates.

Malta Legal medical Acquired ASG Pharma, a GMP-certified lab that

will be a production hub for Europe.

Spain Limited legal medical

Majority interest in a licensed, GMP-certified

laboratory in Alicante.

Also a 30% stake in CAFINA to purchase cannabis

and hemp for CBD extraction.

United Kingdom Controlled substance Agreement to import pharma-grade CBD isolate

(up to 30kg / month).


Legal medicalAustralia


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As we noted in the industry section of this report, we believe Germany’s medical market is the primary

near-term international opportunity for the Canadian LPs. However, we note there are several hurdles a

Canadian LP must meet in order to be able to export product into the German medical market: have an

export license from Health Canada, GMP-certification, and a distributor partner with supply relationships

in the fragmented German pharmacy landscape.

We note that Aphria is currently in the process to receive GMP certification and after the company has

met all the regulatory hurdles, it can begin to fulfill the 1,200 kg order received from CC Pharma GmbH.

Brand Development

Currently, Aphria has publicly announced two brands as part of the company’s go-to-market strategy for

the recreational market. The company indicated that additional house-brands will be developed. See

Exhibit 19 below.

Exhibit 19: Portfolio of Brands


Nuuvera Acquisition

Aphria recently closed the acquisition of Nuuvera, a Canadian cannabis company holding the only

cannabis GMP-certified lab in Canada (Avanti). In addition, Nuuvera has made progress in securing joint

ventures and supply agreements in many international markets, which made it an appealing acquisition

for Aphria. The transaction was initially valued at about $800 million, but largely due to the decline in

the sector’s valuation, and to a lesser extent due to renegotiation, the transaction value was about $450

million by the time of the closing. The acquisition caused considerable controversy as a number of the

senior officers and directors of Aphria were also shareholders of Nuuvera through their participation in

the early financing of Nuuvera and owned under 1% (740,000 shares) of the company. This senior

officer/director group included four executives and three other directors, including the CEO and CFO of

Aphria. The Aphria senior officer/director group was legally under no obligation to report their holdings

as shareholders of Nuuvera, and as the transaction was structured as a Plan of Arrangement as opposed

to a takeover bid, the holdings of the group were not disclosed in the transaction documents.

Our view is that the senior management teams of most of the LPs are inherently highly entrepreneurial,

and as a result, we were not that surprised to find that Aphria’s officers had invested in the early

financing rounds of another cannabis company. We would not be surprised if there are other instances in

the sector of senior managements investing in the early financing rounds of other companies, as

typically there is a “President’s List” to provide shares for persons close to the company. The acquisition

value of the shares owned by the senior officer/director group was about $4 million in aggregate (of

which the benefit was lower as they would have had some cost). After considering the relative

magnitude of the modest benefit that accrued to the senior officer/director group compared to the

sizeable potential value creation from their holdings in Aphria, the fact that the transaction was

structured so the group took mostly stock in Aphria, and that the cash component was negotiated down

Positioned to

demystify the

cannabis experience

for existing and novice

users alike

Premium brand Medical brand


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from $1.00 to $0.62 per Nuuvera share, we do not believe that the Aphria group’s intention with respect

to the Nuuvera acquisition was contrary to the best interest of the company. However, we believe the

group did not fully appreciate the potential level of sensitivity that could be directed towards these

developments.

Other Notable Strategic Investments

Exhibit 20: Overview of Select Strategic Investments

Current Operations and KPIs: Medical Only

Given that the recreational market in Canada remains an illicit industry, Aphria’s current operations to-

date only serves the medical end market in Canada. We note that Aphria’s reported volume sold and

revenues include the wholesale of product to other LPs. See Exhibit 21 below.

Exhibit 21: Aphria KPIs

Aphria DiamondJoint venture between Aphria (51%) and Double Diamond (49%).

Construction of 1.3mm sq. ft. greenhouse.

HIKU Brands

(HIKU-CNSX)

7.5% (just under 10% diluted) interest. Aphria is listed as a preferred

supplier to HIKU.

Althea Company

33% interest. Althea is an Australian licensed medical producer.

Althea will import from Aphria until construction of its facility is

complete.

Tetra Bio-Pharma

(TBP-CSE)

Under 10% interest. Joint distribution of medical cannabis to the

Maritimes and Quebec; Aprhia will supply cannabis to Tetra for

packaging and formulation at Tetra's New Brunswick facility. Tetra is

also conducting clinical trials.

Resolve Digital

Under 10% interest. Resolve is developing a medical device system

that delivers a metered dosage of cannabis oil or bud through a pre-

package single use Smartpod.

Green Acre Capital

Cumulative investment by Aphria: $1.2mm (total commitment of

$2mm). Green Acre Capital is a private investment fund focused on

the Canadian cannabis sector.


KPI FQ1/17 FQ2/17 FQ3/17 FQ4/17 FQ1/18 FQ2/18 FQ3/18

Market Share

Registered Patients - Canada 269,502

Registered Patients - Aphria ~40,000

Market Share by Patients 15%

Volume Sold - Canada (kg) 15,616

Volume Sold - Aphria (kg)1

585 639 653 738 852 1,237 1,428

Market Share by Volume 9%

Sales KPIs for Aphria

Total Sales ($ 000s)1

$4,376 $5,227 $5,119 $5,718 $6,120 $8,504 $10,267

Cost KPIs for Aphria ($/g)

Cash Cost to Produce Dried Cannabis $1.23 $1.26 $1.73 $1.11 $0.95 $1.45 $0.96

Packaging & Fulfillment Cost $0.14 $0.17 $0.14 $0.20 $0.20 $0.27 $0.26

Depreciation $0.43 $0.36 $0.36 $0.36 $0.46 $0.40 $0.33

Shipping cost is included in Sales & Marketing expenses.

Source: Statistics Canada, company filings.

Note (1): Includes wholesale to other LPs.


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d.

Gearing Up for the Recreational Market

Despite the uncertainty on the date of initial legalization, provincial/territorial governments have

already begun to establish their supply chains. Most provincial/territorial governments will purchase

cannabis from LPs on a wholesale basis to distribute into the retail channel. As a result of this regulated

supply chain, securing provincial/territorial supply contracts will be critical for LPs to access recreational

markets. See Exhibit 5 in the industry section of this report for more details on each

province’s/territory’s supply chain model.

At this point, Quebec, Newfoundland & Labrador, New Brunswick, Prince Edward Island (PEI), and Yukon

have publicly announced LP suppliers. So far, Aphria has announced a supply agreement with Quebec

and New Brunswick for the recreational markets and with Shoppers Drug Mart in anticipation that future

regulations will permit pharmacies to dispense medical cannabis prescriptions. In addition, Aphria

announced that Great North Distributors (GND) will be the company’s exclusive manufacturer’s

representative for the recreational market. GND is a subsidiary of Southern Glazer, which is North

America’s largest wine and spirits distributor. See Exhibit 22 below.

Exhibit 22: Aphria’s Recreational Go-to-Market Strategy by Province

Company History and Recent Developments

Aphria’s wholly owned subsidiary, Pure Natures Wellness (PNW), which operates the Leamington

greenhouse facility (Aphria One), is licensed to produce and sell medical cannabis under the ACMPR

regulatory framework. PNW received its cultivation and sales licenses in November 2014, followed by a

sales license for cannabis extracts (i.e., oil) in August 2016. In March 2017, Aphria shares were listed on

the TSX. See Exhibit 23 below for recent notable developments.

Quebec

1 of 6 LPs

signed

3-year term

Max 12,000

kg / yr

TBD

TBD

TBD

TBD


TBD

TBD

New Brunswick

1 of 5 LPs signed

2,500 kg

TBD

TBD

TBD

TBD


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Exhibit 23: Recent Notable Developments

CEO Profile: Vic Neufeld

Vic Neufeld was appointed CEO of Aphria in June 2014. Prior to this, Mr. Neufeld was CEO of Jamieson

Laboratories (now Jamieson Wellness) from 1993 to 2014. During his tenure as CEO, Jamieson increased

sales from $20 million to over $250 million, grew its market share from 7% to 25% and established its

brand across 44 countries. Mr. Neufeld was also previously a Partner with Ernst & Young. He holds a

Bachelor’s degree in Economics from Western University and an Honours degree in business and an MBA

from the University of Windsor.

