U.S. Markets closed

'We are leagues ahead of anybody currently in the U.S.': Aurora Cannabis CCO

Terry Booth, chief executive officer of Aurora Cannabis Inc., left, and Cam Battley, chief corporate officer of Aurora Cannabis Inc., attend a news conference at the Toronto Stock Exchange (TSX) in Toronto on Monday, May 14, 2018. (Getty Images)

Cam Battley knows his American competition is going to come on strong. But he doesn’t seem particularly bothered about it.

The chief corporate officer of Aurora Cannabis Inc. (ACB.TO) has long described Canada’s global leadership in the sector as a “happy accident.” One sparked by the 2001 Supreme Court decision forcing Ottawa to open a legal path to medical pot.

Of course, the promise of federal recreational legalization, and the ability to raise capital on North American stock exchanges absent U.S. rivals, has added considerable momentum.

“This has given us a unique historical opportunity where the U.S. is not the leader,” Battley told Yahoo Finance Canada on the sidelines of the O’Cannabiz Conference and Expo in Toronto on Thursday.

Save for a few scant examples, Canada has historically struggled to scale businesses globally. The question is, can Aurora and its peers parlay their first-mover advantage into sustainable market dominance once the mighty U.S. branding machine is fully fired up?

Yahoo Finance Canada Morning Brief

The rising tide of U.S. cannabis is becoming tougher to ignore. Canada’s licensed producers are shut out of a legal market estimated to be worth US$22 billion in legal spending by 2022. Canadian sales are forecast to reach $3.8 billion that year.

The revenue gap appears to be closing, underscoring the pent-up value of the growing patchwork of legal U.S. states. Massachusetts-based Curaleaf Holdings Inc. (CURA.CN) reported fourth-quarter revenue of $32 million, and California’s MedMen Enterprises Inc. (MMEN.CN) brought in $29.9 million. To compare, Aurora reported $41 million in revenue in its fourth quarter.

For now, Canada is the world leader in legal pot. The question of how long that will remain the case is the focus of tense debate as Canadian licensed producers expand their global footprint into Europe and Latin American, and U.S. players mature and consolidate at home.

Battley said he has raised the prospect of Canada’s declining influence with the federal government in recent months, though he declined to name the officials or specify a department.

“Any government, especially in an economy that is changing fast — we’re losing in oil and gas, we’re losing in automotive — would be interested in a growth industry,” Battley said, adding that he found a “receptive audience” in talks with officials about loosening restrictions on branding and promotion to help build loyalty to Canadian product in a safe and regulated way.

He wants politicians to be proud of cannabis grown in their ridings in the way people boast about wine from British Columbia’s Okanagan Valley or Ontario’s Niagara Region. He expects that will take some time.

“They don’t have to be ashamed about it,” Battley said. “We are the leaders, and we will continue to maintain that lead over time, I hope.”

Terry Booth, chief executive officer of Aurora Cannabis Inc., right, gestures while speaking with Cam Battley, chief corporate officer of Aurora Cannabis Inc., center, during a news conference at the Toronto Stock Exchange (TSX) in Toronto, Ontario, Canada, on Monday, May 14, 2018. (Cole Burston/Bloomberg via Getty Images)

LOOKING SOUTH

Last week Aurora’s chief rival Canopy Growth Corp. (WEED.TO) announced a C$3.4 billion bid for New York-based Acreage Holdings Inc. (ACRG-U.CN), hinging on the U.S. government effectively removing federal prohibition.

The deal, which still requires regulatory and shareholder approval, in addition to major U.S. legislative action, has stoked anticipation for similar cross-border offers from Canopy’s Canadian competitors. It also raised the prospect of the U.S. inching closer than previously thought to taking the handcuffs off its fragmented cannabis industry.

Consider that former U.S. House Speaker John Boehner sits on Acreage’s board. He’s publicly remarked that some of the most conservative U.S. lawmakers have evolving views on cannabis.

