The tail end of 2018 wasn’t great for Canadian licensed cannabis producer (LP) Aurora Cannabis’s stock prices— but then, the end of the year wasn’t kind to anyone’s stock. Volatility across markets caused almost all of 2018’s earnings to vanish in a span of a few weeks, especially for companies listed on the Dow Jones and the S&P 500.
Despite the end-of-year frenzy on the public exchanges, Aurora still made 2018 its best year yet. In 2018, Aurora announced that its liquid assets exceeded CA$500 million (US$374 million); that it invested large stakes in CanniMed and The Green Organic Dutchman, two other publicly traded Canadian LPs; that it won the public bid to supply Italy with medical cannabis (through the country’s Department of Defense); and that it received its official cultivation license for its more than 800,000-square-foot hybrid indoor facility (named Aurora Sky) located near Edmonton International Airport—and these were only the January headlines.
Aurora’s goal is simple: Become a global leader in cannabis and cannabinoid production. To achieve that goal, the company is building itself on four pillars:
- The use of high-level automation in cannabis cultivation to streamline processes, reduce costs and maximize return-on-investment (ROI);
- Access capital via public markets and deploy shareholder capital intelligently and rapidly to create a fully integrated cannabis company;
- Capture a significant portion of Canada’s consumer market to establish Aurora as a respected consumer brand; and
- Rapidly establish a global footprint in the American cannabis market to assume a leading global position.
Big Bet on Tech
Aurora Sky is the crown jewel of Aurora Cannabis’ North American portfolio and in a class of its own as a CA$150 million (US$112 million) hybrid indoor cannabis cultivation facility. From ground level, it looks like any other large commercial property or hangar near an airport. Travelers landing at or departing from Edmonton International Airport will get a better sense of what makes this facility unique in cannabis—the building’s glass roof.
This design, created in collaboration with Larssen Limited (which Aurora purchased in November 2017 and re-branded to Aurora Larssen Projects (ALPS)), allows Aurora to harness the sun’s power while maintaining the same number of high-pressure sodium (HPS) lights and using the same sophisticated environmental control system (ECS) as an indoor facility.
Cam Battley, the company’s chief corporate officer (CCO), says, “The objective of creating this … concept in cannabis cultivation is to ensure that we have an absolutely optimal environment for plant health and high yield.”
At scale, the Sky facility will produce more than 100,000 kilograms (220,000 lbs.) of cannabis per year. (Currently, Aurora Sky is operating at about 25-percent capacity with one mother room and four flower rooms licensed for sale by Health Canada.) According to the company’s most recent pro forma, it cost Aurora CA$1.45 (US$1.08) to produce every dried gram of cannabis it sold in Canada during its first fiscal quarter of 2019. Battley says that figure likely will drop to less than CA$1 (US$0.75) once the facility is fully operational. (The mean cost per gram across the cannabis industry was US$1.29 in 2017, according to Cannabis Business Times’ 2017 “State of the Cannabis Lighting Market” report.)
What helps keep those costs down is the Sky facility’s “unprecedented” level of automation and technology in the cannabis industry, Battley says. That automation and technology also allows Samantha Olivier, Aurora Sky’s lead cultivator, to oversee the facility’s current stock of 200,000 plants (with more on the way as the company waits to receive more sales licenses from Health Canada) with a team of just six employees.
One such piece of technology is a robotic crane that sits above the canopy in the rooms. The crane can reach across a 34,000-square-foot space—the size of each of Aurora Sky’s mother and flower rooms—and move plant tables to the front of the room, where one of the six crop scouts can do their work.
“It would be very hard, for example, for a crop scout to reach [all] 30,000 plants per room. I'd have to have a massive team for that,” Olivier says. With the robotic arm, “Once you identify something, you just bring the table to the front and then you can walk around and check individual plants. Instead of having to look one by one down the rows, you’ll go straight to that table that has a problem to be fixed.”
Connected to the crane are infrared and ultraviolet cameras that periodically photograph every table. Those photos run through a specialized software that compares them to pictures of healthy crops and crops infected with various pests and diseases. “The cameras and our software are far more sensitive than the human eye and [are] able to cover the entire canopy, not just the plants that are closest to walkways,” Battley says.
Plant anomalies are flagged for review, and a crop scout will conduct a manual inspection if necessary. To conduct that manual inspection, a scout simply types the table number into the crane control system and the table is brought to him. This system eliminates the need to leave ample work space throughout the canopy, allowing Aurora to fit 30,000 plants in a 34,000-square-foot room.
For Olivier, the biggest challenge with managing the increasingly large canopy is getting her team to stomach losing a plant. “For example, if we have a plant that is drier than the other ones, we have to remove that plant, and people feel so heartbroken. I say, ‘Look, it's one in 30,000!’” Olivier says with a chuckle. “I'm trying to create this culture that the company is a large-scale production environment, and the [team members] are so attached to this plant.” She notes, however, that a dedicated workforce is a good problem to have.
