The Aurora Edge
How the newest player in Canada’s medical marijuana industry can smoke out the competition
On April 1, 2014, Health Canada introduced a new regulatory framework, the Marijuana for Medical Purposes Regulations (MMPR), which served as a platform for the birth of Canada’s commercial medical marijuana industry. Heath Canada’s regulation enables private-sector enterprises to become, upon receipt of a license from Health Canada, licensed producers and distributors of medical marijuana to registered patients (Patients). Today’s industry is expected to hold a $1.3B dollar valuation by the end of the decade, as the number of Patients is expected to rise from 40,000 to almost 500,000 by 2024 in Canada. Presently, however, licensed producers operate in an increasingly competitive landscape with no cap indicated on the total number of licenses to be granted.
Such a competitive environment poses challenges for newly emerging licensed producers, such as Aurora Cannabis Enterprises (Aurora). Industry leaders, such as Canopy Growth Corporation, have been authorized to sell medical marijuana since nearly the inception of the new regulation. Aurora, a publicly traded company holding a 55,000 sq.ft purpose- built production facility, only received its license to cultivate medical marijuana in February 2015. As such, Aurora enters the market at a critical time upon its final inspection by Health Canada. Those producers preceding Aurora in receiving a sales license have secured foundations of repeating Patients who provide a source of recurring revenue. As a result, Aurora must develop a proactive strategy by which to compete against the host of incumbent licensed producers in maximizing Patient acquisition.
An examination of the current regulatory environment and operational strategy of leading Canadian licensed producers reveals that Aurora can develop an effective platform for Patient acquisition by forging an exclusive research partnership with Israeli licensed producer, Cann Pharmaceutical. As a result, Aurora can operate at the forefront of industry developments and engage in outreach initiatives with Canadian health care practitioners.
General Barriers to Patient Acquisition
Potential medicinal users of medical marijuana become Patients by receiving a prescription from a health care practitioner and registering that prescription with a licensed producer. Once registered, regulation stipulates onerous requirements for Patients wishing to amend their registration. The difficulty in switching producers underscores the significance of Aurora’s ability to capture and retain Patients seeking their first licensed producer.
Health Canada’s regulation is explicit in prohibiting any advertisement of marijuana “as a treatment, preventative or cure for any disease, disorder or abnormal physical state”. As in order switching producers underscores the significance of Aurora’s ability to capture and retain Patients seeking their first licensed producer.
Health Canada’s regulation is explicit in prohibiting any advertisement of marijuana “as a treatment, preventative or cure for any disease, disorder or abnormal physical state”. As a result, Aurora may only reach prospective Patients through activities not intended to promote the sale of medical marijuana. Such a limitation emphasizes the need for an indirect yet influential channel by which to reach and attract first-time Patients.
Engaging in outreach initiatives targeted to health care practitioners and strategic third parties can help Aurora bolster Patient acquisition rates by means of Patient referrals. While individual Patients can register with licensed producers of their choosing, the collective influence of health care professionals will be significant to Aurora’s ability to acquire Patients. Health care practitioners are influential in the decision-making of Patients via frequent interaction and legal freedom to share a wide variety of information, including views on perceived product quality and research advancements associated with each licensed producer. By forging relationships with practitioners who can relay such information, Aurora can gain access to a legitimate and powerful forum to attract a large Patient base. Presently, however, many doctors are reluctant to prescribe medical marijuana, alleging a lack of science-based evidence regarding medicinal effectiveness.
Recognizing that practitioners are in the driver’s seat of determining Patient acquisition rates, several licensed producers are attempting to approach practitioners with research that may convey indicators of efficacy. These producers hope that promulgating a better understanding of medical marijuana’s potential medical efficacy will encourage practitioners to recommend their brand. Examples of proactive licensed producers include MedReleaf, which has 20 clinical trials underway, along with Canopy Growth Corp. who interacts directly with practitioners to disseminate awareness of pre- existing information surrounding medical uses of marijuana. In FY2015, Canopy Growth’s Medical Outreach Team conducted over 5000 physician visits. Correspondingly, the LP demonstrated a steady pattern of growth for each operational quarter. Grams sold grew to 165,000 in March 2015 with the number of grams sold between January and March 2015 having tripled the number of grams sold between January and March of 2014.
Harvesting Strategic Research Dollars
To best respond to health care practitioner concerns, Aurora should seek to secure a leadership position in R&D by establishing an exclusive partnership with Israeli medical marijuana producer, Cann Pharmaceutical (Cann), with more than fifteen years of experience producing medical marijuana, branded under the “Better, Medical Grade Cannabis” banner.
This partnership will enable Aurora to lead the industry in addressing research-based concerns of health care practitioners. Israel is widely renowned for its reputation as a predominant and progressive world leader in medical cannabis research. In addition, Aurora can avoid the lengthy approval process from organizations such as Health Canada and the Drug Enforcement Administration.