The two founders of Aphria, Cole Cacciavillani and John Cervini, have had long careers in the agricultural

and greenhouse industry.

January 2018

Announces

acquisition of

Nuuvera

February 2018

Quebec

April 2018

Appoints Chief

Commercial Officer,

Chief Legal Officer

and governance

policies

Supply or Retail

Agreements

International

Expansion

Facility

Development

M&A / Strategic

Investments

January 2018

Announces Aphria

Diamond joint

venture

January 2018

Broken Coast facility

acquisition

March 2018

Signs jointly

exclusive supply

agreement with

Argentinian importer

January 2018

New Brunswick

March 2018

Acquires ASG

Pharma, a GMP lab

in Malta

February 2018

Signs offtake

agreement with

Verve Dynamics, a

licensed producer in

Lesotho


May 2018

Signs exclusive

supply agreement

with Colcanna SAS,

a Colombia importer

and distributor

May 2018

Announces 25%

investment in Berlin-

based Schöneberg

Hospital

May 2018

Signed exclusive

agreement with

Great North

Distributors


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d.

Income Statement

Aphria Inc.Income Statement for the Fiscal Year ended May 31

(amounts in C$000's except per share)

Est Est Est

2016 2017 2018 2019 2020

Old COGS reporting New COGS reporting

Revenue $8,434 $20,438 $34,482 $148,440 $740,063

Cost of goods sold, net 1,861 3,599

Amortization 590 986

Inventory production costs 8,356 41,735 202,505

Gross Margin before fair value changes 5,982 70.9% 15,854 77.6% 26,126 75.8% 106,705 71.9% 537,558 72.6%

Unrealized (gain) on changes in fair value of bio assets 5 (1,444) (11,482) - -

Inventory expensed to cost of sales 7,250 - -

Reported Gross margin 5,977 70.9% 17,298 84.6% 30,358 88.0% 106,705 71.9% 537,558 72.6%

General + administrative 2,425 28.8% 4,678 22.9% 10,502 30.5% 50,000 33.7% 80,000 10.8%

Selling, marketing + promotion 3,598 42.7% 6,664 32.6% 12,758 37.0% 90,000 60.6% 140,000 18.9%

Research + development 220 2.6% 492 2.4% 430 1.2% 5,000 3.4% 10,000 1.4%

EBITDA (267) nmf 5,463 26.7% 6,668 19.3% (38,295) -25.8% 307,558 41.6%

Adj. EBITDA attributable to Aphria shareholders1

(41,039) 282,958

0.0%

Amortization 362 4.3% 956 4.7% 2,070 6.0% 22,500 15.2% 35,000 4.7%

Impairment of intangible asset 3,500 - - -

Share-based compensation 462 2,399 16,668 32,000 35,000

Operating income (1,091) nmf (1,392) nmf (12,070) -35.0% (92,795) -62.5% 237,558 32.1%

Other (income) expenses (289) (4,996) (42,847) - -

Finance expense (income), net (728) (1,533) 8,000 13,500

Earnings before tax (802) nmf 4,332 nmf 32,310 93.7% (100,795) -67.9% 224,058 30.3%

Incom tax expense (recovery) (1,200) 134 8,139 - 56,014

Net income 398 nmf 4,198 nmf 24,171 70.1% (100,795) -67.9% 168,043 22.7%

Non-controlling interest - 1,176 10,600

Net income attributable to Aphria shareholders 24,171 70.1% (101,971) -68.7% 157,443 21.3%

Earnings per share

- Basic 0.01$ 0.04$ 0.18$ (0.40)$ 0.62$

- Diluted 0.01$ 0.04$ 0.17$ (0.38)$ 0.59$

Weighted average shares outstanding - basic 58,443 104,341 157,168 255,910 255,910

Weighted average shares outstanding - diluted 58,443 111,428 164,776 268,707 268,707


Note (1): Excludes fair value changes in biological assets and non-recurring expenses. Backs out non-controlling interest.


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Cash Flow Statement

Aphria Inc.Cash Flow Statement for the Fiscal Year ended May 31


Est Est Est

2016 2017 2018 2019 2020

Net income (loss) after income taxes $398 $4,198 $24,171 ($100,795) $168,043

Income tax expense (recovery) (1,200) 134

Change in fair value of biological assets 5 (5,005)

Depreciation and amortization 952 1,942 2,070 22,500 35,000

Gain on sale of capital assets (7) (11)

Disposition and usage of bearer plants 67

Impairment of intangible assets 3,500

Accrued interest on convertible note advanced to debtors (34)

Profit from equity accounted investee (210)

Amortization of finance fees on long-term debt 5

Gain on marketable securities (209)

Share-based compensation 462 2,399 16,668 32,000 35,000

Unrealized gain on long-term investments (6,312)

Realized loss on long-term investments 2,741

Consulting revenue (512)

Change in non-cash working capital (1,598) 2,633 (4,488) (26,500) (33,000)

Net cash from operating activities (988) 5,326 38,421 (72,795) 205,043

Share capital issued, net of cash issuance costs 10,315 204,408 195,661 - -

Share capital issued on warrants exercised 6,065 23,039

Share capital issued on stock options exercised 975

Advances from related parties 1,140 388

Repayment of amounts due to related parties (1,140) (852)

Proceeds from long-term debt, net of finance fees 32,825 - 300,000 -

Repayment of long-term debt (644) - - -

Net cash from financing activities 16,380 260,139 195,661 300,000 -

Issuance of promissory notes receivable (200) -

Repayment of promissory notes receivable 232 568

Investment in capital assets (4,426) (66,416) (200,000) (200,000) (200,000)

Business acquisitions (55,697) - -

Proceeds from disposal of capital assets 37 33

Investment in intangible assets, net of shares issued (54) (1,306)

Convertible note advanced to debtors (1,500)

Purchase of equity investments (25,366)

Investment in marketable securities (109,269)

Proceeds from disposal of marketable securities 22,131

Investment in long-term investments (1,560) (28,097)

Proceeds from divestiture of long-term investments 7,196

Net cash from investing activities (5,971) (202,027) (255,697) (200,000) (200,000)

Net cash inflow (outflow) 9,421 63,438 (21,615) 27,205 5,043

Cash and cash equivalents, beginning 7,052 16,473 79,910 58,296 85,501

Cash and cash equivalents, end 16,473 79,910 58,296 85,501 90,544



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Balance Sheet

Aphria Inc.Balance Sheet for the Fiscal Year ended May 31


Est Est Est

2016 2017 2018 2019 2020

Assets

Cash and equivalents $16,473 $79,910 $58,296 $85,501 $90,544

Marketable securities - 87,347 87,347 87,347 87,347

Accounts receivable 1,779 826 5,000 40,000 100,000

Other receivables 127 4,512 4,512 4,512 4,512

Inventory 2,089 3,887 3,887 3,887 3,887

Biological assets 698 1,363 1,363 1,363 1,363

Prepaid assets 160 1,060 1,500 2,000 10,000

Due from DFMMJ Investments - 464 464 464 464

Promissory notes receivable 568 -

Current assets 21,893 179,367 162,367 225,072 298,116

Capital assets 7,309 72,500 270,430 447,930 612,930

Intangible assets 4,318 1,891 1,891 1,891 1,891

Convertible note receivable 1,361 1,361 1,361 1,361

Embedded derivative 173 173 173 173

Interest in equity accounted investee 28,376 28,376 28,376 28,376

Long-term investments 1,560 27,788 27,788 27,788 27,788

Deferred tax asset 3,315 3,315 3,315 3,315

Goodwill 1,200 1,200 1,200 1,200 1,200

Other 634,758 634,758 634,758

Total Assets 36,280 315,970 1,131,659 1,371,864 1,609,907

Liabilities

Accounts payable and accrued liabilities 1,266 5,873 6,000 15,000 50,000

Deferred gain from equity accounted investee - 2,800 2,800 2,800 2,800

Current portion of promissory note payable - 878 878 878 878

Current portion of long-term debt - 765 765 765 765

Current liabilities 1,266 10,316 10,443 19,443 54,443

Promissory note payable - 366 366 366 366

Long-term debt - 31,420 31,420 331,420 331,420

Total Liabilities 1,266 42,102 42,228 351,228 386,228

Shareholders' Equity

Share capital 40,917 274,317 1,049,039 1,049,039 1,049,039

Warrants 694 445 445 445 445

Share-based payment reserve 1,724 3,230 3,230 3,230 3,230

Deficit (8,321) (4,123) 36,716 (32,079) 170,965

Total Equity 35,013 273,869 1,089,431 1,020,636 1,223,679

36,280 315,970 1,131,659 1,371,864 1,609,907



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Company Coverage: Canopy

Our Investment Thesis

We are initiating coverage of Canopy Growth (Canopy) with an Outperform rating.

