The marijuana industry is evolving at an incredible pace. As recently as the midpoint of the past decade, no countries had given recreational weed the green light, and only a select few U.S. states had medical cannabis laws on their books. Today, two-thirds of all U.S. states have passed medical marijuana laws; 66% of the public supports a broad-based legalization, according to Gallup; and two countries have OK'd recreational pot sales, including Canada, which in October became the first industrialized country to do so.

As the marijuana industry ramps up, every company wants to be a leader. And when it comes to production, that company is Aurora Cannabis (ACB -0.70%).

An up-close view of a flowering cannabis plant that's growing indoors.

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Aurora Cannabis is attempting to run away from its competition

Rather than choosing to grow entirely from the ground up, Aurora Cannabis has been especially active among Canadian pot growers in acquiring capacity. Though some of its largest projects are organic builds, including the Aurora Sun project (1.62 million square feet) and the Aurora Sky campus (800,000 square feet), it paid about $2 billion to buy MedReleaf, $850 million for CanniMed Therapeutics, and $200 million for South America's ICC Labs. MedReleaf was a particularly important purchase for Aurora as it brought the soon-to-be retrofitted Exeter facility into its portfolio, and boosted Aurora's peak output by approximately 140,000 kilos a year.

All told, Aurora Cannabis management conservatively expects to top 500,000 kilos a year, with yours truly expecting more like 780,000 kilos annually by 2022. With the exception of Canopy Growth and its more than 500,000 kilos of forecast output, no other producers are even within a stone's throw of Aurora's potential yearly output.

Of course, investors are paying through the nose for this future production. Even with the highest current annual run rate (150,000 kilos) among marijuana growers, Aurora is still producing at what I suspect is less than 20% of peak capacity.

Two businessmen shaking hands, as if in agreement.

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Say hello to the U.S. version of Aurora Cannabis

Cannabis companies want to emulate Aurora's growth strategy, and one U.S.-focused vertically integrated dispensary stock -- i.e., a dispensary operator that controls its cannabis supply chain -- looks to be doing a pretty good job of it. Ladies and gentlemen, say hello to the U.S. version of Aurora Cannabis: Harvest Health and Recreation (HRVSF).

To say that Harvest Health has been active on the acquisition front would probably be a gross understatement. Over just the past six months, Harvest Health has completed the purchase of, or announced acquisitions of:

  • CBx Enterprises, a Colorado manufactured products market-leader, in November 2018.
  • San Felasco Nurseries, a Florida medical-marijuana treatment center license holder, in November 2018.
  • Falcon International, a vertically integrated operator in California, in February 2019.
  • Six licenses from Devine Holdings in Arizona, in February 2019.
  • Verano Holdings, a vertically integrated operator, in March 2019.
  • Dispensary operator CannaPharmacy in April 2019.

While each of these deals serves a purpose, the biggest is the $850 million all-stock deal to buy privately held Verano, which is pending. The move would significantly increase Harvest Health's total license count for retail stores, grow farms, and processing facilities. 

A miniature basket holding a cannabis flower, with another miniature basket next to it containing cannabis oils.

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Aurora and Harvest Health share many similarities

How exactly is this like Aurora? While Harvest Health currently operates 10 cannabis stores in four states, it will have licenses to operate 213 facilities in 17 states if its Falcon, Verano, and CannaPharmacy deals all close. Of these 213 facilities, 130 of them are retail stores. That's four dozen more retail licenses than MedMen Enterprises, the next-closest dispensary in terms of currently held retail licenses. 

Another similarity between Aurora and Harvest Health is that while they both offer competitive advantages, based on the figures noted above, they're also losing quite a bit of money as they expand their cannabis empire. Through the first six months of fiscal 2019, Aurora Cannabis has racked up $192 million Canadian ($142.3 million) in operating losses. Meanwhile, Harvest Health's full-year report, released earlier this week, reversed a $5.2 million year-ago operating profit into a $12.9 million operating loss. A near-quintupling in general and administrative expenses to $35.7 million was almost entirely responsible for the company's loss.

Likewise, one-time expenses and adjustments didn't work in Harvest Health's favor in the fourth quarter. The company recorded a noncash $50.7 million charge in Q4 tied to the conversion of convertible debt to equity. Aurora suffered massive losses as well in the calendar fourth quarter (its fiscal second quarter) as a result of revaluing its investment holdings.

A person holding a magnifying glass over a balance sheet.

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These two companies also share the fact that they have a lot to prove given the premiums they've been willing to pay to inorganically thrust themselves into the pole position in their respective niches. Aurora was carrying CA$3.06 billion in goodwill on its balance sheet as of its most recent quarter, representing 63% of total assets, whereas Harvest Health's goodwill doubled from 7.2% of total assets at the end of 2017 to 14.5% of total assets at the end of 2018. And, mind you, this doesn't include the premium it's paying to acquire Verano.

Lastly, both Aurora and Harvest Health love to finance their acquisitions by using their common stock. Ballooning outstanding share counts are a dangerous proposition for existing shareholders, and could make it more difficult for these companies to generate a profit in the future. Of course, for the management teams of Aurora and Harvest Health, this short-term pain is well worth the long-term market share gains.

It's still very early, but Harvest Health is making its case as the runaway leader in the U.S. dispensary space, at least in terms of peak retail presence.