Olivier’s task to create that culture is not going to get easier. Once fully licensed and operational, Battley estimates the size of Aurora Sky’s entire production team—including harvesting, post-harvest processing and other ancillary groups—at 400 members. That might seem like a lot for one facility, but, as the CCO is quick to point out, “that is only three times more than our Mountain facility [a 55,000-square-foot facility near Calgary], which has 125 people, but the production is 20 times that of Aurora Mountain.”
Those 400 team members will be responsible for overseeing and processing approximately 100 harvests per year, according to company estimates, as each of the 24 rooms will be harvested up to six times per year. Following a standard 60-day flowering cycle, that means a flower room must be harvested roughly every 3.5 days.
“We believe that we've invented the first 21st-century cannabis production concept,” Battley says.
Turbulence in the Market
Aurora Cannabis needs that production capacity to catch up with the demand created by Canada’s newly legalized adult-use market that launched Oct. 17, 2018. Much ink was spent detailing Canadian consumers’ complaints about supply shortages, poor-quality cannabis and incomplete or incorrect deliveries. Those complaints were no surprise to Battley.
“For months in advance of consumer legalization, I've been speaking coast to coast, reminding people that we should not expect perfection on day one,” Battley says. He expected the larger LPs to take the brunt of the responsibility for any rollout issues—they have been, after all, among some of the most publicized companies in Canadian media for the past year—but he adds that the early issues are no one’s fault. Rather, they are simply part of the process.
“What we're doing is something quite remarkable in that we [are] establishing a brand-new, nationwide, very complex … retail system with 13 different jurisdictions and different rules. It's to be anticipated that there will be some bumps in the road,” he says.
Demand during the launch of the adult-use market was “definitely higher” than anticipated, Battley says. State-run websites were out of stock and crashing within hours of opening sales, and provinces with brick-and-mortar operations, such as Alberta and Quebec, saw eager customers wrapped around stores, with some visitors waiting upwards of four hours to make a legal cannabis purchase. Battley believes that is a hopeful sign as “it's indicative that people do, in fact, have a willingness to migrate from the black and gray markets to the legal and regulated one at the existing price points, including taxes.”
Through its various brands and distribution partnerships with other LPs, Aurora launched approximately 250 SKUs into the adult-use market. Early sales reports have the company excited, as well. Internal reports showed that Aurora’s sales accounted for roughly 30 percent of total sales on the Ontario Cannabis Store’s website during the first days of legalized sales. Meanwhile, in British Columbia, products made by Aurora or its subsidiary MedReleaf were the province’s top-four sellers. In order:
- Tangerine Dream-San Rafael ’71/MedReleaf
- Blue Dream-Aurora Cannabis
- Great White Shark-San Rafael ’71/MedReleaf
- Pink Kush-San Rafael ’71/MedReleaf
Amid Canada’s new adult-use market craze, however, Aurora remains determined to prioritize its medical patients, some of whom have been with Aurora since the LP’s 2013 launch.
“Registered patients are a commitment, and you have to maintain that variety of product on your medical … menu to ensure that patients have access to the different products that they need,” Battley says. As such, Aurora did not create product reserves ahead of legalization, instead only making available the product that each province’s distributor ordered. Now that it has completed its first shipments, Aurora is evaluating what new orders it can fill while keeping the priority on its registered medical patients.
When the market will stabilize, though, is anyone’s guess, Battley says, pointing to the facts that nearly every LP is expanding and new licenses are being granted make such predictions difficult to make. “But a reasonable estimate,” he adds, “is that this will take a number of months to reach equilibrium.”
Of the People, For the People
To fund its expansion projects and acquisition deals, Aurora went public.
It became one of the first cannabis companies listed on a stock exchange after completing a reverse takeover to join the Canadian Securities Exchange (CSE), a junior exchange in Canada, in 2014. Afterward, the LP quickly fortified its stock-exchange presence: In 2016, Aurora joined the Toronto Venture Exchange; in 2017, the Toronto Stock Exchange (TSX), and on Oct. 23, 2018, under the ticker “ACB,” the company started trading on the New York Stock Exchange (NYSE). (Aurora, like Canopy Growth, can be listed on the NYSE because it is not a U.S.-based firm and, as such, is not violating U.S. law by cultivating cannabis.)
A top benefit of going public, according to Battley, is mandatory disclosure requirements. “It forces any company to operate in a far more disciplined and transparent fashion,” he says.
Aurora’s quarterly financial filings include information that most cultivators are loath to share. Information such as revenue, expenses and debts are required by exchanges. But others, such as kilograms produced, kilograms sold and “cash cost to produce per gram of cannabis,” are metrics that Aurora submits to investors voluntarily to provide them a better understanding of the company’s inner workings.
“We believe that's a good thing because this is a very new, young industry,” Battley says. “One of the critical challenges for the company and the hope to lead on a global basis is to evolve very rapidly from startup to grown-up. That means being measured on a consistent basis, being able to compare to peers, and establishing ourselves as rapidly as possible on the same basis as mature industries.”
Comparing Aurora’s growth since it began public trading to other mature industries is not fair because Aurora is a startup in a fast-growing market, but that comparison does reveal how the company, and the cannabis industry, has evolved in just two years. When it was first listed on the CSE, Aurora’s market cap was US$52.4 million (at today’s currency exchange rate). At press time, Aurora’s NYSE market cap was around US$6 billion, a more than 11,350-percent increase.
