2020 was supposed to be a breakout year for the Canadian cannabis industry after Health Canada approved regulations in late 2019 that would allow companies to sell cannabis derivative products (i.e. edibles, vape pens, concentrates, topicals, and more).
So far this year, the most important growth driver for the cannabis industry has been the US market. Despite the rollout of cannabis derivative products in Canada, the market continues to be under pressure, and this is a trend that we are following.
One of the most important trends that we have noticed with from Canadian cannabis producers is related to the opportunity in the US and believe that this could be signaling the end of the Canadian cannabis trade. Today, we want to highlight 3 leading Canadian cannabis producers that have become focused on the US market and believe that this is the start of a much more significant trend.
Canopy Growth: Positioned to Capitalize on the US Market
Since 2014, Canopy Growth Corporation (WEED.TO) (CGC) has been considered the leading Canadian cannabis company. We have been following the company since it commenced trading in 2014 and have been impressed with how the management team has been able to turn it into the industry leader that it is today.
With more than $2 billion of cash on the balance sheet, Canopy Growth can afford to make mistakes and still be considered an industry leader. The company has made its fair share of mistakes that resulted in the firing of the Founder and CEO Bruce Linton in 2019.
Prior to the firing of Bruce, Canopy Growth was already focused on the US cannabis market through a merger agreement with Acreage Holdings, a multi-state US cannabis retailer. When the agreement was reported, the market responded very favorably to the deal and the shares surged higher.
Following the signing of the agreement, Canopy Growth became highly focused on the hemp market in the US and formed a relationship with Martha Stewart. The relationship with Martha Stewart is the second celebrity that Canopy Growth has signed a deal with (the first one was Snoop Dogg) and we are favorable on the brand awareness that was created through it.
Canopy Growth is quietly positioning itself to capitalize on the US market once cannabis is no longer illegal at the federal level. In regard to Acreage Holdings, the companies recently amended the agreement and Canopy Growth will need to make an up-front payment of more than $37.5 million to Acreage shareholders. Under the original agreement, Canopy was supposed to pay more than $300 million to Acreage shareholders and we find the change to be substantial.
Over the next year, we expect to see Canopy Growth take additional steps to position itself to capitalize on the US cannabis market. The new management team is comprised of executives that have a proven track record of success in a variety of industries and we will monitor how they are able to drive the story forward.
Aurora Cannabis Bets Big on the US CBD Market
Aurora Cannabis Inc. (ACB.TO) (ACB) is another Canadian cannabis producer that has recently become focused on the US market. When compared to Canopy Growth, the company is taking a much different approach to the US market and recently announced the acquisition of Reliva, a CBD brand.
Aurora Cannabis was once considered to be a darling on Wall Street. Now, the company cannot raise equity capital and is fighting to survive. In order to stay listed on the NYSE, Aurora Cannabis was forced to conduct a reverse stock split and this is a trend that we have been closely following.
Following the reverse split, Aurora has continued to be under pressure, and we continue to remain cautiously optimistic with the opportunity. We believe that there is a lot of operation risk associated with Aurora Cannabis and the management team will need to execute in order to stay alive.
Last month, rumors about a potential merger between Aurora Cannabis and another leading Canadian cannabis producer surfaced and the market initially responded favorably to it. Although we would not be surprised if Aurora merged with a similar sized business or was acquired by a larger cannabis business, we continue to remain cautious with long-term opportunity.
During the last quarter, several leading broker-dealers that cover the cannabis industry have gone negative on Aurora Cannabis and have been lowering price targets on the stock. We believe that the company is betting big on the US CBD market to turn the story around and are not too confident in the strategy.
HEXO: A Cannabis Beverage Execution Story
In 2018, HEXO Corporation (HEXO.TO) (HEXO) made headlines when it reported to have formed a strategic relationship with Molson Coors (TAP.CN). Although it took almost two years for the relationship to report something substantial, the companies formed Truss Beverage Co. and recently introduced 5 cannabis beverage brands to the Canadian cannabis market.
Through the relationship with Molson, HEXO plans to capitalize on the US CBD industry and plans to launch cannabis beverages in strategic markets. Once cannabis is no longer illegal in the US, we expect the relationship to launch THC drinks in the US and are bullish on the amount of value that can be generated through it.
Although HEXO’s initial focus on the US market is small, we believe that something is better than nothing and will monitor how the story evolves from here. Molson provides HEXO with substantial distribution in the US and expect this to play an important role in the success of the relationship.
During the last year, HEXO has been under substantial pressure and we believe that the relationship with Coors could prove to be the catalyst that the Canadian cannabis producer needed. We believe that the relationship with Molson Coors is a key pillar of the HEXO opportunity and will monitor how it benefits both businesses over the long-term.