It seems counterintuitive on the surface – bet on a market that’s been around for years rather than following the herd on flashy adult-use cannabis and fantasies of hundred-billion-dollar markets.
But Aurora Cannabis did just that three years ago, wagering its future by betting on medical cannabis at a time other companies were wagering on recreational marijuana, which Canada legalized in 2018.
It’s working, and it could offer lessons to other CEOs and top executives.
The Edmonton, Alberta-based licensed producer zigged when everyone else zagged, putting the company in the enviable position of having far fewer competitors, a healthy balance sheet and organic growth in overseas medical markets.
“I knew that medical made money. And I know rec was a maybe, coulda, woulda, shoulda, but I knew we were hemorrhaging cash on rec, and we didn’t see it getting better,” Aurora CEO Miguel Martin told MJBizDaily in a phone interview.
Aurora, though still not profitable, appears to be tracking in the right direction.
Consider Feb. 9: It was a day of contrast for two companies considered bellwethers in the early years of Canada’s adult-use cannabis industry.
Aurora employees attended a virtual town hall meeting to mark a milestone of sorts.
The company had just posted a modest but positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) worth 1.4 million Canadian dollars ($1 million) in its second fiscal quarter of the year.
Aurora also marked the completion of a painful transformation program it had begun three years earlier.
On that same day, the atmosphere at rival Canopy Growth was markedly different.
While Aurora had exited its “transformation,” Canopy announced it was embarking on its own.
The Ontario-based LP disclosed it was closing its flagship – and symbolically meaningful – cultivation facility in an old chocolate factory at 1 Hershey Drive in Smiths Falls.
The company also was cutting more than a third of its workforce, or about 800 positions. It’s unclear where Canopy’s top executives will work after the facility is closed in approximately five months.
Prompting the downsizing were ballooning losses: Canopy has lost CA$2.6 billion in its current fiscal year – which ends in March – and there’s still another quarter to go.
Aurora knows this situation well.
Two weeks after Martin took over as Aurora’s CEO on Sept. 8, 2020, the company reported a net loss of CA$3.3 billion for its 2020 fiscal year – one of the largest ever in the cannabis industry.
By then, Aurora was already six months into the first phase of its own “transformation” plan, initiated by then-interim CEO Michael Singer.
Three years later, on Feb. 9, 2023, Aurora announced it had completed the transformation.
“There were a lot of tough things in the midst of all that downsizing,” Martin told MJBizDaily.
“But going through that in 2020, as opposed to going through that in 2022 – whether it’s the capital markets, whether it’s the Canadian rec market – I’m just so glad we got it taken care of earlier, because right now it’d be a real challenge.”
Rightsizing footprint
When Aurora announced its corporate overhaul in February 2020, a news release described the need to “significantly reduce the company’s expense base, rationalize capital expenditures, and better align its balance sheet with current market conditions.”
In other words, Aurora, like most of Canada’s large cannabis producers at the time, was growing far more cannabis than it could sell.
The company was doing so in costly greenhouses scattered across many countries.
In a previous interview with MJBizDaily, Martin described the circumstances leading up to that point as a greenhouse “arms race.”
The transformation’s initial phase involved fixing the company’s supply-demand imbalance.
In early 2020 – before Martin was CEO – an investor presentation boasted that the company’s cultivation capacity was 150,000 kilograms per year, spanning 11 sites in three countries.
That year, Aurora sold 51,441 kilograms (56.7 tons) of cannabis – only one-third of the 152,740 kilograms of marijuana it grew that year.
And among those 11 sites, only four are in use today.
Selling most of them during its corporate makeover helped Aurora save money and halve production in the 2022 financial year – to 73,371 kilograms.
The company sold 50,003 kilograms of cannabis that year – a major improvement over previous years.
Martin said of the excess cultivation: “There was just no path forward to making it work.”
When Aurora promoted Martin to CEO from chief commercial officer, the company said part of his role was to execute the next phase of Aurora’s business overhaul, with a focus on commercial strategy.
Martin said during the MJBizDaily interview that Aurora “got really aggressive 2½ years ago, starting with the balance sheet and the debt load, then doing a very aggressive review, bringing in some really thoughtful third parties about (cultivation) footprint. And in the midst of that also looking at core business.”
While cutting deep into the company’s expenses, it was time for a frank assessment of Aurora’s advantages.
‘Core’ shift to medical
As Aurora decided to shift gears dramatically by focusing on the medical cannabis business – while keeping its toes in the recreational side of the market – more difficult decisions needed to be made.
“I think we all dropped our ego about rec, and that it was going to be OK to be ninth or 10th” in terms of market share, “which would be a 2.7 or a 2.8 (percentage of market) share,” Martin said.
Aurora’s market share in the ultracompetitive adult-use segment has nosedived in recent years.
The company started with more than 20% of the market shortly after legalization in 2018, but its share has fallen gradually to below 3% today, leading to large cultivation facilities being underutilized.
Martin said of the company’s adult-use business, “Margins were going down, (market) share was dropping, all of our business was on deep discount, and it just didn’t seem right.”
But its share of Canada’s medical market has been gradually increasing. (Canada’s medical market has been falling in value but remains the world’s largest federally legal medical marijuana market.)
Martin and his team reassessed its core business strategy.