The company put some of those funds toward advancing cannabis-science research. Currently, Aurora has 40 clinical studies completed or underway, Battley says, in addition to seven pre-clinical studies. The cannabis producer’s research partners include McGill University, University of Saskatchewan, University of Toronto, the Ontario Brain Institute and Mount Sinai Hospital. With these partners, and others, Aurora conducts studies on the potential benefits of cannabis for cancer pain management, osteoarthritis and epilepsy, among other conditions, as well as attempts to identify genetic markers to gauge an individual’s receptivity to cannabis medications to better dose products.
That research is important to serve Aurora’s more than 67,000 registered patients. But Aurora also has nearly four times as many shareholders (approximately 250,000) as patients. Battley says managing shareholders’ hunger for a return on investment and patients’ needs for safe and consistent medicine is part of the balancing act that comes with being listed on an exchange. Some might view those needs as competing, but not Battley. “Our shareholders need us to create a valuable company and to secure a position as a global leader in this space,” he says. “A way to do that is by being very, very good at your business.”
Think (and Act) Globally
Those public funds have also allowed Aurora’s executives to think beyond Canada’s borders, Battley says. “The access to capital has allowed us at Aurora to create what we believe is the most integrated cannabis company globally, with divisions that cover everything from facility design and engineering to the cultivation of both cannabis and hemp, to derivative products to distribution networks in Canada and internationally.”
Stated simply, Aurora’s global plans go beyond being first to market as new countries develop their medical or adult-use cannabis programs. The company is looking to establish cultivation and production businesses in multiple markets and tailor those businesses’ practices to those environments.
For example, Aurora’s acquisition of Uruguay-based cannabis cultivation and processing company ICC Labs grants the Canadian LP access to the Latin American market and allows the company to produce—at lower costs—higher-margin cannabis derivatives (such as isolates or distillates) that can then be sold anywhere in the world that allows imported cannabis products. Meanwhile, the Aurora Sky facility model, with its use of automation and robotics, can be replicated in more developed countries and still manage to produce cannabis at less than CA$1 per gram.
To be competitive on cost on a global scale, Battley says there are two choices: “Either produce in countries with a lower-cost labor or produce in developed countries with the use of a great deal of high technology. We're doing both.”
Beyond cost, Battley says Aurora has gone to great lengths to ensure quality on a global scale. The company owns two of the six Canadian facilities that are EU-GMP certified (the same certification required to run a pharmaceutical laboratory in Europe): Aurora Mountain and MedReleaf-Markham. EU-GMP certification also allows Aurora to export into the German market.
“We believe that in order to sell product into the European market going forward, companies will have to be able to meet that standard,” Battley says. “That regulation will serve as, effectively, a barrier to entry against the companies that cannot meet that level of certification.”
Aurora is on its way to global dominance, neck-in-neck with its main competitors, Canopy Growth Corp and Tilray. To date, Aurora has either cultivation facilities or production labs in Australia, Brazil, Canada, Cayman Islands, Colombia, Denmark, Germany, Italy, Malta, Mexico, Poland, South Africa and Uruguay. It also possesses additional sales agreements with nine other countries, meaning Aurora (or one of its subsidiaries) has a presence in 22 countries at press time.
But one market remains the company’s white whale: America.
“We are engaged in every permissible way right now,” Battley says. While Aurora can’t open a cultivation facility on U.S. soil without losing its exchange listing or suffering some other fatal consequence, it has entered into licensing agreements and invested in various areas of the cannabis industry through its spin-off investment firm, Australis Capital.
Many of those deals improve Aurora in both the short- and long-term. For example, Aurora’s licensing deal with California pre-roll maker Wagner Dimas allows Aurora to bring the U.S. company’s pre-roll technology into its Canadian facilities. Concurrently, Australis invested in a 15-percent stake of Wagner Dimas.
The Wagner Dimas deal is exemplary of Aurora’s calculated approach to international expansion: It grants the LP early access to the American market by allowing the company to establish itself in the production line. It also serves to increase profits, as pre-rolls are “higher value-added, higher margin products than dried flower,” Battley says.
Even Aurora’s plan for how to re-consolidate with Australis Capital is laid out. Aurora has a 10-year option to purchase 40 percent of Australis—the first 20 percent at IPO-share price and the other 20 percent at current market rate.
“So we have put a great deal of thought into the U.S. market,” Battley says.
That said, no other country has a cannabis industry like America’s (mostly because America has developed 33 different programs), which makes predicting the impact of federal legalization on market trends difficult, according to Battley.
“The U.S. will be very distinct from others in the world,” he says. “It will be a very competitive market, and like in any competitive market, we will see a variety of business strategies executed upon, and we'll see which ones are most successful in the long-term.”
As it plays the long game with America, Aurora’s global expansion will continue. As Battley says, “The vision remains to establish ourselves as a global leader operating in every market … where cannabis is legal on whatever basis, whether CBD only, whether the full range of medical cannabis product and, ultimately, [in] additional markets that choose to evolve their own legal consumer system. We have a unique opportunity to do that.”