Near-term market leader in recreational market: In an industry where restrictive marketing and

packaging regulations may significantly limit product differentiation, we believe the key near-term

success factor for LPs will be to secure in-store shelf space for their products. However, based on our

visits to most of the larger Canadian LPs’ facilities, where many are still under construction or waiting for

licenses, we are concerned that the majority of companies will not have the inventory or production

capacity to meaningfully participate in the near-term market. We believe Canopy will be one of the few

LPs with sufficient product to supply the initial recreational demand and we believe such a “first mover”

advantage should enable the company to quickly capture significant share and generate attractive unit

economics in an undersupplied market.

Well positioned for international opportunity: We believe Canopy could be well-positioned to supply

emerging medical markets outside of Canada. We consider the company’s current international

operations to be more advanced versus most other players and Canopy appears to be laying the

groundwork in markets where medical is not yet legalized, but may soon be. In addition, the approach

to develop cultivation in “hub” regions like Denmark for export to Germany and eventually Australia for

export to the Asia-Pacific region provides the company longer-term access to these markets.

Long-term global-branded leader: We believe Canopy could emerge as a leader over the long term

given that the company’s scale will facilitate meaningful investment in areas such as brand

development, value-add formats, advanced pharmaceutical applications, and the gradual legalization of

international medical markets. We believe Canopy’s strategic alliance with Constellation Brands could

prove to be a significant advantage as the industry evolves into value-add formats, and in this particular

case, into cannabis-infused beverages.

Our target price of $45 is based on a projected enterprise value that is about 20x our Base Case fiscal

2020 EBITDA estimate. We believe the forward multiple of 20x is appropriate based on a number of

considerations:

This is within the valuation range attributed to Canadian consumer discretionary stocks, with

Dollarama at the high end.

We note that our Base Case fiscal 2020 EBITDA estimate assumes that Canopy’s facility

expansions are only at 65% of full ramp potential versus management’s expectation that the

facilities will be close to 100% capacity by that time. In our Upside Case, we assume that the

facilities achieve 75% of full ramp and Canopy experiences firmer selling prices, and based on

that scenario, our $45 target price would represent a multiple of 14.5x our Upside fiscal 2020

EBITDA estimate. If the Upside scenario were to unfold, our implied target price would

generally be in the mid-range for Canadian consumer stocks.

If these facilities reach full capacity by fiscal 2020, which is above and beyond our Upside

scenario, Canopy’s EBITDA generation would be even higher and under these circumstances,

our implied target multiple would be 11x.

BMO Base BMO Upside Management

Production as

% of Full Ramp65% 75% 100%

Target Price $45 $45 $45

Implied Target

Multiple (off fiscal

2020 EBITDA)

20.0x 14.5x 11.0x



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The 20x forward multiple (based off our Base Case fiscal 2020 EBITDA estimate) is generally

higher than the valuation multiples attributed to the brewery and tobacco stocks, although in

the context of spirits companies (see “Comparable Companies – Alcohol & Tobacco”). We

believe the cannabis industry presents substantially higher growth opportunities and

potentially higher EBITDA margins as the Canadian recreational market expands, value-add

product formats are legalized and more international jurisdictions establish medical regulatory

frameworks. Specific to Canopy, our target multiple reflects our view that the company has a

relative head start in brand development and international expansion, and could emerge as a

leading global branded company in the long-term.

Possible Scenarios

Our forecast horizon in terms of earnings estimates consists of fiscal 2019 and fiscal 2020. We have

three scenarios: Base, Upside, and Downside. See Exhibit 24 below.

Our outlook for Canopy’s ramp over the next two fiscal years is below that of management’s

expectations as we believe all LPs will likely encounter challenges to ramp their significant grow

facilities. We believe initial aggregate demand from the domestic medical and recreational markets will

satisfy industry supply and Canopy will be able to sell all that it can produce in the near term. Our

demand projections assume that international sales during this period are minimal; however, if

international sales were to develop at a faster rate than we anticipate, then overall demand could be

even stronger than we are forecasting.

Exhibit 24: BMO Research’s Scenarios for FY2020

Risks to Consider

In terms of risks that are common to the larger LPs, we note that Canopy is in the process of undertaking

a dramatic increase in production. In fiscal Q3/18, Canopy produced 7,961 kg of cannabis. However,

based on our Base Case projections, we estimate that the company’s current expansion plans will

provide Canopy with just below 60,000 kg of production in fiscal 2019, and about 215,000 kg of

production in fiscal 2020. We believe an expansion plan of this magnitude is subject to considerable

execution risk, and hence our more conservative ramp projections versus management’s expectations.

In addition, Canopy has undertaken a significant scope of start-ups, investments, joint ventures, and

acquisitions, both domestically and internationally, over such a short period. Due to the sheer number of

these investments, we are concerned that management structure, oversight and controls may be

insufficient and that this could result in unanticipated developments. Moreover, we have found that

Canopy’s senior management is inherently entrepreneurial in style, and that while this attribute is at the

($ mm unless otherwise stated) Base Upside Downside

Total Production (kg) 215,770 258,750 170,700

Avg. Selling Price - Medical $8.73 $8.73 $8.73

Blended Wholesale Price - Recreational $5.50 $6.00 $4.00

Cost of Production ($ / g)

Harvest $0.55 $0.45 $0.65

Post-harvest $0.55 $0.55 $0.55

Packaging + shipping (medical) $1.50 $1.50 $1.50

Packaging + shipping (recreational) $0.50 $0.50 $0.50

Total Revenues $1,237 $1,585 $727

Adj. EBITDA $576 $773 $238



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core of the company’s impressive development and success to date, a shift in corporate culture will be

necessary as Canopy grows and matures into a true multi-national company.

Finally, many LPs are establishing brands for the recreational market. At this time, the LPs (including

Canopy) have only provided limited details surrounding their brand development and marketing

strategies. In addition, we note that there is a high possibility of significant regulatory restrictions on the

scope of marketing and branding activities that can be undertaken by the LPs. As a result, it is difficult

for us to assess which brands, including those of Canopy’s, will ultimately emerge with adequate market

share.

Overview of Canopy

Canopy is a Canadian-based licensed cannabis producer with seven operational cultivation facilities in

Ontario, Quebec, and Saskatchewan. The company is currently in the process of expanding production

capacity in both existing and new facilities. See Exhibit 25 below.

Exhibit 25: Current and Future Production Facilities

Current Annual Production Future Annual Production

Facility Type

Total Size1

(sq. ft.)

Est. Annual

Production2

(kg)

Total Size1

(sq. ft.)

Base Case

Production in

FY20202 (kg)

Long-term

Potential Annual

Production2 (kg)

Smiths Falls, ON Indoor 168,000 9,360 450,000 15,600 24,300

Mirabel, QC Greenhouse 700,000 24,570 37,800

Niagara, ON Greenhouse 350,000 8,400 1,000,000 17,200 37,200

BC Tweed - Aldergrove4Greenhouse 1,300,000 58,500 91,000

BC Tweed - Delta4Greenhouse 1,700,000 78,000 119,000

Denmark Greenhouse 430,000 0 16,000

Newfoundland Indoor 150,000 3,000 12,000

Bowmanville, ON Indoor 75,000 6,750

Yorkton, SK Indoor 60,000 5,400

Scarborough, ON Indoor 50,000 4,500

Creemore, ON3Indoor 15,000 1,350

St. Lucien, QC Indoor 10,000 900


Note (1): Total space includes both cultivation rooms and other space (such as offices, processing and shipping areas).

Note (2): BMO Capital Markets estimates from base case scenario.

Note (3): Facility is 40% owned by Canopy. Canopy has an off-take arrangement for between 75%-100% of production.

