Aurora Cannabis Is Going Head to Head With Canopy Growth Over This High-Margin Product

Big changes are happening in Canada. Following a decisive 56 to 30 vote on bill C-45 in Canada’s Senate, it now looks to be just a matter of time before recreational marijuana is legal in our neighbor to the north. Becoming the first developed country in the world to legalize adult-use marijuana should open the door to billions of dollars in added annual sales for Canadian pot stocks up and down the supply chain.

Given this near-certainty, it’s no surprise that Canadian growers have been expanding their capacity as quickly as their balance sheets will allow.

Image source: Getty Images.

Canopy Growth and Aurora Cannabis aren’t natural competitors…

Canopy Growth Corp. (NYSE: CGC), which is the largest pot stock by market cap, has more than tripled its licensed production capacity since the year began, and is expected to more than double it once again in the months and years to come. With approximately 5.7 million square feet of growing space in British Columbia, Canopy Growth is expected to generate in the neighborhood of 500,000 kilograms of cannabis a year.

Canopy also owns the most recognizable cannabis brand throughout all of Canada: Tweed. Tweed’s online sales are expected to play a critical role in winning over recreational weed consumers in the coming months. Combined with Canopy’s partnership with minority stakeholder Constellation Brands, as well as its presence in physical retail stores, Canopy Growth’s distribution network and potential within the recreational market is practically unmatched.

Perhaps the one company that could give Canopy Growth a run for its money is Aurora Cannabis (NASDAQOTH: ACBFF). Having begun the year with an estimated annual production capacity of just over 100,000 kilograms of cannabis, Aurora Cannabis is now expected to generate 570,000 kilograms a year, when at full capacity. This added capacity comes from its acquisition of CanniMed Therapeutics, its pending all-share buyout of MedReleaf, its joint venture with Alfred Pedersen & Son (known as Aurora Nordic), and its announced 1.2-million-square-foot greenhouse project in Medicine Hat, Alberta, to be known as Aurora Sun.

Aurora has a particularly keen focus on the medical side of the market. Even though the recreational weed market is going to be enormous, medical cannabis offers less risk of price fluctuations and commoditization. In other words, while dried cannabis is often thought of as the key product for cannabis producers, it’ll likely be oils, extracts, and other differentiating, high-margin products that make the difference.

Image source: Getty Images.

… but they’re about to go head to head over this product

Though these are two marijuana juggernauts that aren’t natural enemies or competitors, they do now have a product that they’ll be going head to head against each other: softgel cannabis oil capsules for medical marijuana patients.

Canopy Growth has been manufacturing softgel capsules for medical cannabis patients since the midpoint of last year at its Smiths Falls campus, and it’s made these products available at its online website Softgel capsules, which are a higher-priced product that offers a different means of ingestion, generate considerably juicier margins for the pot stocks that sell them, relative to dried cannabis.

As with its cannabis oil products, Canopy Growth offers its softgel capsules with cannabidiol (CBD) or tetrahydrocannabinol (THC). CBD is the nonpsychoactive component of the cannabis plant best known for its medical properties, while THC is the psychoactive component that gets the user “high.”

In Canopy Growth’s third-quarter operating results, the company announced that 23% of total revenue was the result of cannabis oil sales, which includes its softgel capsules. That’s up from just 13% of total revenue in the third quarter of the previous year. Though the company doesn’t break out specifically how much of this 23% in total sales softgel capsules make up, it’s pretty evident that they’re growing in importance for Canopy Growth.

Image source: Getty Images.

The bad news for Canopy is that Aurora Cannabis is entering its softgel space. A week ago today, Aurora Cannabis announced that it was making a 19.99% strategic cash-and-stock investment (worth 10 million Canadian dollars) in privately owned, Montreal-based, Capcium. Capcium is a softgel manufacturer that’ll allow Aurora to more effectively target medical cannabis patients with a differentiated, high-margin product.

Though Capcium’s softgel manufacturing facility isn’t expected to be completed until the fourth quarter of 2019, Aurora plans to establish a softgel manufacturing facility in partnership with Capcium at the Aurora Vie facility in Quebec in the meantime. Assuming an on-time licensing approval from Health Canada, softgel production could begin by the end of this summer. The move would allow Capcium to be Aurora’s exclusive softgel producer, while giving Aurora Cannabis another means to diversify its revenue stream away from dried cannabis.

This is also a smart move on Aurora’s part — and has been a smart decision by Canopy Growth since the middle of last year — considering that export opportunities to countries that’ve legalized medical marijuana are stronger for oil-based products than dried cannabis. Not all of the more than two dozen countries to have legalized medical weed have OK’d the sale of dried marijuana. Meanwhile, cannabis oils are almost universally accepted by these countries, and physicians are much likelier to favor prescribing oil-based products, including softgels, as opposed to smokable cannabis.

It’ll be interesting to see how the softgel market plays out, as well as if other players emerge. But, for the time being, I believe there’s enough demand in this space to safely accommodate both marijuana giants.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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