Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) has invested a significant amount of money into innovation and efficiency, making it attractive as an investment
John Brooker | June 5, 2019 | SmallCapPower: Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) is one of the Canadian cannabis stocks and is the second-largest Canadian cultivator by market cap. The Company has invested a significant amount of money into innovation and efficiency, which makes them attractive as an investment. In an article published on May 24, 2019, we discussed how Aurora Cannabis has a medical cannabis market edge. Today we are going to examine the extensive CAPEX investments that Aurora has made into innovation and efficiency, and why we believe this gives the Company an advantage over its competitors.
Aurora Cannabis is one of the largest and fastest-growing cannabis companies globally, with a current annual production capacity of ~150,000 kg. ACB is vertically integrated and horizontally diversified across many verticals in the cannabis value chain. The segments of Aurora Cannabis include:
- Facility Engineering
- Cannabis Breeding
- Genetics Research
- Production, Derivatives
- High Value-add Product Development
- Home Cultivation, Wholesale
- Retail Distribution
Additionally, the Company’s products include:
- Dried cannabis & cannabis oil
- Vegan cannabis oil capsules
- Hemp products
- Vaporizers & vaporizer accessories
- Herb mills
Aurora’s strategic acquisitions and investments have positioned it as an expert in greenhouse construction and cultivation, with a strong & broad cultivation footprint, and extraction expertise.
Extensive investments into innovation and efficiency prepare Aurora Cannabis for future success
To determine which Canadian cultivator is positioned best within the cultivation space (or the specific area(s) in which they are focused), it is important to assess future strategy, as well as cost structure & margins. Aurora is active in the R&D side of the medical cannabis industry, with 40 clinical trials and case studies either completed or in progress, along with various medical patent applications also in progress.
Aurora Cannabis has invested significant resources into cannabis genetics as well. Understanding the genetic composition of cannabis strains can be a huge advantage for a cultivator, as it can allow them to grow strains with specific characteristics and properties. Aurora was one of the first companies to set up a plant tissue culture program back in February 2015, when it announced an agreement with CanGenX Bio Tech to produce plant tissue culture. In June 2018, ACB invested $115M to acquire one of the leaders in cannabis testing, genetics and R&D, Anandia Labs. At the time of the acquisition of Anandia, Aurora Cannabis cited its intellectual property, which includes the exclusive rights to several key genes in the cannabinoid pathway and patents for genetic markers. This, combined with the strength of Anandia’s expert staff, should provide Aurora with a significant advantage in developing new cannabis cultivars with improved disease resistance, increased crop yield, and lower flowering time. Recently, Aurora Cannabis took further steps to expand its genetics library with the acquisition of Whistler Medical in an all-stock transaction for ~$175 million. Whistler has already commercialised more than 30 flower varieties and strain-specific oil products from an extensive genetics bank of over 150 strains.
Over the past five years, many Canadian cannabis companies have focused on adding production capacity. While demand is currently expected to outpace supply for the next one to two years, the ramping up of production is poised to lead to price compression and downward pressure on margins. We can already see evidence of this based on data from Statistics Canada.
Source: Statistics Canada
Consequently, companies that are not focused on investing in innovation and efficiency are likely to be put in a difficult financial position as industry-wide margins begin to shrink. Aurora’s significant investments into both efficiency and innovative efforts should benefit the Company in the long run, as these efficiency investments are expected to help them attain favourable margins. In November 2017, ACB acquired Larssen Ltd, a company that focuses on high-tech, automated, and environmentally-controlled greenhouses. Over time, Larssen will provide 360-degree solutions for facility design, engineering, construction, maintenance, cultivation, and meeting regulatory requirements. In August 2018, Aurora followed up the Larssen deal by acquiring the cannabis business of HotHouse consulting Inc., a provider of greenhouse consulting services. This follows a December 2016 and November 2017 investment in Radient Technologies, an extraction company that uses Microwave Assisted Processing (MAP), a patented technology to separate cannabis oil from plant material. For Aurora Cannabis, the purpose of this acquisition was to develop a more efficient extraction process. Another strategic investment Aurora has made to improve efficiency and encourage innovation was acquiring Micron Waste Technologies Inc, a developer of proprietary digester solutions for the treatment of organic waste. Micron has developed a new technology that converts organic waste into clean water that meets municipal effluent discharge standards.
Aurora Cannabis stock currently trades at a market cap of $9.8 billion.
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