Note (4): Canopy announced that it will acquire the remaining 33% stake that it currently does not own. Expected closing in late-July 2018.

Same as current


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International Operations

Exhibit 26: Overview of International Operations

As we noted in the industry section of this report, we believe Germany’s medical market is the primary

near-term international opportunity for the Canadian LPs. However, we note there are several hurdles a

Canadian LP must meet in order to be able to export product into the German medical market: have an

export license from Health Canada, GMP-certification, and a distributor partner with supply relationships

in the fragmented German pharmacy landscape.

We understand that Canopy is one of a select number of LPs currently participating as a supplier to the

German medical market. The company announced it received approvals to export to Germany in July

2016, but we believe inventory constraints and regulatory delays in Germany has so far resulted in only

a modest amount of product being exported there. In fiscal Q3/18 ended December 2017, Canopy

shipped 78 kg (or 1% of total volume sold) to Germany.

Canopy's Presence

Country Legal Status of Cannabis

Corporate

Entity

Import &

Distribute

Domestic

Production R&D Overview of Operations

Australia Legal medical Soon

Launch of Spectrum Australia. Will establish a

facility in the State of Victoria for cultivation and

research. The facility is expected to supply other

regions in Asia Pacific.

Brazil Legal medical

Partnership with Brazil company Entourage to

develop cannabis-based pharma products and

launch a clinical research plan.

Chile Legal medicalOperating as Spectrum. Partnership with a

Chilean medical cannabis company.

Czech Republic Legal medical

Acquired Annabis Medical, which will be renamed

to Spectrum Czech. Canopy will import products

for sale in Czech pharmacies.

Denmark Legal medical, domestic production Soon

Operating as Spectrum. Will export production to

the rest of Europe. 430k sq. ft. greenhouse under

development.

Germany Legal medical

Acquired MedCann GmbH to form Spektrum, a

German-based pharmaceutical distributor. Import

products for distribution to pharmacies. Also has

a GMP certified facility in Germany.

Italy Legal medical

JamaicaLegal medical. Decriminalized

recreational.Soon

Operating as Tweed. Licensed for production.

Greenhouse facility development underway.

Poland Legal medical

Spain Limited legal medical

Strategic partnership with Alcaliber SA. Canopy

has transferred 1,500 cannabis genetics to

Alcaliber.



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d.

Portfolio of Brands

Canopy’s go-to-market strategy is to target different markets and consumer demographics with a

portfolio of differentiated brands. See Exhibit 27 below.

Exhibit 27: Portfolio of Brands

In April 2017, Canopy launched its online sales platform, Tweed Main Street. Patients registered with

Tweed, Bedrocan Canada, and/or Mettrum Health (now named Spectrum) can purchase medical

cannabis from these banners on the Tweed Main Street platform. In addition to these three Canopy-

owned brands, the company also launched its CraftGrow program, whereby other LPs can join to access

Canopy’s resources in plant genetics and operational best practices in exchange for selling their harvest

on a wholesale basis to the Tweed Main Street online marketplace.

Other Notable Strategic Investments

Canopy Rivers is a vehicle that establishes investment positions in cannabis production applicants and

existing LPs. Canopy Growth holds a 25% economic and 90% voting interest in Canopy Rivers. Up to this

point, Canopy Rivers has raised about $80 million from private investors and Canopy, and has closed

eight investments. The investee companies benefit from the access to capital, but also essentially have

a partnership with Canopy and thereby access to all of Canopy’s relationships and broad capabilities. The

structure allows Canopy to undertake strategic investments in the industry that may not be suitable for

direct investment by Canopy.

Canopy Health engages in various research areas related to cannabis application for humans and

animals in order to develop intellectual property. Ownership consists of Canopy Growth and qualified

private investors. Canopy Growth has first right to license and commercialize any intellectual property

developed by Canopy Health. In April 2018, Canopy Health announced that it has filed eight provisional

U.S. patients related to the delivery and application of cannabis and cannabinoid-based therapeutics in

certain conditions. The organization now has 38 provisional patent filings. Canopy Growth currently holds

a 44% economic interest in Canopy Health, but announced in May 2018 that it will acquire the

remaining stake it did not own. This transaction is expected to close at the end of July 2018.


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Current Operations and KPIs: Medical Only

Given that the recreational market in Canada remains an illicit industry, Canopy’s current operations to

date only serve the medical market, primarily in Canada. See Exhibit 28 below.

Exhibit 28: Canopy KPIs

Gearing Up for the Recreational Market

Despite the uncertainty on the date of initial legalization, provincial/territorial governments have

already begun to establish their supply chains. Most provincial/territorial governments will purchase

cannabis from LPs on a wholesale basis to distribute into the retail channel. As a result of this regulated

supply chain, securing provincial/territorial supply contracts will be critical for LPs to access recreational

markets. See Exhibit 4 in the industry section of this report for more details on each

province’s/territory’s supply chain model.

At this point, only Quebec, Newfoundland & Labrador, New Brunswick, Prince Edward Island (PEI), and

Yukon have publicly announced LP suppliers. We note that Canopy has secured supply agreements with

all four provinces and one territory. In addition, the company has secured licenses to operate retail

stores in Newfoundland and Manitoba. See Exhibit 29 below.

KPI FQ1/17 FQ2/17 FQ3/17 FQ4/17 FQ1/18 FQ2/18 FQ3/18

Market Share

Registered Patients - Canada 201,398 235,621 269,502

Registered Patients - Canopy 16,699 24,477 29,294 55,601 59,163 63,513 69,919

Market Share by Patients 29% 27% 26%

Volume Sold - Canada (kg) 12,090 13,574 15,616

Volume Sold - Canopy (kg) 984 1,169 1,245 1,740 1,830 2,020 2,330

Market Share by Volume 15% 15% 15%

Implied gram per patient - Canada 60 58 58

Implied gram per patient - Canopy 59 48 43 31 31 32 33

Sales KPIs for Canopy

Medical Cannabis Sales ($ 000s) $6,979 $8,197 $9,163 $13,976 $14,568 $16,140 $19,340

Avg. Selling Price ($/g) $7.09 $7.01 $7.36 $8.03 $7.96 $7.99 $8.30

Sales Mix - % Dried Flower 94% 86% 86% 78% 81% 82% 77%

Sales Mix - % Oils & Gel Capsules 6% 14% 14% 22% 19% 18% 23%

Cost KPIs for Canopy ($/g) F2017 not comparable to F2018 due to restatements

Cash Harvest Cost $1.10 $0.99 $0.87 $0.86 $0.76 $0.72 $0.59

Cash Post-harvest Cost $0.54 $0.71 $0.54 $0.60 $0.51 $0.53 $0.44

Shipping, Fulfillment & Packaging $1.01 $1.01 $1.17 $1.44 $1.50 $1.48 $1.50

Depreciation related to cultivation is included in overall depreciation expense.

Source: Statistics Canada, company filings.


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d.

Exhibit 29: Canopy’s Recreational Go-to-Market Strategy by Province

Company History and Recent Developments

The predecessor entity that eventually formed Canopy was incorporated in August 2009 as LW Capital

Pool Inc. (LW), which listed on the TSX Venture Exchange in June 2010. As a “capital pool company”, LW

had no assets, other than cash, or any business operations. In March 2014, the shareholders of Tweed, a

licensed cannabis producer with a facility in Smiths Falls, Ontario, completed a reverse takeover of LW

and the combined entity renamed to Tweed Marijuana. In June 2014, Tweed Marijuana acquired all the

outstanding shares of Prime 1 Constructions Services Corp., which was conducting business as Park Lane

Farms. The company was later renamed to Tweed Farms, which operates a greenhouse for cannabis

cultivation in Niagara-On-The-Lake. This transaction was followed by several acquisitions that are now

part of Canopy’s portfolio of brands. See Exhibit 30 below.

Exhibit 30: Notable Acquisitions

Quebec

1 of 6 LPs

signed

3-year term

12,000 kg

Yukon

1 of 2 LPs

signed

3-year term

Up to 900 kgNewfoundland

Only LP signed

First 2 years

supply 8,000 kg

4 retail sites

New Brunswick

1 of 5 LPs signed

2-year term

4,000 kg in year 1

PEI

1 of 3 LPs

signed

2-year term

Min. of 1,000

kg in year 1

TBD

TBD

TBD

TBD

TBD

TBD


Manitoba

1 of 4

companies

selected to

operate retail

stores

Partner with

Delta 9

Announced

Date

Target

Company Assets Acquired

Purchase Price

($ mm)

6/24/2015 Bedrocan Canada

-annual production capacity of 50,000 sq. ft.

