Aurora Cannabis Strikes Oil in Germany, and Higher Revenue and Profit Margins Should Be on the Way

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Nearly everyone has focused on Aurora Cannabis' (NYSE: ACB) great opportunity in the Canadian recreational marijuana market. The company has gotten off to a pretty good start with that opportunity, capturing a 20% market share in its latest quarter.

But nearly everyone also knows that Aurora's future rides largely on international medical marijuana markets. The largest of these international opportunities right now is Germany. On Tuesday, Aurora Cannabis announced that it had begun selling cannabis oils to German pharmacies. It's a milestone that should mean that higher revenue and profit margins are on the way.

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The leader in Germany

Germany reformed its laws in 2017, allowing easy patient access to medical cannabis and providing full insurance coverage. However, the country didn't have the infrastructure for domestic cannabis production. That opened the door for Canadian marijuana producers.

Aurora Cannabis quickly established itself as the leader in the German medical cannabis market. The company acquired Pedanios in May 2017, renaming its new subsidiary as Aurora Deutschland. Pedanios was already the top importer, exporter, and distributor of dried cannabis flower in Germany.

By September 2017, Aurora had secured the necessary approvals to begin exporting dried cannabis flower from Canada to supply the German market. The company continued to forge relationships with physicians, pharmacies, and patients across the country.

Germany now claims the most important legal marijuana market outside of North America. Arcview Market Research and BDS Analytics project that marijuana sales in the country will total close to $1.6 billion by 2022.

Higher and higher

To be sure, German medical cannabis sales aren't yet anywhere close to the projections for three years from now. Even though Aurora Cannabis is the leader in the market, its sales remain relatively low.

In the quarter ending Dec. 31, 2018, Aurora reported European revenue of $2.9 million Canadian (close to $2.2 million). This figure represented only 6% of the company's total cannabis revenue.

But cannabis oils are often more popular with patients than dried cannabis flower. Aurora should enjoy higher demand in future quarters as it sells cannabis oils in Germany. That higher demand will translate to higher sales.

In addition, cannabis oils command premium prices compared with dried flower. Aurora CFO Glen Ibbott noted in the company's Q2 conference call that derivative products such as oils were priced more than 60% higher than dried flower in the Canadian consumer market. While that premium might be higher than what the company will have in Germany, there's no doubt that cannabis oils will make more revenue there for Aurora than dried flower will.

Even better, profit margins will be higher. The opportunity to sell cannabis oils in Germany fits right into the company's strategy of focusing on higher-margin products like oils in medical cannabis markets, which themselves provide higher margins than the consumer market.

Just the beginning

Last September, Tilray became the first Canadian marijuana producer to supply both dried cannabis flower and cannabis oils to Germany. Aurora's entry into the cannabis oils market could shake things up in the German market. But Germany is just the beginning.

Aurora Cannabis chief corporate officer Cam Battley stated in the company's Q2 call that "getting those cannabis oils and, subsequently, different form factors into Germany is going to be a very big deal for us." He added that other European markets would also "be extremely keen on non-flower forms of cannabis products." Battley is probably right.

The European Union (EU) represents a market of more than 500 million people (including the United Kingdom, which is in the process of leaving the EU). That's nearly 14 times bigger than Canada's population. There are only eight EU Good Manufacturing Process certified cannabis production facilities in the world. Aurora Cannabis has two of them.

Aurora should be able to use its success in Germany as a springboard to establishing market leadership in other European countries. Its latest announcement only solidifies the company's position.

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Keith Speights 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.