Does Your IP Moat Your Business?

This article was written by Sean McLean, CEO & Co-Founder, Peregrine Precision Systems, and originally published here.

Cannabis 2.0 will reward the companies that own something others cannot replicate. There is a fight playing out in public right now that shows exactly what strong IP is worth — and what it costs to have nothing.

I predict Cannabis 2.0 will put a heavy emphasis on intellectual property. IP will reward the companies that own it and have moated their businesses with it.

Regulatory reform and the clarity that comes with it are opening the door to far more research and development. We should prepare for new product categories reaching consumer segments and demographics this industry has never served.

And yet I continue to be amazed at the focus and attention this industry places on smokable flower, for recreational and medicinal use alike. We are now seeing new markets launch with non-combustible delivery rules written into them. That is just one strong signal about where this is heading, and it is not subtle.

The most obvious reasons for this narrow focus may be twofold. First, the opportunity to supply EU-GMP medicinal flower, which is growing at a faster velocity than North American markets. This commands leadership’s focus and resources. Second, an immature, unreliable ingredient supply chain preventing the launch of next-generation formulated products incorporating more rare and researched molecules.

The questions I wish were being asked

I often wonder whether the leadership of this industry’s most reputable medicinal cannabis companies sit down and ask themselves the harder questions.

• What do we need to build today to achieve and maintain market leadership tomorrow and beyond?
• What does CPG, or cannabis as medicine, look like in the future?
• How will physicians prefer to prescribe it, and what will patients most comfortably adopt?

The value of product differentiation is badly understated in today’s industry. If every company looks the same, sells the same form factors, and competes on the same shelf, what exactly is being built for shareholders over the long term?

A case study, playing out in public

Curaleaf’s hostile takeover attempt of Aurora is the most useful thing to happen to this argument in years. It is the sector’s first hostile bid since 2019, and it is being fought entirely over the question of what a company is worth.

Both sides argue from the perspective of their own interests, as they should. Curaleaf measures Aurora by historical financial performance and by the forward-looking statements Aurora’s own leadership has made. Aurora measures itself against its foundation and what it believes it can build from it. Both present interesting perspectives, and the argument will play itself out eventually.

Aurora’s board rejected it unanimously on 2 September, arguing the offer represents roughly 0.8× forward revenue and a substantial discount to precedent transactions — and that more than 90% of the synergies Curaleaf identified would not flow to Aurora shareholders.

But look at what Curaleaf is actually reaching for. By Aurora’s own account of the approach, the objective is to acquire its EU-GMP facilities and global medical platform at the lowest price possible. This is not a bid for cash flow. It is a bid for capability that would take years to build.

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Now change one variable. Valuable IP.

Here is where the case study becomes genuinely instructive. Suppose Aurora held intellectual property that very few other companies hold. For example, an effective molecule that only they could produce at a viable economic cost, enabling proprietary products. And suppose they were on a credible path to commercializing it, with a blockbuster outcome available to their shareholders at the end of it.

How would that change this fight?

Would Curaleaf be in as strong a position, or would it have to price the optionality and future value of that IP into its offer? Aurora, for its part, could argue that what it holds will be worth materially more than what is being put on the table today — and it would have something concrete to point at while making the argument.

IP, depending on its value and its application, can act like an insurance policy for a company confident in its positioning and its ability to commercialize.

It can also do something more immediate. It can help a company whose share price is still down more than 90% from its peak defend itself against an opportunistic bid. A discounted share price invites the approach. Something the acquirer cannot replicate is what changes the price.

The benefit of intellectual property is that it is hard to put a value on. It is worth something different to each of us, depending on what we are able to do with it.

This is not really about Aurora

Most of the companies in this sector are built around the same molecules, sold in the same formats, into the same channels. That was a reasonable place to build a business in Cannabis 1.0. It is a difficult place to defend one in Cannabis 2.0, when regulatory clarity brings pharmaceutical standards, new delivery systems and products, and buyers who ask different questions.

When balance sheets in the sector look alike, consolidation gets priced on conservative multiples of what already exists. The only companies that break out of that arithmetic are the ones holding something unique. Something the acquirer cannot simply build itself.