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Aurora Cannabis: Recreational market gets ‘whatever's left,’ medical is top priority

An employee tends to marijuana plants at the Aurora Cannabis Inc. facility in Edmonton, Alberta, Canada, on Tuesday, March 6, 2018.  Photographer: Jason Franson/Bloomberg via Getty Images

Aurora Cannabis Inc. (ACB.TO) won’t go out of its way to remedy recreational cannabis shortages in Canadian provinces at the expense of sales in higher-margin medical markets, executives said on a post-earnings conference call Monday evening.

The Edmonton-based producer said it captured about 20 per cent of Canadian sales in the first full quarter since recreational legalization, according to Health Canada data.

Aurora is rapidly ramping up production, growing 7,822 kilograms and selling 6,999 kilograms in the three months ending Dec. 31, 2018, up 57 per cent and 162 per cent respectively from the same period a year earlier. Its massive 800,000-square-foot hybrid indoor Aurora Sky facility is now said to be fully complete. The company expects it to reach full production capacity soon.

How much of Aurora’s cannabis will be sold to underserved Canadian recreational buyers in excess of current agreements will depend on demand in higher-value markets and the provinces’ willingness to offer comparable prices.

“We’re not that ready to give them more than what our contract requires when we are getting double in other locations,” Aurora Chief Executive Officer Terry Booth told analysts on the company’s second quarter earnings call. “It is not something that we have top of the priority list in providing cannabis for a lesser price if we don’t have to.”

Shortages have persisted since recreational legalization last October. Retail outlets in Quebec have been forced to limit sales to just three days per week. New Brunswick’s provincial retailer has laid off 60 workers due to lack of inventory. Supply woes forced Ontario’s government to limit the number of brick-and-mortar stores to 25 until the situation is resolved.

Aurora reported $47 million in net revenue from cannabis in the second quarter, $25.9 million for medical and $21.6 from consumer sales. The company said it expects lower average net selling prices per gram equivalent from the Canadian consumer market, versus the Canadian medical and European medical markets.

“Our percentage that we sell into the Canadian consumer market will be whatever’s left after we’ve fully allocated all the other higher-value markets,” Chief Financial Officer Glen Ibbott said on the call. “We’ll meet our minimum commitments. But even within the allocation of provinces, we look province-by-province where it makes sense to supply either our commitment or more than our commitment.”

Aurora is continuing its aggressive international expansion, and expects a strong increase in international exports in the remainder of 2019. The company can sell into some of the most restrictive and promising markets in the European Union, including Germany and Italy. Aurora said it exported its first batch of cannabis oil to the United Kingdom on Monday.

“If I lose sleep over anything, I lose sleep over our ability to supply this global cannabis market. It is coming at us very fast,” Booth said. “I see this world expansion in the cannabis space not even close to being fed properly. It’s at least five years before we have an oversupply situation for companies that can export under EU GMP compliant facilities.”

He expressed frustration over provinces that seem unwilling to pay more for higher-quality cannabis, and suggested Aurora may raise its prices in response. He expects the company will have more leverage to command higher prices as consumers build loyalty to Aurora’s line of products.

“That will give us an opportunity to go back to the provinces and say, ‘Hey, you know what? We have an awesome demand for these particular products. We are going to be increasing our prices. We’re not going to continue to sell our cannabis at the same price as our competitors,’” Booth said. “I think the high-quality cannabis pricing will go up without a doubt.”

Aurora reported a better-than-expected $54.2 million in revenue in the second quarter, up 363 per cent from the same period last year. Net earnings swung to a $237.7 million loss, from a $7.7 million gain from the same period a year ago.

Toronto-listed Aurora shares have climbed about 40 per cent in 2019. Shares fell 4.52 per cent lower  to $9.50 after the market closed on Monday.

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