Today we break down reasons why Aurora Cannabis Inc. (TSX:ACB) is one of the strongest cannabis stocks in the market
John Brooker | May 24, 2019 | SmallCapPower: Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) is one of the most popular cannabis stocks amongst millennials, according to an April 30, 2019, article by Motley Fool. The Company is the second-largest Canadian cultivator by market cap and has a distinguishable international strategy into medical markets, which makes them attractive as an investment in our opinion. Today, we will break down this international strategy and why it is expected to give the Company an edge over its competition in the long run.
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Aurora Cannabis is one of the largest and fastest-growing cannabis companies in the world, with a current annual production capacity of approximately 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, and Retail Distribution. The Company’s products include dried cannabis & cannabis oil, vegan cannabis oil capsules, hemp products, vaporizers & vaporizer accessories, and 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.
Aurora Cannabis’ expansion into medical markets expected to increase operating margins
With two well-established medical brands, MedReleaf and CanniMed, as well as medical supply agreements with Shoppers Drug Mart, Pharmasave, and PharmaChoice, Aurora Cannabis has positioned itself to become a dominate player in the Canadian medical market.
The goal of Aurora’s international strategy is to increase long-term operating margins. While many Canadian cultivators have focused on the recreational market, Aurora Cannabis has differentiated itself by investing heavily into medical cannabis. The Company has a strong presence in the Canadian market, currently with ~20% market share, and has established itself as one of the top three brands amongst Canadian medical cannabis consumers.
Canadian Cultivators Estimated Patient Count
Source: Jefferies Group LLC estimates
Aurora Cannabis Medical Business Review
Source: Data complied from Lift & Co Reviews
The market for medical cannabis may be smaller than the market for recreational, however we are of the opinion that targeting the medical market is more advantageous for Aurora. This is due primarily to its best-in-class medical platform & distribution networks, which provides the Company with the potential for high-operating margins. According to the Canadian fourth-quarter National Cannabis Survey, higher margins on the medical side are a result of medical patients using cannabis more frequently than recreational users (Health Canada estimates medical patients use 2.1 grams/day).
Additionally, medical consumers buy more often than recreational consumers, and are more willing to buy cannabis derivatives products, such as oils and tinctures. Derivative products feature higher price points and greater margins than dried flower. With medical cannabis there is also the potential to export products internationally as 40+ countries globally have legalized cannabis for medical purposes, while only two countries have legalized recreational use. Health Canada reported that in 2018 Canadian cultivators exported ~1,500 kg of cannabis (Source: archived data, new data).
Currently, education is one the largest barriers preventing use of medical cannabis, specifically amongst doctors and patients. Most patients are uneducated regarding medical cannabis use and indications. According to Health Canada, there are ~180 licensed producers in Canada with over 700 strains to choose from. With all this choice, patients will generally look to their doctors for advice regarding what product to consume. The issue here is that there is still a misalignment between doctors in Canada and the medical cannabis industry, as only 1/8th of registered Canadian doctors are prescribing cannabis despite there being nearly 350,000 qualified medical patients. Most doctors have been taught their entire career to base their decisions on scientific information, not anecdotal evidence. Therefore, the lack of clinical trials and research regarding the medical benefits of cannabis remains a deterrent for many doctors. Building trust with both patients and doctors will be crucial to success in the medical space in Canada. 
Aurora’s commitment towards educating and building trust with patients and doctors should help them become a market leader in the Canadian cannabis space. Currently, Aurora Cannabis is the only Canadian cultivator to have a dedicated app for patients, which was launched in 2016, and includes the ability to browse, purchase, and amend prescriptions.
Aurora also acquired Canvas RX, Canada’s largest medical cannabis patient outreach and counseling service, in 2016.
Aurora Cannabis is active in the R&D side of the medical cannabis industry. The Company has 40 clinical trials and case studies either completed or in progress. ACB also has a total of three medical patent applications. Aurora has partnered with Mitacs, a national not-for-profit research and training organization, to fund the University of Alberta research program studying the health outcomes associated with cannabis use. The Company also launched an international collaborative medical research project that will comprehensively examine the therapeutic impact and human health outcomes of CBD oil as a therapy for chronic pain, anxiety, and depression.
Aurora Cannabis stock currently trades at a market cap of $11.7 Billion.
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