The “Transformation” of Aurora Cannabis Under the Leadership of Its CEO Can Teach Competitors a Lot
At first glance, it seems like a bad idea to bet on a market that has been around for a long time instead of going with the crowd on adult-use cannabis and dreams of hundred-billion-dollar markets.
But Aurora Cannabis did just that three years ago. When other companies were betting on recreational marijuana, which became legal in Canada in 2018, Aurora Cannabis bet on medical cannabis.
It works, and other CEOs and top executives could learn from it.
The licensed producer in Edmonton, Alberta, went in the opposite direction of everyone else. This put the company in the enviable position of having far fewer competitors, a healthy balance sheet, and organic growth in medical markets overseas.
“I knew that people made money in medicine. “I know rec was a maybe, coulda, woulda, shoulda, but I knew we were losing money on rec, and we didn’t see it getting better,” Aurora CEO Miguel Martin told MJBizDaily in a phone interview.
Even though Aurora is still not making money, it seems to be heading in the right direction.
Consider the 9th of February. It was a day of contrasts for two companies that were seen as leaders in the early years of Canada’s cannabis industry for adults.
Employees of Aurora went to a virtual town hall meeting to mark a sort of milestone.
In its second fiscal quarter of year, the company had just reported small but positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 1.4 million Canadian dollars ($1 million).
Aurora also marked the end of a painful process of change that had started three years before.
On the same day, things were very different at competitor Canopy Growth.
Aurora had finished its “transformation,” but Canopy said it would start its own.
The Ontario-based LP said it was closing its “flagship” and “symbolic” cultivation facility at 1 Hershey Drive in Smiths Falls. This was an old chocolate factory.
The company was also getting rid of about 800 jobs, which is more than a third of its staff. It’s not clear where the top executives of Canopy will work after the building closes in about five months.
Canopy has lost CA$2.6 billion in its current fiscal year, which ends in March, and there’s still one quarter left. This is what led to the layoffs.
Aurora Is Used to Being In This Situation
On Sept. 8, 2020, Martin became CEO of Aurora. Two weeks later, the company reported a net loss of CA$ 3.3 billion for its 2020 fiscal year. This was one of the biggest losses in the cannabis industry’s history.
Then, Aurora was already six months into the first phase of its own “transformation” plan, which was started by Michael Singer, who was the interim CEO at the time.
On February 9, 2023, three years later, Aurora said that the change was done.
Martin told MJBizDaily that there were a lot of hard things going on during all of the cutting back.
“But going through that in 2020 instead of 2022—whether it’s the capital markets or the Canadian recreation market—I’m just so glad we took care of it earlier because it would be hard right now.”
Getting the Size Right
When Aurora announced its reorganization in February 2020, a news release said that it needed 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 a lot more cannabis than it could sell.
The company did this in expensive greenhouses in many different countries.
In a previous interview with MJBizDaily, Martin called what led up to that time an “arms race” in greenhouses.
In the first step of the change, the company’s supply and demand were balanced.
Before Martin became CEO in early 2020, an investor presentation bragged that the company could grow 150,000 kilograms of cannabis per year at 11 sites in three countries.
That year, Aurora sold 51,441 kilograms (56.7 tons) of marijuana, which was only a third of the 152,740 kilograms it grew.
Only four of these 11 sites are still used today.
Aurora saved money by selling most of them during its corporate makeover. This cut production in half in the 2022 financial year, to 73,371 kilograms.
That year, the company sold 50,033 kilograms of cannabis, which was a big jump from the years before.
Martin said, “There was just no way to make it work,” referring to over-cultivation.
When Aurora made Martin CEO from the chief commercial officer, the company said that part of his job was to run the next phase of Aurora’s business makeover, with a focus on commercial strategy.
Martin told MJBizDaily in an interview that Aurora “got really aggressive two and a half years ago, starting with the balance sheet and the amount of debt, then doing a very aggressive review and bringing in some really thoughtful third parties about (cultivation) footprint. And while doing all of that, we are also looking at our core business.”
Even though the company’s costs were going up a lot, it was time, to be honest about what Aurora had going for it.
The Shift from “Core” to Medical
As Aurora decided to make a big change by focusing on the medical cannabis business while still keeping a foot in the recreational side of the market, it had to make some hard choices.
Martin said, “I think we all put aside our pride when it came to rec and decided that it would be fine to be ninth or tenth in terms of market share, which would be 2.7 or 2.8 percent of the market.”
In the last few years, Aurora’s market share in the very competitive adult-use market has plummeted.
Shortly after legalization in 2018, the company had more than 20% of the market. Since then, its share has slowly gone down to less than 3%, which means that large cultivation facilities are not being used.
Martin said of the company’s adult-use business, “Margins were going down, the (market) share was going down, all of our business was on deep discount, and it just didn’t seem right.”
But its share of the medical market in Canada has been slowly going up. (The value of Canada’s medical marijuana market has been going down, but it is still the largest federally legal medical marijuana market in the world.)