Aurora can gain access to a foundation of pre-existing proprietary product and related patient research accumulated by Cann. Furthermore, Cann’s established relationships with the network of Israeli hospitals, and both federal and university laboratories will prove advantageous in commissioning further research. It is allegedly easier to conduct medical marijuana- related research and clinical studies in Israel than in any other country in the world. Out of the eight existing Israeli producers, Cann holds a significant competitive advantage in its 15 years of production, research, and patient experience. Therefore, it is imperative for Aurora to act swiftly in securing this partnership in order to capture Cann before other Canadian licensed producers and maximize the host of data which it can build upon and distribute to healthcare practitioners.
Conducting and presenting the findings of such research will highlight Aurora’s commitment to R&D and emphasis on product quality – elements of considerable importance to practitioners searching for the most scientifically sound avenue in which to direct Patients.
Why Cann Must Enter Canada
Cann currently operates in an Israeli market with meagre numbers of domestic Patients and a federal prohibition on the exportation of medical marijuana. Also, Israelis are currently being treated with medical marijuana under official permits that many allege are becoming increasingly difficult to obtain. Continuing to operate in such a limited market constricts Cann’s ability to capitalize on its wealth of accumulated product and patient knowledge to bolster top-line growth.
In contrast, Canada currently boasts 40,000 medical marijuana Patients expected to reach almost 500,000 by 2024. In addition, regulations allow for Canadian licensed producers to be granted export permits. Canada could be one of the world’s top medical marijuana exporters, due to its high-quality products that are a result of Health Canada’s strictly regulated cultivation practices and product standards. Aurora has aligned its growth strategy with international expansion and the aggressive pursuit of export contracts. In April 2015, Aurora entered an agreement to form Australis Holdings LLP to construct a new marijuana production facility in the US; the site will be the largest industrial development catering to the cannabis industry in Washington. Aurora’s international growth and export potential can strengthen Cann’s top-line growth while providing a tremendous degree of international brand recognition.
Cann should move swiftly to capitalize on the rapidly growing Canadian medical marijuana market, however, it faces many challenges to entering Canada independently. While Health Canada has not indicated a cap on the number of licenses to be granted, it was suggested in the first draft of the legislation that the number of licensed producers would not exceed 50. As of March 31, 2015, Health Canada had received 1,284 applications, granted licenses to 25 producers, and was in progress of reviewing 324 other applications. The application process is arduous and takes approximately two years to grant a sales license under ideal conditions. Additionally, Cann must consider the significant degree of saturation already present in the Canadian market. With 25 licensed producers having already been granted licenses and large industry actors having begun consolidation to form dominant entities, Cann would be faced with tremendous competition without the partnership with Aurora Edge.
Blossoming in the Long-Term
In the short-term, it would be feasible for Aurora to seek Patient acquisition by assuming a position of cost leadership. This can work to maximize market share in the price-sensitive Canadian market where many Patients pay 10 to 30 times more under the regulation than under the old regime. Being the only licensed producer in Alberta allows Aurora to minimize capital and operational costs as a result of one of the lowest national tax rates and Alberta’s deregulated utility system. However, in the future, with the prospect of a Canadian recreational market and the potential for a dramatic rise in production as seen in Washington and Colorado, pressure on prices will likely extend across the industry. Therefore, it will be important for Aurora to partner with Cann to facilitate a long-term approach to Patient acquisition. Notably, when industry-wide cost pressure materializes, Aurora will likely have learned how to best use its cost structure so as to remain competitive in profitability. This will likely be of appeal to Cann in choosing to partner with Aurora.
Moreover, the partnership can position Aurora as a first-mover in the production and research of medical marijuana derivative products, such as cannabis oil. With medical marijuana extracts comprising between 30 to 60% of legal market sales in the US, a significant opportunity exists to capitalize on such products. Aurora can use Cann’s long-term experience in the production of medical marijuana-derivatives to secure a first-mover advantage in undertaking best production practices related to oils. Similarly, Aurora can use Cann’s ability to expediently commission Israel-based research to act proactively in educating health care practitioners on the short and long-term. Patient impact associated with such products. It is feasible for Aurora to be top-of-mind for practitioners in this new realm of products.
Proactive engagement in oil-based research, best production practices and health care practitioner education initiatives can also enable Aurora to secure exclusive relationships with specialty clinics whose Patients stand especially to benefit from oil-based medical marijuana. Establishing such partnerships would deem Aurora the preferred supplier in exchange for research commitments tied to the medical marijuana-treatment of the specific ailments these clinics service. Licensed producers such as Organigram and Aphria have entered similar arrangements with various national organizations. Aphria expects income from sales generated by these contracts to comprise 25 to 30% of revenue. These licensed producers have also secured a consistent stream of demand for long-term periods between 3 to 10 years, with options to extend. A strategic partnership with Cann Pharmaceuticals today provides Aurora with the winning edge it needs to acquire a highly sustainable source of incoming Patients in the future.