Boehner is also the honorary chairman for the National Cannabis Roundtable lobbyist group, a major proponent of the STATES Act, which would allow states to legalize cannabis without federal interference.

Last week, Steve White, the chief executive officer of Arizona-based Harvest Health and Recreation Inc. (HARV.CN) said the STATES Act, if passed, would clear hurdles keeping U.S. multi-state operators like his company off the major exchanges.

He predicts U.S. cannabis companies, many of which reside on the Canadian Securities Exchange, will up-list to the New York Stock Exchange, “disappearing” the valuation multiples separating American and Canadian producers, while improving access to banks and institutional investors.

Battley is skeptical that the STATES Act would prompt a sudden surge of new NYSE listings. And he sees plenty of other formidable headwinds for U.S. players looking to take on Aurora.

Under the current rules, seed-to-sale U.S. multi-state operators like Acreage and Harvest have to grow cannabis in the states they sell it in. Each state sets their own regulations.

“What is going to happen when it is nationally regulated? What is the FDA going to do as a regulator? Does anybody know?” Battley asked. “They will have to rethink their production strategy. Having smaller production in each state in which you operate is not the ideal business model.”

Aurora’s handful of ultra-modern “Sky Class” facilities are truly massive by comparison. Battley is aiming for them all to be EU-Good Manufacturing Practices (EU-GMP) certified. It’s one of the highest quality certifications in the world, and fast becoming a global standard for medical cannabis.

“In terms of scale, in terms of production, in terms of revenues, in terms of innovation, we are leagues ahead of anybody currently in the U.S.,” Battley said.

“There are some great companies doing some amazing things in the U.S., but once constraints are lifted, and the NYSE allows both U.S. companies to list there, and allows Canadian companies to operate in the U.S. and touch the plant, we are going to be there in a very, very big way.”

Last year, the company announced it would spin off its Australis Capital Inc. (AUSA.CN) subsidiary focused on growth in the U.S. market. The Edmonton-based producer has the option of reacquiring 40 per cent of Australis’ shares, if cannabis becomes federally permissible.

“You can think of Australis as acting like an advance team for us in the U.S. market,” Battley said.

Aurora also has U.S. billionaire investor Nelson Peltz in the wings as a strategic advisor. With Wall Street acumen and deep ties to major consumer packaged goods companies like Mondelez International Inc. (MDLZ) and the Procter & Gamble Company (PG), Peltz is widely expected to play a key role in Aurora’s U.S. expansion.

“We decided that we didn’t need to give away control to one company in one mature industry à la Constellation or Altria, where they have taken control of those boards. At Canopy the majority (of board members) are from Constellation. At Cronos the majority are from Altria. They are on a clear path to majority ownership of the shares,” Battley said. “(We) envision creating strategic partnerships with multiple companies in multiple different verticals, and remaining independent.”

TAKING TIME

Last year, investors were champing at the bit for Aurora to find a beverage partner after reports the company was in talks with the Coca-Cola Company emerged (KO) on the heels of Constellation’s $5 billion deal with Canopy. No beverage deal has been announced.

“We’ve already demonstrated that we don’t need to follow anyone else’s playbook,” Battley said.

Citing an example, he said at one point the industry found itself in a mad dash to scoop up greenhouse space en mass. Facilities that grew tomatoes and cucumbers.

Aurora held back, favouring a slower build-out based on its advanced “Sky Class” cultivation facilities decked out with advanced air filtration and positive pressure to keep out disease and protect crops.

“It’s really starting to bite right now. If you take a look at the December quarter, we were the production leader in this industry. Canopy harvested 7,500 kilograms. We produced 7,800 kilograms. In Canopy’s prior quarter they did 15,000. They had a significant drop off there, while we are just starting to rise. That’s a big difference because at the time Canopy had 4.3 million square feet of licensed space and we had less than a million,” Battley said.

“We’ve made it clear that our business strategy is a little bit different from some of our peers. Thus far, it has worked out very well.”

Download the Yahoo Finance app, available for Apple and Android.