Aurora Cannabis: Poised To Dominate Canadian Marijuana

| About: Aurora Cannabis (ACBFF)

Summary

The strategic decision to use plant tissue culture technology is paying dividends in consistent production yields.

A detailed focus on providing the ultimate customer experience leads to rapid market penetration and future loyalty.

Aurora is consistently making strategically sound capital investments to prepare for significant market opportunities.

Plant Tissue Culture Technology

Plants traditionally reproduce by forming seeds, which are fertilized by pollen. DNA, in nature, combines in unpredictable ways to create new and unique organisms. It takes plant breeders many years of careful work to grow a plant with desirable characteristics due to this unpredictability. But leading-edge technology called micropropagation allows researchers to grow exact copies of plants without seeds. An entire plant can be regenerated from a single cell under ideal conditions. Plant tissue culture is seen as an important technology for the production of disease-free, high-quality planting material and the rapid production of many uniform plants.

Aurora Cannabis (OTCQB:ACBFF) is one of currently 35 producers licensed in Canada under Marihuana for Medical Purposes Regulations (MMPR) to produce and sell medical marijuana. Aurora has collaborated with CanGenX BioTech Inc. to utilize micropropagation through plant tissue culture technology. This assures healthy, disease-free plants grown in sterile conditions with scalable production producing stable, characterized plants. Micropropagation increases the amount of planting material to facilitate large-scale planting and thus many genetic prints of a plant can be produced in a short time.

Micropropagated plants are observed to:

  • establish more quickly.
  • grow more vigorously and taller.
  • have a shorter and more uniform production cycle.
  • produce higher yields.

Plant tissue culture offers several distinct advantages over traditional cloning:

  • completely sterile conditions for plant production ensures all batches begin disease-free.
  • massive scalability and consistency in predictable time frames.
  • greater production efficiencies and increased yields due to improved plant vigor and health.
  • the process aligns well with stringent pharmaceutical-type production standards.

In other words, plant tissue culture will allow for more rapid, efficient full crop cycle turn-over than traditional methods. I believe this strategic decision to implement an advanced breeding technology is likely one key reason behind how Aurora has achieved both a near 100% cloning success rate for a large commercial scale cannabis grower and production yields of crops that have exceeded management's initial expectations.

A Profound Customer Focused Experience

Executing on such a successful production strategy has directly led to an impressive customer-focused experience, which likely attributed to astounding market penetration and industry-leading growth in a relatively short history of being in business.

Aurora was issued a license by Health Canada for cannabis sales on November 30, 2015, with client registration and sales commencing Jan 5, 2016. In the initial three months after going "live", the company had registered 1,000 medical patients. It required just one more month to sign up another 1,000 patients, another month thereafter to hit a total of 3,500 patients and the latest update on September 6, 2016, stated total registered clients exceeding 7,700 in just eight months of business.

To put all of this in perspective, just compare Aurora's results to another competitor that I admire, Aphria Inc. (OTCQB:APHQF), which got its sales license from Health Canada on November 26, 2014, and commenced registration/sales in late December 2014. It took Aphria five months to reach 1,000 clients and by May 31, 2016, (or seventeen months) registered 4,675 clients. Aurora managed to achieve over 4,500 client registrations in just six months' time!

Obviously, it is not unheard of for new companies to blitz a market segment with lucrative promotions and incentives to achieve strong results. However, if you cannot properly service these newly signed up clients with a high-quality product, diverse selection, steady and stable supply, and strong customer service, then customers will walk away and conduct their business elsewhere. Peruse the various forums and comment sections of cannabis company reviews and it will give a general indication whether a company is offering inferior product or poor customer service.

Initially, I was somewhat skeptical of Aurora's industry-leading patient sign-ups and assumed that either most could not be adequately serviced properly or that a high churn rate would become evident in the near future. Aurora has indicated that so far, the client retention rate has exceeded 90% and the company sold 100 Kg of product in June 2016 and achieved monthly revenue of $1 million in July 2016.

A key reason for this is Aurora's strong emphasis revolving around providing a superior customer experience. This is evident based on various customer-friendly initiatives:

  • Providing high-quality products such as one strain (Warwick #2) with THC value of 32% and another product with CBD value of 24% (Temple). CBD or Cannabidiol is one of two main active ingredients in cannabis that is desired for treating patients suffering from seizures or epilepsy since it is non-psychoactive unlike the other main active ingredient, THC or Tetrahydrocannabinol, that is known for its psychoactive effects.
  • Sterile environment results in cannabis not requiring the use of either pesticides or gamma irradiation leading to a much healthier and fresher end product.
  • Providing a same-day shipping service to customers in Calgary (and surrounding areas), which got branched out to Edmonton (and surrounding areas), and with future plans to include Red Deer. This faster delivery service does not require any extra charge to the end user.
  • Recently launched a user-friendly mobile phone app to allow its customers to purchase product at their convenience.

Strategic Capital Investments For Significant Future Growth

Aurora made a significant capital investment of $10.5 million in constructing the first purpose-built facility in Alberta, Canada for growing cannabis. It is a 55,200 square foot indoor-grow building, utilizing state-of-the-art technology and is currently licensed for 5,400 Kg of production with the capacity for over 8,000 Kg annually. It is strategically located at the foothills of a mountain resulting in low utility cost. An educated and technical workforce resides nearby as its facility is located near Olds College, which is the largest agricultural college in Alberta.

Although the upfront cost is significant and building the infrastructure from scratch required more resources, the benefits of doing so makes it a strategically sound investment. Consider that the number of medical marijuana users registered by Health Canada had soared to 53,649 by the end of March 2016 and growing sequentially by 10 percent every month, the number by September 2016 should now be in excess of 85,000 users. Health Canada estimates that the number of medial marijuana users in Canada will grow to 309,000 by 2024 and generate $1.3 billion in sales.

In relative terms, $10.5 million is thus a drop in the bucket long term, and ultimately more importance should be weighted towards rapidly capturing market share and adequately retaining existing customers. A first-class facility designed from the onset to produce medical-grade marijuana makes more strategic sense than attempting to retrofit buildings previously used for chocolate manufacturing or older greenhouses designed to grow tomatoes.

With the upcoming news of legalization of marijuana for recreational usage anticipated for announcement in spring 2017 by the Liberal government in Canada, the implications for a much larger market measured in several billions of dollars will likely be generated. Thus, the next big bet that Aurora will make was announced on August 23, 2016, for the build-out of a massive 600,000 square foot automated hybrid greenhouse that will utilize machines to irrigate, monitor, harvest and package crops. Construction will take two years to complete with production to start by the end of summer 2018 and estimated annual production capacity to exceed 70,000 Kg of cannabis.

Such bold, strategic decisions followed up with action and execution are hallmarks of an emerging industry leader. Although Aurora Cannabis started one or two years later compared to its competitors that received licenses by Health Canada under MMPR, I would not be surprised if this company ends up as the dominant elephant in the country when viewed from a longer-term cycle in the 5-10 year range.

Disclosure: I am/we are long ACBFF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own the Canadian equivalent ticker ACB trading on the Canadian Securities Exchange.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.