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Martin and His Team Looked at The Company’s Main Business Plan Again
Martin said in February 2022 that some of the most important parts of the medical strategy would be better margins, less competition, higher barriers to entry for competitors, and sales opportunities in markets that already exist, not ones that might exist in the future.
Martin notices that there are a lot of medical markets outside of Canada and that they are growing steadily.
“Right now, the lion’s share of profit comes from medical cannabis,” he said, talking about how marijuana companies make money now.
“In the medical field, you only have to compete with a few companies overseas, but in Canada, we have 250. So these (medical markets) are real and are happening right now. They are good for the economy.”
Aurora has the largest market share in Canada because it serves about 60,000 people who use medical marijuana.
As part of the core shift to medical, the company had to figure out what facilities it still needed.
“The next big decision was about Sky,” he said of the company’s flagship greenhouse in Edmonton.
“That one was tough. “It showed what the company stood for in a way,” he said.
“It was a big deal for a lot of people in the industry because it was such a high-tech, automated process, but we just couldn’t grow flowers that could compete.”
After spending more than CA$150 million on the facility, Aurora couldn’t make it work for Sky because it only sold a small part of the company’s production capacity.
Not for cannabis, at least.
Aurora spent CA$45 million last summer to buy a controlling stake in Bevo, a profitable company that grows vegetables and plants for sale.
Bevo also agreed to pay up to CA$25 million to buy the Sky building.
“No one had ever done anything like Sky before,” Martin said. “The system couldn’t handle it.
“And the fixed cost of a building like that made no sense when prices were going down.
“That was hard because Sky meant so much to so many people, both inside and outside of Edmonton.
“But it just couldn’t work, so we had to put it away. Thank God for Bevo.”
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When Martin Took Over, the Company Was in A Lot of Debt. how Did He Change His Mind?
Martin said that he and his team made decisions using a “matrix.”
Martin said in the interview, “The first thing in that matrix, which is a little bit different from most, would be our trust in the regulatory process.”
This new approach shows how important the rules of each country are when it comes to making sales happen regularly.
Martin said that the matrix had different “quadrants,” or pillars, such as:
Having clear rules.
How a market takes advantage of Aurora’s business strengths.
“Size of the prize,” which refers to the number of possible sales.
“It’s just not worth it in some places,” he said, giving Mexico as an example.
“Every once in a while, Mexico is going to legalize marijuana, and everyone gets really excited. But then, when there’s an election, it all goes away,” he said.
“The political system in South (and Central) America didn’t seem stable enough for us to feel comfortable with the huge investments we had in four countries, so we cut it down to one,” he said.
Martin thinks that countries like Australia, the Czech Republic, Germany, Israel, Malta, and Poland have a “thoughtful, science-based regulatory process.”
He said, “That might take longer, but it didn’t look like two steps forward and three steps back.”
“It was going in a way that we thought we could figure out. And most importantly, they were all happy to import (EU-Good Manufacturing Practice) products.”
Aurora kept its asset for growing crops in Denmark, but it doesn’t see any benefit for itself in places like Central America and Northern Africa.
“That was a big part of our competitive edge,” Martin said. “We produce more EU-GMP products than anyone else, and we do it well.
“Then we realized that having a positive EBITDA was important, so we only had a small amount of money to bet with.”
Martin also talked about how Aurora should be different from other cannabis businesses.
Five years ago, there was almost nothing that made Aurora and Canopy different from each other.
Many investors pushed executives to make bad decisions, like building “the biggest greenhouse in the world” or “being first” in as many places as possible, even though there were no actual sales there.
Even though companies still lose money, the business world is different now.
“Take Canopy and Tilray and me. “There’s nothing bad about any of this,” Martin said.
“Tilray is an American company that makes both alcohol and marijuana. That’s alright. They have decided to do it this way.
“Canopy is just as much a Canadian or international company as it is a U.S. option play. That’s all right.”
But, he said, Aurora is “the largest medical company in the world and is based in Canada.
He also said, “We’re all so different.” “Organigram is different and Decibel is different. But we’re all thrown together, and I think that’s bad for everyone.
“Cannabis is still alive. The global change is not getting smaller. I have a strong feeling that a number of Canadian companies will come out on top. I think cannabis is still alive and well, even though it may be taking longer.”
The CEO admits that there is still a lot to do in terms of execution and making money.
Also, investors aren’t jumping for joy just yet.
Over the past year, Aurora’s stock on the Nasdaq has gone down steadily, just like most cannabis stocks. This is because investors lost interest when the hope of real reform in the U.S. went up in smoke.
Aurora’s shares, which trade on the Nasdaq as ACB, are now worth less than $1. They also trade on the Toronto Stock Exchange under the symbol ACB.
“I think now that it’s all about how it’s done,” Martin said.
“How do you make a big medical and recreation system that makes money?
“Because everyone says, ‘Why don’t you just quit recreation and focus on medicine, Miguel? Because rec is a big deal. You learn about the customer, and in these markets, rec is going to be important.
“For us, it’s about making our whole system, including genetics, science, research, cultivation, product development, and execution, more profitable and make more money in Canada, both in the medical and recreational fields.
“And then making a system that can be moved around easily.”