-a subsidiary of Bedrocan Beheer BV, a leading LP in the

Netherlands

-international expansion of Bedrocan is limited due to licensing

rights

$61

11/1/2016 Vert Medical

-Quebec-based LP with an indoor grow facility in Saint-Lucien

-strategic rationale is to establish a brand specifically for the

Quebec medical and recreational market

~$6 to 7

11/28/2016

MedCann GmbH

Pharma and

Neutraceuticals

-German-based pharmaceutical distributor

-MedCann will distribute imported cannabis from Canopy to

German pharmacies to supply the country's medical market

-Upon acquisition, MedCann was renamed as Spektrum

~$10 to 11

12/1/2016Mettrum Health Corp.

(renamed to Spectrum)

-Canadian-based LP with three indoor production facilities in

Ontario totaling 100,000 sq. ft.

-the second largest LP in the Canadian medical market

-strategic rationale was to establish Mettrum (now named

Spectrum) as Canopy's medical brand globally given the restrictions

with Bedrocan

-Canopy management also attributed value to Mettrum's colour-

coded strain classification system and product offering, particularly

the Mettrum yellow oil.

$380



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d.

Exhibit 31: Recent Notable Developments


CEO Profile: Bruce Linton

In addition to his current role as CEO of Canopy, Bruce Linton also serves as President of HBAM Holdings

(since May 2007). Mr. Linton is currently a Director on the Board of Thermal Energy International.

Mr. Linton’s prior professional background has been primarily in the telecom and technology industries.

After graduating from Carleton University in 1992 with a Bachelors of Public Administration, Mr. Linton

joined Newbridge Networks and eventually held a senior executive position at CrossKeys Systems, a

subsidiary spun out of Newbridge. Mr. Linton founded WebHancer, which developed customer-tracking

software. He also served as CEO of Clearford Water Systems from 2005 to 2012.

April 2018

Acquired Annabis

Medical: importer &

distributor of medical

cannabis in Czech

Republic

February 2018

Manitoba

April 2018

Yukon,

and finalized

Quebec

April 2018

Spectrum Australia

April 2018

Both BC Tweed

greenhouses are

fully licensed for

cultivation

Supply or Retail

Agreements

International

Expansion

Facility

Development

M&A / Strategic

Investments

December 2017

Newfoundland

October 2017

Announces 20%

investment from

Constellation Brands

December 2017

Acquired Vert

Médical

October 2017

Formed BC Tweed

to develop two

greenhouses of

3mm sq. ft. December 2017

Spectrum Denmark

announces plan to

establish facilityOctober 2017

Tweed JA will build

facility in Jamaica

September 2017

New Brunswick

September 2017

Expansion of

Niagara greenhouse

September 2017

Supply agreement

with AusCann in

Australia

September 2017

Establish Spectrum

Denmark JV

January 2018

Prince Edward

island


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Income Statement

Canopy Growth CorporationIncome Statement for the Fiscal Year ended March 31


Est Est Est

2016 2017 2018 2019 2020

Old COGS reporting standards

Revenue $12,699 $39,895 $79,056 $327,105 $1,236,528

Inventory production costs 33,371 114,378 373,451

Gross Margin before fair value changes 0.0% 0.0% 45,685 57.8% 212,727 65.0% 863,077 69.8%

Unrealized (gain) on changes in fair value of bio assets (38,805) (60,061) (35,374)

Inventory expensed to cost of sales 12,796 39,577

Other cost of sales 19,722 22,747

Reported Gross margin 18,986 149.5% 37,632 94.3% 81,059 102.5% 212,727 65.0% 863,077 69.8%

Sales + marketing 5,653 44.5% 12,960 32.5% 33,452 42.3% 112,227 34.3% 170,000 13.7%

Research + development 721 5.7% 810 2.0% 1,214 1.5% 3,500 1.1% 7,000 0.6%

General + administrative 8,177 64.4% 16,858 42.3% 38,436 48.6% 83,338 25.5% 110,000 8.9%

Equity investment (income) loss 276 2.2% 50 0.1% 170 0.2% - 0.0% - 0.0%

Share-based compensation 3,497 27.5% 8,736 21.9% 46,936 59.4% 72,000 22.0% 75,000 6.1%

Reported EBITDA 662 5.2% (1,782) -4.5% (39,149) -49.5% (58,338) -17.8% 501,077 40.5%

Adjusted EBITDA1

(26,104) 13,311 576,077

Depreciation + amortization 2,256 17.8% 6,064 15.2% 20,735 26.2% 33,200 10.1% 70,000 5.7%

Other 1,155 7,369 2,491 - -

Operating income (2,749) -21.6% (15,215) -38.1% (62,375) -78.9% (91,538) -28.0% 431,077 34.9%

Interest expense (income) 140 66 (101) 4,220 8,750

Other non-operating costs (gains) 481 1,778 (44,660) - -

Earnings before tax (3,370) -26.5% (17,059) -42.8% (17,614) -22.3% (95,758) -29.3% 422,327 34.2%

Tax expense (recovery) 126 (401) 8,405 - 105,582 25.0%

Net income (3,496) -27.5% (16,658) -41.8% (26,019) -32.9% (95,758) -29.3% 316,745 25.6%

Non-controlling interest (51) 9,036 176 -

Net income attributable to Canopy shareholders ($3,496) -27.5% ($16,607) -41.6% ($35,055) -44.3% ($95,934) -29.3% $316,745 25.6%

Earnings per share

- Basic (0.05)$ (0.14)$ (0.20)$ (0.47)$ 1.47$

- Diluted (0.05)$ (0.14)$ (0.19)$ (0.40)$ 1.26$

Weighted average shares outstanding - basic 77,024 118,990 173,792 209,544 215,310

Weighted average shares outstanding - diluted 77,024 118,990 180,147 245,709 251,475


Note (1): Excludes fair value changes in biological assets and non-recurring expenses. Adds back share-based compensation and deducts non-controlling interest.


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Cash Flow Statement

Canopy Growth CorporationCash Flow Statement for the Fiscal Year ended March 31


Est Est Est

2016 2017 2018 2019 2020

Net income (loss) after income taxes ($3,496) ($16,658) (26,019) (95,758) 316,745

Depreciation and amortization 2,256 6,064 20,735 33,200 70,000

Share of loss (gain) in equity investment 276 50

Unrealized (gain) on change in fair value of bio assets (38,805)$ (60,061) (35,374)$

Net changes in inventory and biological assets 20,063 34,761

Share-based compensation 3,678 10,043 46,936 72,000 75,000

Non-cash acquisition costs 1,333

Loss on disposal of property, plant and equipment 661

Income tax (recovery) expense 126 (401)

Increase in fair value of acquisition consideration related liabilities 481 1,193

Changes in non-cash operating working capital items 1,544 (4,078) (4,836) (25,000) (36,000)

Other 350

Net cash from operating activities (13,527) (27,093) 1,442 (15,558) 425,745

Purchases of property, plant and equipment (12,196) (29,391) (130,000) (400,000) (300,000)

Purchases of intangible assets (141)

Purchase of acquisitions 1,054 11,193 - (1,000) -

Proceeds on disposals of property and equipment 37

Purchases of restricted investment (236) (300)

Net cash from investing activities (11,378) (18,602) (130,000) (401,000) (300,000)

Proceeds from issuance of common shares 14,376 130,276 269,990 - -

Proceeds from exercise of stock options 319 6,961

Proceeds from exercise of warrants 7,703 126

Payment of share issue costs (1,642) (8,066)

