Is ACB Truly a Medical Company at Heart?

On December 2, Aurora Cannabis (ACB) announced approval for one of its cannabis oils under Ireland’s new MCAP (Medical Cannabis Access Programme). Physicians can now prescribe this cannabis oil for patients who experience multiple sclerosis-related spasticities, as well as severe and treatment-resistant epilepsy.

These physicians can also prescribe ACB’s product for patients suffering from intractable nausea and vomiting due to chemotherapy. ACB can now export and supply the approved cannabis oil in Ireland. Currently, Irish authorities have only approved two products under this initiative.

So far, 2019 has proved disastrous for Aurora Cannabis’s shareholders. Year-to-date, the company has seen almost half of its market value vanish. Against this backdrop, ACB’s advancements in the medical marijuana space are proving to be the silver lining in the dark cloud of gloom surrounding the cannabis sector.

In its investor presentation, ACB noted that it was a “medical cannabis industry leader in Europe and Latin America.” The company offers dry flowers, oils, and soft gels in its medical product portfolio. The company plans to strengthen its position in the medical space through patient acquisition, cost optimization, product innovation, and ongoing research programs.

So, is ACB more of a medical marijuana player and less of a fully diversified cannabis player? Let’s find out.

ACB: Targeting leadership in the global medical marijuana market

In its investor presentation, ACB identified “Leadership in Global Medical Markets” as one of the strategic initiatives to target near-term profitability. According to BMO Research and Deloitte, the total addressable medical and recreational market in Canada is worth $3 billion and $9 billion, respectively.

ACB estimated the total addressable medical and recreational market globally to be $70 billion and $115 billion, respectively. The company estimated the total global cannabis opportunity to be $200 billion.

ACB’s performance in the medical marijuana space was one of the few positives in its rather dismal first-quarter earnings. The company’s medical cannabis revenues were up 2.69% sequentially and 26.6% YoY (year-over-year) to 30.45 million Canadian dollars.

Canadian medical cannabis revenues rose 1.26% sequentially and 20% YoY to 25.49 million Canadian dollars. ACB derived its international revenues almost completely from medical cannabis sales, rising 10.73% sequentially and 77.02% YoY to 4.96 million Canadian dollars.

ACB gradually increased its revenue exposure to medical cannabis from 29.97% in Q4 to 40.47% in Q1. The company’s registered patient base jumped 8% sequentially to 91,116 at the end of September 2019. On November 15, 2019, the company had 91,408 active registered patients.

ACB enjoys better pricing and higher gross margins for its medical cannabis business. The company’s average net selling price for medical cannabis was 8 Canadian dollars in the first quarter, down 6% sequentially. However, this was much higher than the $5.28 average net selling price of recreational cannabis.

In the first quarter, the company reported a gross margin of 63% for its medical cannabis business. This is higher than the company’s 53% gross margin for its consumer business. ACB expects its medical cannabis margins to improve further with the launch of more cannabis-infused derivative products.

ACB aims to dominate Europe’s medical market

As reported by BNN Bloomberg, ACB CEO Terry Booth acknowledged that he might have overestimated the potential in Europe’s cannabis market. He expects that the European medical marijuana market “will take some time” for the medical community to become aware of cannabis prescribing trends. In its investor presentation, ACB estimated the legal cannabis opportunity in Europe to be 90 billion Canadian dollars.

The recent ban in Germany may prove challenging

Currently, ACB holds the largest share in Germany’s medical cannabis market. The company has a headcount of more than 70 in Germany and the EU. In May 2017, the company acquired the then-leading German medical cannabis player, Pedanios GmbH. Pedanios was a licensed wholesale importer, exporter, and distributor of medical cannabis in the EU.

According to the investor presentation, this deal gave ACB the first-mover advantage in Germany’s medical cannabis market. Plus, the company also operates GMP-certified (Good Manufacturing Practices) facilities in Germany to further penetrate the EU.

In April 2019, Germany’s Federal Institute for Drugs and Medical Devices selected ACB as one of the three public tender winners for cultivating and distributing medical marijuana in Germany. The company expects to earn higher margins on its medical cannabis sales due to Germany’s broad insurance coverage.

On November 29, Marijuana Business Daily reported a temporary ban on ACB’s cannabis sales in Germany. Germany’s health authorities anticipate reviewing ACB’s proprietary process, deployed to maximize the cannabis flower’s shelf life. Although temporary, this ban can cause ACB to permanently lose a significant portion of its customer base.

Patients who temporarily switch to other products are expected to require prescriptions to return to ACB’s products. Against the backdrop of a ban, physicians may not be willing to prescribe ACB’s products. They may be concerned about future product availability issues.

ACB has a significant presence in other European markets

According to its investor presentation, Aurora Cannabis is the first licensed cannabis producer to export medical cannabis to Denmark. In January 2018, the company formed a joint venture with Alfred Pedersen & Søn to establish  Aurora Nordic.

Based in Odense, Denmark, ACB has a 51% ownership stake in the 1 million-square-foot Aurora Nordic facility. With a goal of becoming Europe’s largest cannabis producer, Aurora Nordic also comes with a 100,000-square-foot retrofit facility. In February 2019, the company agreed to acquire a 51% stake in Gaia Pharm Lda to establish a local medical cannabis and derivative products facility in Portugal.

In July 2018, ACB became the first licensed producer to secure a letter of intent (or LOI) from Malta Enterprise for a seed-to-pharma cannabis operation. The company is also the first licensed producer to export medical cannabis to Malta.

In February 2019, Aurora Cannabis completed its first commercial shipment of medical cannabis oil to the United Kingdom. In July 2019, the company also won a two-year contract to export medical cannabis to Italy. The company must supply at least 400 kg of medical cannabis to the Italian government. ACB also became the first licensed producer to privately export medical cannabis to the Italian government in April 2018.

In October 2018, Aurora Cannabis became the first licensed producer to secure the Polish Ministry of Health’s approval for supplying medical cannabis to Poland. The company also completed the first order of medical cannabis to the Czech Republic through pharmaceutical wholesaler Czech Medical Herbs in November 2018.