In February 2022, Martin said key components of the medical strategy would include better margins, less competition, higher barriers to entry for competitors and the availability of potential sales in markets that already exist today – rather than hypothetical ones that might exist down the road.
Martin observes that medical markets outside Canada are numerous and experiencing steady growth.
“Medical cannabis is the absolute lion’s share of profitability right now,” he said, referring to where marijuana companies are making money today.
“(Overseas) you only compete against a couple of companies (in medical), unlike Canada, where we have 250. So these (medical markets) are real, they’re today. They’re great economics.”
Aurora serves roughly 60,000 active medical cannabis patients in Canada, making it No. 1 in terms market share.
Part of the core shift to medical involved assessing which facilities the company still needed.
“The next big decision was around Sky,” he said of the company’s flagship greenhouse in Edmonton.
“That was a tough one. It was sort of a beacon of what the company stood for,” he continued.
“It was this important touchstone for a lot of people in the industry as an ultramodern, automated process, but we just couldn’t grow competitive flower.”
Selling only a small fraction of the company’s production capacity meant Aurora ultimately couldn’t make the economics work for Sky after spending more than CA$150 million on the facility.
At least not for cannabis.
Aurora spent CA$45 million last summer to acquire a controlling interest in Bevo, a profitable supplier of propagated vegetables and ornamental plants.
Bevo also agreed to acquire the Sky facility for up to CA$25 million.
“No one had ever done anything like Sky before,” Martin said. “The system just didn’t support it.
“And the fixed cost of a facility like that, when prices were declining, just didn’t make any sense.
“That was hard, because Sky was so important to so many people, externally, internally, Edmonton.
“But it was just untenable, so we had to mothball it, and thank God for Bevo.”
Aurora’s ‘matrix’
The company was swimming in a sea of red ink when Martin took over. How did he turn that around?
Martin said he and his team used a “matrix” to drive decision-making.
“The first thing in that matrix, which is a little bit atypical for most, would be our confidence in the regulatory process,” Martin said in the interview.
Why?
This new approach reflects the significant role a respective country’s regulations play in prying open potential and consistent sales.
Martin described the matrix as having various “quadrants” or pillars, including:
- Regulatory certainty.
- How a market leans into Aurora’s corporate advantages.
- “Size of the prize,” referring to potential sales.
“There are some places where it’s just not worth it,” he said, citing Mexico as an example.
“Every once in a while, Mexico’s going to legalize cannabis, everyone gets all excited, and then it goes away, because there’s an election,” he said.
“South (and Central) America did not seem to have the steadiness of the political process for us to be comfortable with the massive investment that we had in four countries, so we took it down to one,” he said.
Instead, Martin sees a “thoughtful science-based regulatory process” in countries such as Australia, the Czech Republic, Germany, Israel, Malta and Poland.
“That may take longer, but it didn’t seem to be two steps forward, three steps back,” he said.
“It was moving forward in a way that we thought was predictable. And importantly, all of them were comfortable with importing (European Union-Good Manufacturing Practice) product.”
Notably, Aurora maintained its cultivation asset in Denmark but doesn’t see any advantage for itself in places such as Central America and Northern Africa.
“That was a core competitive advantage that we had,” Martin said. “We have more EU-GMP production than anybody, and we’re good at that.
“Then we realized that EBITDA positivity was important, so we only had a little bit where we could make some bets.”
Differentiation
Martin also talked about separating Aurora from other cannabis companies.
Five years ago, there was virtually nothing to differentiate the Auroras and Canopys of the industry.
Many investors encouraged executives to make poor decisions by building “the biggest greenhouse in the world” or “being first” in as many places as possible – forget that there were no actual sales there.
The industry is different today, even though companies continue to lose money.
“Take us, Canopy and Tilray. And none of this is negative,” Martin said.
“Tilray is as much a U.S. alcohol company as they are a cannabis company. That’s fine. That’s the decision they’ve made.
“Canopy is as much a U.S. option play as they are a Canadian or international entity. And that’s fine.”
But Aurora, he noted, is “a Canadian medical company that is the largest internationally.
“We’re all so different,” he added. “Organigram is different and Decibel is different. But we all get smashed together, and I think it does everybody a disservice.
“Cannabis is not dead. The global opportunity is not slowing. I’m of the strong belief that there’ll be a good amount of Canadian companies that are the winners. I think cannabis is alive and well, albeit maybe it’s taking longer.”
The CEO acknowledges there is still much to do regarding execution and profitability.
Also, investors aren’t celebrating yet.
Aurora’s stock has declined steadily over the past year on the Nasdaq – along with most cannabis stocks – as investor enthusiasm evaporated when the prospect of meaningful reform in the U.S. went up in smoke.
Aurora’s shares – which trade as ACB on the Nasdaq – now sit below $1. They also trade as ACB on the Toronto Stock Exchange.
“Now I think it’s really about execution,” Martin said.
“How do you create a big, profitable medical and rec system?
“Because everyone says, ‘Miguel, why don’t you just get out of rec and just focus on medical? Because rec is really important. You learn about the consumer, and rec’s going to be important in these markets.
“For us, it’s the evolution of strengthening our overall system, making it more profitable – genetics, science, research, cultivation, product development, execution – and making more money in Canada, both in medical and rec.
“And then creating a system that’s really portable.”
Matt Lamers can be reached at matt.lamers@mjbizdaily.com.