Issuance of long-term debt 3,500 - 175,000 -

Increase in capital lease obligations 260

Repayment of long-term debt (1,900) (959) - - -

Net cash from financing activities 18,856 132,098 269,990 175,000 -

Net cash inflow (outflow) (6,049) 86,403 141,432 (241,558) 125,745

Cash and cash equivalents, beginning 21,446 15,397 101,800 243,232 1,674

Cash and cash equivalents, end 15,397 101,800 243,232 1,674 127,419



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Balance Sheet

Canopy Growth CorporationBalance Sheet for the Fiscal Year ended March 31


Est Est Est

2016 2017 2018 2019 2020

Assets

Cash and equivalents $15,397 $101,800 $243,232 $1,674 $127,419

Restricted short-term investments 550 550 550 550

Accounts receivable 1,486 5,815 7,000 50,000 100,000

Biological assets 5,321 13,643 49,017 49,017 49,017

Inventory 22,153 45,981 45,981 45,981 45,981

Prepaid expenses and other assets 489 3,735 4,000 4,000 10,000

Assets held for sale 6,180 6,180 6,180 6,180

Current assets 44,846 177,704 355,960 157,402 339,147

Property, plant and equipment 44,984 96,270 205,535 572,335 802,335

Intangible assets 31,861 162,263 162,263 162,263 162,263

Goodwill 20,886 241,371 241,371 241,371 241,371

Other 804 - - 1,000 1,000

Total Assets 143,381 677,608 965,129 1,134,371 1,546,116

Liabilities

Accounts payable and accrued liabilities 6,107 15,386 12,000 30,000 50,000

Deferred revenue 533 588 588 588 588

Current portion of long-term debt 553 1,691 1,691 1,691 1,691

Current liabilities 7,193 17,665 14,279 32,279 52,279

Acquisition consideration related liabilities 1,258 - - - -

Long-term debt 3,469 8,639 8,639 183,639 183,639

Deferred tax liability 7,413 35,798 35,798 35,798 35,798

Other long-term liabilities 243 766 766 766 766

Total Liabilities 19,576 62,868 59,482 252,482 272,482

Shareholders' Equity

Share capital 131,080 621,541 891,531 891,531 891,531

Share-based reserve 5,804 23,415 23,415 23,415 23,415

Warrants 676 - - - -

Accumulated other comprehensive loss - 198 198 198 198

Retained Earnings (Deficit) (13,775) (30,382) (18,501) (42,259) 349,486

Non-controlling interest - (32) 9,004 9,004 9,004

Total Equity 123,785 614,740 905,647 881,889 1,273,634

143,361 677,608 965,129 1,134,371 1,546,116



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d.

Comparable Companies - Cannabis

Tamy Chen, CFA (416) 359-5501

Peter Sklar, CPA, CA (416) 359-5188

Cannabis Coverage

Market Fiscal Current EV / Recent Quarter # of

Share Price 52-Week Cap. EV Year Revenue EBITDA Selling Price Cash COP (2)

Volume Sold Registered

Company Rating (1) 25-May-18 High Low (C$ mm) End FY2019E FY2020E FY2019E FY2020E (C$ / gram) (C$ / gram) (kg) Patients

Canopy Growth Corporation (3) OP $35.00 $44.00 - $6.58 $8,697 $8,275 31-Mar 25.3x 6.7x 621.7x 14.4x $8.30 $1.03 2,330 69,919

Aurora Cannabis (4) $8.02 $15.20 - $1.90 $4,793 $5,002 30-Jun 41.0x 5.8x nmf 13.9x $7.99 $1.53 1,353 45,776

Aphria (3) OP $11.90 $24.75 - $4.55 $3,198 $3,173 31-May 21.4x 4.4x nmf 11.2x $8.30 $0.95 1,428 40,000

Medreleaf Corp. $24.51 $31.25 - $6.81 $2,809 $2,572 31-Mar 19.0x 6.8x 76.0x 18.3x $8.64 $1.83 1,263 n.a.

Cronos Group $7.76 $14.83 - $1.58 $1,673 $1,670 31-Dec 11.4x 5.4x 34.4x 16.1x n.a. n.c. n.a. n.a.

Hydropothecary Corporation $5.17 $5.42 - $0.75 $1,179 $1,033 31-Jul 9.6x 3.5x 45.3x 9.0x $8.99 $0.97 132 n.a.

The Green Organic Dutchman $4.12 $4.25 - $3.50 $1,040 $880 31-Dec nmf nmf nmf nmf n.a. n.a. n.a. n.a.

CannTrust Holdings $8.57 $10.58 - $5.86 $877 $780 31-Dec 3.9x 2.8x 10.9x 6.8x $7.63 n.c. 982 40,000

OrganiGram Holdings $4.88 $5.68 - $1.81 $788 $738 31-Aug 6.7x 3.4x 22.6x 9.9x n.c. n.c. 348 12,957

Cannabis Wheaton $1.39 $2.97 - $0.68 $716 $602 31-Dec 3.6x 1.1x 19.6x 3.3x n.a. n.a. n.a. n.a.

Supreme Cannabis Company $1.77 $3.49 - $0.23 $594 $563 30-Jun 6.8x 3.8x 28.3x 10.3x n.a. n.a. n.a. n.a.

Emerald Health Therapeutics $4.21 $9.68 - $1.03 $557 $512 31-Dec nmf nmf nmf nmf n.a. n.a. n.a. n.a.

HIKU Brands $1.50 $4.82 - $0.55 $526 $521 31-Mar 38.2x 6.8x nmf 31.3x n.a. n.a. n.a. n.a.

Namaste Technologies $1.47 $1.75 - $0.04 $411 $359 31-Aug nmf nmf nmf nmf n.a. n.a. n.a. n.a.

Newstrike Resources $0.67 $3.30 - $0.18 $358 $321 31-Dec nmf nmf nmf nmf n.a. n.a. n.a. n.a.

Notes:

Not reflective of entire industry. This comp sheet only includes companies with a fully-diluted market capitalization value above $400 million.

N.a. = not available / disclosed. N.c. = figure disclosed by company is not comparable to other players.

(1) Stock Rating System: OP – Outperform; Mkt – Market Perform; Und. – Underperform; R – Restricted.

(2) Cash cost of production up to the point before packaging and fulfillment.

(3) Forward estimates are BMO Capital Markets.

(4) Metrics do not reflect announced acquisition of MedReleaf.

Source: Company filings, BMO Capital Markets Inc., FactSet.

BMO Capital Markets is restricted on Aurora Cannabis


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(all in USD '000s) Share Market Enterprise EV / EBITDA Sales Gross Margin (%) EBITDA Margin (%) Selling & Marketing Margin (%)

Company name Price (US$) Cap. Value 2018E 2019E 2017A 2018E 2017A 2018E 2017A 2018E

Breweries

Large cap

Ambev SA $5.51 $86,500 $84,634 13.5x 12.0x $15,003 $14,163 60.0% 63.4% 41.4% 44.2%

Anheuser-Busch InBev SA/NV $95.00 183,693 295,593 12.5x 11.7x 56,444 57,145 59.4% 64.5% 39.2% 41.4%

Diageo plc Sponsored ADR $146.34 91,938 104,496 18.1x 17.0x 15,343 16,664 46.5% 62.3% 33.9% 34.6%

Molson Coors Brewing Company Class B $61.43 13,232 24,336 9.6x 9.5x 11,003 11,019 40.1% 41.3% 22.8% 22.9%

Heineken NV $102.14 58,240 75,376 11.7x 11.0x 24,688 26,429 43.7% 42.2% 26.0% 24.4%

Carlsberg A/S Class B $113.07 17,231 20,992 10.0x 9.6x 9,372 9,496 48.8% 50.1% 23.8% 22.2%

Large-cap average 12.6x 11.8x 49.8% 54.0% 31.2% 31.6%

Mid-cap

Compania Cervecerias Unidas S.A. $13.27 $4,905 $5,173 8.4x 8.4x $2,617 $2,841 53.0% 53.2% 21.0% 21.6%

Embotelladora Andina S.A. Sponsored ADR Pfd Class A $23.49 1,853 2,820 5.0x 4.6x 2,847 3,039 42.2% NA 19.3% 18.4%

Mid-cap average 6.7x 6.5x 47.6% 53.2% 20.1% 20.0%

Small-cap

Boston Beer Company, Inc. Class A $240.05 $2,790 $2,724 16.2x 15.2x $863 $915 52.1% 53.2% 19.4% 18.4%

Craft Brew Alliance $19.35 374 406 18.6x 16.4x 207 214 31.5% 33.6% 7.9% 10.2%

Small-cap average 17.4x 15.8x 41.8% 43.4% 13.7% 14.3%

Tobacco

Large cap

British American Tobacco p.l.c. $51.51 $118,140 $179,884 11.9x 11.2x $26,066 $33,431 58.9% NA 45.4% 45.0%

