As pot stocks boom on hopes for U.S. legalization, Canadian cannabis companies struggle for growth
After huge recent stock gains on the hopes of a larger market for legal pot in the U.S., Canadian cannabis companies didn’t offer much to justify the exuberance Monday.
Pot stocks experienced big gains in the past three sessions on hopes that presumptive President-elect Joe Biden would provide a path to the federal decriminalization of cannabis. In the same election that Biden challenged incumbent President Donald Trump, four states legalized recreational sales of the drug, leading to one-third of Americans living in states that have approved legal adult use of marijuana.
Only Canadian pot companies trade publicly on the large U.S. exchanges, and three of those companies released quarterly earnings Monday amid stock gains of 30% to 150% since the open on Thursday. Only one, Canopy Growth Corp.
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was able to show sales growing appreciably from last year, despite opening of the Canadian market to new products such as edibles and vapes.
Canopy is the biggest cannabis company measured by market capitalization, thanks to a $4 billion investment from Corona beer brewer Constellation Brands Inc
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It is also the only Canadian company that has agreed to acquire a U.S. multi-state operator, the largest of the pot businesses in the U.S. because they operate in multiple legal-pot states, via its agreement with Acreage Holdings.
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“We’re excited by the prospects of participating in the U.S. THC market, and we’ve already developed a U.S. ecosystem that positions us well as [a] hemp and cannabis powerhouse when, not if, U.S. permissibility happens,” Chief Executive David Klein said in a conference call Monday.
Klein said that Biden’s win is an “important step on the path to federal permissibility of cannabis in the U.S. market through decriminalization and descheduling,” and welcomed the results of ballot initiatives last week that saw four more states legalize cannabis for adult use — New Jersey, Arizona, Montana and South Dakota. Klein said that neighboring states will see pressure to legalize to avoid losing tax dollars, specifically mentioning Pennsylvania and New York, and Tilray Inc.
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Chief Executive Brendan Kennedy suggested the same in a conference call later in the day while adding Connecticut to his list.
Canopy has also launched CBD brands with Martha Stewart in the U.S. and is aiming to become a major cannabis-focused CPG company, Klein said. Canopy posted a narrower-than-expected loss and revenue that beat estimates, and its stock rose 4.6% to $24.58, the highest close since January.
Aurora Cannabis Inc.
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gave a much more chaotic view of the cannabis industry’s current state of affairs, after a boom in investment following Canadian decriminalization fizzled amid financial reality. Aurora posted a loss of more than C$100 million for the fiscal first quarter after losing more than C$3 billion the previous year, and sales sank to C$67.8 million from C$73.7 million.
It was no matter for Aurora stock, which had already doubled in Thursday and Friday trading. Shares gained another 14.9% Monday to $14.65.
While Canopy was hailing its CBD deal with Martha Stewart, Aurora revealed that it paid $40 million to end a similar deal with UFC. The companies had joined forces to advance clinical research on CBD products and athletes’ wellness last summer with some fanfare, a deal that was intended to last eight years when struck by then-CEO Terry Booth but led to some cancelled events and a big payout.
CBD has been the preferred route into the U.S. market for Canadian cannabis companies looking for quick entry. Aurora took its long-promised plunge into the U.S. market with a CBD acquisition earlier this year, after Tilray purchased a large hemp company with an eye on the CBD market nearly a year before.
Tilray reported earnings after the bell Monday and produced the bottom line closest to profit among the three, with losses of 2 cents a share and promises of adjusted profitability in the fourth quarter. Sales barely budged from last year, but executives blamed that on bulk sales last year that the company halted to focus on core businesses. Tilray shares gained 6.6% in after-hours trading following release of the results Monday, after gaining more than 80% in the previous three sessions.
All three companies focused on their cost-cutting abilities, especially in regards to general and administrative costs, after excess spending in the days of high stock prices — as well as the COVID-19 pandemic — focused investors’ eyes on liquidity and burn rates. Aurora’s recently installed CEO Miguel Martin proclaimed his company had “the largest cut to G&A of any Canadian” licensed producer, and the other companies sought to challenge him.
“Importantly, our end-to-end review has identified cost savings opportunities in the range of $150-$200 million across cost of goods sold, general and administrative expenses, and inventory, and efforts are under way to quickly capture value,” Canopy Chief Financial Officer Mike Lee said.
“We have reduced our quarterly SG&A, including R&D from approximately $48 million in Q4 2019 to roughly $26 million over the past two quarters, a remarkable improvement over a short period of time,” Kennedy said.