Altria Group Inc $55.63 105,767 118,449 12.1x 11.4x 19,494 19,631 61.3% 61.6% 50.7% 50.0%

Philip Morris International Inc. $80.34 124,786 152,534 11.4x 10.6x 28,688 31,371 63.3% 63.0% 43.2% 42.5%

Imperial Brands PLC $36.68 35,029 51,675 10.1x 9.8x 19,355 11,393 34.7% 73.5% 27.1% 45.0%


Mid-cap

Vector Group Ltd. $19.25 $2,587 $3,435 13.2x 11.8x $1,807 $1,868 32.1% 34.5% 14.2% 13.9%


Small-cap

Schweitzer-Mauduit International, Inc. $43.95 $1,350 $1,927 9.0x 8.6x $983 $1,052 28.8% 28.9% 20.4% 20.4%

Small-cap average 9.0x 8.6x 28.8% 28.9% 20.4% 20.4%

Spirits/Wine

Large cap

Constellation Brands, Inc. Class A $216.81 $40,971 $51,084 16.5x 15.1x $7,586 $8,145 50.4% 51.4% 36.5% 38.0%

Brown-Forman Corporation Class A $55.09 26,440 28,250 22.5x 20.9x NA 3,477 NA 67.8% NA 36.1%

Pernod Ricard SA $169.69 44,807 53,959 17.7x 16.8x 9,822 10,531 62.2% 62.2% 31.8% 28.9%


Mid-cap

Vina Concha Y Toro S.A. Sponsored ADR $43.00 $1,606 $1,980 13.3x 10.9x $991 $1,062 35.7% 37.9% 13.1% 14.0%

Andrew Peller Limited Class A $13.98 $601 $768 14.7x NA NA $303 NA 40.9% NA 17.3%

Corby Spirit and Wine Limited Class A $15.69 $447 $389 12.0x 11.9x $108 $113 63.9% NA 31.6% 28.8%


Small-Cap

Castle Brands Inc. $1.24 $205 $244 26.3x 21.7x NA $100 NA 41.5% NA 9.3%

Truett-Hurst, Inc. Class A $1.37 6 16 NA NA 22 NA 33.5% NA NA NA

Willamette Valley Vineyards, Inc. $8.34 $41 4,465 NA NA $21 NA 61.8% NA NA NA

Small-cap average 26.3x 21.7x 47.7% 41.5% NA 9.3%

Source: FactSet.

Comparable Companies – Alcohol & Tobacco


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Glossary

Term Definition

ACMPR Access to Cannabis for Medical Purposes Regulation. Replaced the MMPR and is the current regulatory framework that oversees the legal medical cannabis market in Canada. Allows both Health Canada licensed commercial producers and approved individuals to grow. The amount that can be grown by an individual is limited.

Bill C-45 Federal legislation outlining the framework for legalizing recreational cannabis in Canada.

Cannabinoids Distinct active chemical compounds found in the cannabis plant. There are over 100 different cannabinoids that have varying effects on the human body’s receptors. The two primary cannabinoids are THC and CBD.

CBD Cannabidiol. One of the two primary cannabinoids found in the cannabis plant. Does not cause psychoactive effects. Associated with medical benefits (i.e., anti-inflammatory) and is used to treat various conditions including arthritis, diabetes, chronic pain, etc.

Cloning Involves taking a clipping off a mother plant, and planting it in a separate pot to grow its own roots. The clone then develops into a fully grown cannabis plant for harvest.

Drying Following the flowering stage, the plant is subject to a period of drying to remove all moisture and maximize its concentration of cannabinoids.

Edibles A type of value-add format. Consumables that are infused with cannabis, such as cookies, brownies, chocolates, and beverages.

Extraction A process to extract the cannabinoids and terpenes from parts of the cannabis plant into a liquid form. The two most common methods are supercritical CO2 extraction and ethanol extraction.

Flowering The third stage of the cultivation process following vegetation where the clone plant matures, developing flowers/buds with trichomes on them.

Genetics The cannabis strain’s genetic makeup (also called a genotype) that gives its effects, flavours, potency, and growth characteristics. Acts as a blueprint for the growth and development of the plant, but it is also highly influenced by its environment (see “Phenotype”).

GMP Good Manufacturing Process. A system to ensure that consistent standards are being applied to a specific process. There are various GMP standards that may only be recognized by certain jurisdictions.

Greenhouse facility A cannabis cultivation facility with a glass roof that utilizes the sun but typically contains supplemental lighting. Typically have lower capital and operating costs versus an indoor facility, but the environment cannot be as strictly controlled as an indoor facility.

Hemp A variety of cannabis that are dominant-sativa species. Produces smaller flowers, or buds. Very low in THC concentration.

Indoor facility A fully engineered and constructed building (including a roof) for cannabis cultivation. Typically have higher capital and operating costs versus a greenhouse facility. The climate can be more strictly controlled and therefore can result in higher yield and quality flower. The cultivation process is completely dependent on artificial lighting.

Indica One of the principal cannabis species. The species can be distinguished by their plant structures and leaves. The indica plant is typically shorter and bushier than sativa.

LP Health Canada licensed producer of cannabis. Typically refers to commercial producers.


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MMAR Medical Marijuana Access Regulations. Initial regulatory framework that legalized the medical cannabis market in Canada in 2001. Allowed approved individuals to grow cannabis, or appoint a designated person to grow for several individuals.

MMPR Marihuana for Medical Purposes Registration. Replaced the MMAR. Only permitted Health Canada licensed commercial producers to grow cannabis.

Mother Plant A plant that is used to make new cannabis plants through a cloning process. See “Cloning”.

Oil A liquid substance extracted from the cannabis plant which is then combined with a medium such as sunflower oil for consumption.

Phenotype The traits of the cannabis plant that the environment pulls out from the plant’s genetics. This means the same genetic being cultivated in two different facilities could yield materially different traits.

Propagation The first stage of the cultivation process following cloning where the new clone plant establishes its roots.

Sativa One of the principal cannabis species. The species can be distinguished by their plant structures and leaves. The sativa plant is generally tall, thin, and wispy.

Strain (or Hybrid) A hybrid mix of the plant species (sativa, indica), developed either through selective breeding or naturally occurring in the wild.

Terpenes Organic compounds in the cannabis plant. Gives the plant a unique smell profile.

THC Tetrahydrocannabinol. One of the two primary cannabinoids in the cannabis plant. Provides the psychoactive effect attributed to cannabis.

THC Concentrates A type of value-add format. Comes in various shapes, sizes, and forms. Contains a very high concentration of THC. Within this format category, forms of these include wax, shatter, kief, and hash.

Trichomes Crystalline or hair-like components found on the flowers of the unpollinated female cannabis plant that contain the cannabinoids, terpenes, and other compounds. Trichomes grow all over the cannabis plant, but are in highest concentration on the flowers or buds.

Value-add Formats Formats containing cannabis beyond dried flower and oils, such as vape pens, edibles, and concentrates.

Vape pen A form of consuming cannabis. Vape pens contain a cartridge that is pre-filled with cannabis oil. A battery-powered element inside the pen heats the oil into a vapour that can be inhaled.

Vegetation The second stage of the cultivation process following propagation where the clone plant experiences rapid growth. Plants at this stage are subject to a specific environment of light and nutrients to maximize the plant’s yield of unpollinated female flower buds, which has the highest concentration of cannabinoids.


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Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018

C$25

C$20

C$15

C$10

C$5

C$0

Aphria Rat ing History as of 05 /26 /2018Aphria Rat ing History as of 05 /26 /2018

Closing Price Target Price

Outperform (OP); Market Perform (Mkt ); Underperform (Und); Speculat ive (S); Suspended (Spd); Not Rated (NR); Rest ricted (R)

Source: FactSet , BMO Capital Markets

Jul 2015 Oct 2015 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018

C$50

C$40

C$30

C$20

C$10

C$0

Canopy Growth Rat ing History as of 05 /26 /2018Canopy Growth Rat ing History as of 05 /26 /2018

Closing Price Target Price

Outperform (OP); Market Perform (Mkt ); Underperform (Und); Speculat ive (S); Suspended (Spd); Not Rated (NR); Rest ricted (R)

Source: FactSet , BMO Capital Markets

IMPORTANT DISCLOSURES

Analyst's Certification

We, Peter Sklar and Tamy Chen, hereby certify that the views expressed in this report accurately reflect our personal views about thesubject securities or issuers. We also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this report.

Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets andtheir affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness ingenerating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and serviceto clients.

Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. Theseanalysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions oncommunications with a subject company, public appearances and trading securities held by a research analyst account.

Company Specific Disclosures

Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to Canopy Growth within the past 12 months.

Disclosure 2: BMO Capital Markets has provided investment banking services with respect to Canopy Growth within the past 12 months.

Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to Canopy Growth within the past12 months.

Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from Canopy Growth within thepast 12 months.

Disclosure 6A: Canopy Growth is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limitedor an affiliate within the past 12 months: A) Investment Banking Services

Cannabis | Page 50 May 28, 2018

Disclosure 16: A research analyst has extensively viewed the material operations of Aphria and Canopy Growth.

Disclosure 18: A redacted draft of this report was previously shown to Canopy Growth (for fact checking purposes) and changes were made tothe report before publication.

Methodology and Risks to Target Price/Valuation for Aphria (APH-TSX)

Methodology: EV / EBITDA

Risks: Key risks include: the recreational cannabis industry in Canada is an emerging sector with limited and unreliable market forecasts ofdemand and other consumer trends, any adverse regulatory changes could impair the company's business model in the Canadian medicaland/or recreational markets, the company's operating history is limited, reliance on key management including Vic Neufeld (CEO) and its twofounders, Cole and John, any increase in key input costs such as utilities or labour, risks inherent in the agriculture business, product liabilityand risk of recalls, risks related to international operations (including but not limited to regulatory, economic and social volatility in thoseforeign markets).

Methodology and Risks to Target Price/Valuation for Canopy Growth (WEED-TSX)

Methodology: EV / EBITDA

Risks: Key risks include: the recreational cannabis industry in Canada is an emerging sector with limited and unreliable market forecasts ofdemand and other consumer trends, any adverse regulatory changes could impair the company's business model in the Canadian medicaland/or recreational markets, the company's operating history is limited (incorporated in 2010 and began conducting business in 2013), relianceon key management including Bruce Linton (CEO), any increase in key input costs such as utilities or labour, risks inherent in the agriculturebusiness, product liability and risk of recalls, risks related to international operations (including but not limited to regulatory, economic andsocial volatility in those foreign markets).

Distribution of Ratings (May 27, 2018)

Rating category BMO rating BMOCM USUniverse*

BMOCM US IBClients**

BMOCM US IBClients***

BMOCMUniverse****

BMOCM IBClients*****

StarMineUniverse

Buy Outperform 48.8% 18.7% 52.6% 50.2% 54.6% 55.3%

Hold Market Perform 48.9% 16.1% 45.4% 47.5% 44.2% 39.7%

Sell Underperform 2.3% 15.4% 2.1% 2.4% 1.2% 5.0%

* Reflects rating distribution of all companies covered by BMO Capital Markets Corp. equity research analysts.** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Banking servicesas percentage within ratings category.*** Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensation for Investment Bankingservices as percentage of Investment Banking clients.**** Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.***** Reflects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment Banking servicesas percentage of Investment Banking clients.

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REAL ESTATE

REITs (Canada)Jenny Ma, CFA 416-359-4955Troy MacLean, CFA 416-359-8366

REITs (US)John P. Kim 212-885-4115R. Jeremy Metz 212-885-4053

INFORMATION TECHNOLOGY

IT Services & SoftwareKeith Bachman, CFA 212-885-4010

Communications EquipmentTim Long 212-885-4101

Information Technology Thanos Moschopoulos, CFA 416-359-5428

Semiconductors Ambrish Srivastava, Ph.D. 415-591-2116

Telecom/Media/CableTim Casey, CFA 416-359-4860

Media and InternetDaniel Salmon 212-885-4029

UTILITIES

Electric Utilities & Independent PowerBen Pham, CFA 416-359-4061

US Pipelines & MLPsDanilo Juvane, CFA 713-518-1267

MACRO

Investment StrategyBrian G. Belski 212-885-4151 416-359-5761

EconomicsDouglas Porter, CFA 416-359-4887Michael Gregory, CFA 312-845-5025 416-359-4747Earl Sweet 416-359-4407

Quantitative/TechnicalMark Steele 416-359-4641Herbert Sun 416-359-6704

Exchange Traded FundsJin Li 416-359-7689

SPECIAL PROJECTS

Special ProjectsKimberly Berman 416-359-5611

CONSUMER DISCRETIONARY

Retailing/ConsumerPeter Sklar, CPA, CA 416-359-5188

CannabisTamy Chen, CFA 416-359-5501Peter Sklar, CPA, CA 416-359-5188

RestaurantsAndrew Strelzik 212-885-4015

Toys & LeisureGerrick L. Johnson 212-883-5192

Auto PartsPeter Sklar, CPA, CA 416-359-5188

EducationJeffrey M. Silber 212-885-4063

Special SituationsStephen MacLeod, CFA 416-359-8069Jonathan Lamers, CFA 416-359-5253

CONSUMER STAPLES

Food RetailKelly Bania 212-885-4162

Food & Ag ProductsKenneth B. Zaslow, CFA 212-885-4017

Food & BeverageAmit Sharma, CFA 212-885-4132

Personal Care & Household ProductsShannon Coyne, CFA 404-926-1591

HEALTHCARE

BiotechnologyDo Kim 212-885-4091Matthew Luchini 212-885-4119

Managed Care/FacilitiesMatthew Borsch, CFA 212-885-4094

Medical TechnologyJoanne K. Wuensch 212-883-5115

PharmaceuticalsAlex Arfaei 212-885-4033Gary Nachman 212-883-5113

FINANCIALS

Canadian BanksSohrab Movahedi 416-359-7157

US Large Cap Banks & Specialty FinanceJames Fotheringham 212-885-4180

US BanksLana Chan 212-885-4109

Insurance/Diversified Financials (Canada)Tom MacKinnon, FSA, FCIA 416-359-4629

Diversified Financials (Canada)Nik Priebe, CFA 416-359-4293

ENERGY

Oil & Gas – IntegratedsRandy Ollenberger 403-515-1502

Oil & Gas – E&PJared Dziuba, CFA 403-515-3672 Phillip Jungwirth, CFA 303-436-1127Ray Kwan, P.Eng. 403-515-1501Dan McSpirit 303-436-1117Mike Murphy, P.Geol. 403-515-1540David Round +44 (0)20 7664 8052

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MATERIALS

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US Chemicals John McNulty, CFA 212-885-4031

Packaging & Forest ProductsMark Wilde, Ph.D. 212-883-5102Ketan Mamtora 212-883-5121

INDUSTRIALS

Transportation & AerospaceFadi Chamoun, CFA 416-359-6775

Diversified IndustrialsDevin Dodge, CFA 416-359-6774

Diversified Industrials & Industrial DistributionR. Scott Graham 212-885-4077

MachineryJoel Tiss 212-883-5112

Business & Industrial ServicesJeffrey M. Silber 212-885-4063

Mobility Equipment & TechnologyRichard Carlson, CFA 212-883-5141

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and project financing, merger and acquisitions advisory services, securitization, treasury

management, market risk management, debt and equity research and institutional sales

and trading. With approximately 2,500 professionals in 30 locations around the world,

including 16 offices in North America, BMO Capital Markets works proactively with clients to

provide innovative and integrated financial solutions.

BMO Capital Markets is a member of BMO Financial Group (NYSE, TSX: BMO), one of the

largest diversified financial services providers in North America with US$591.6 billion total

assets and over 45,000 employees as at January 31, 2018. For more information, visit

www.bmocm.com/.

BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, (Member FDIC), BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe and Australia and BMO Advisors Private Limited in India.

® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere.

www.bmocm.com

AbOuT bMO CAPITAL MArkeTS

bMO CAPITAL MArkeTSCAnAdA LeAdS The GLObAL CAnnAbIS PArAdIGM ShIFT: InITIATInG APhrIA And CAnOPy AT OuTPerFOrM

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