Canopy Growth to have hemp-CBD in U.S. as early as Q4

Canopy Growth to have hemp-CBD in U.S. as early as Q4
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Canopy Growth Corp. expects to have CBD products in the U.S. where permissible as early as the fourth-quarter, but says the related hemp-production facilities it has in the works can easily switch to cannabis if and when it becomes federally legal south of the border.

Co-chief executive Bruce Linton said the licensed cannabis producer is “on track” to have products with hemp-derived CBD, or cannabidiol, south of the border with a timeline of either the fourth-quarter of this year or the first quarter of 2020.

This will require hemp production and processing operations in multiple states, he said on a conference call discussing its latest quarterly results.

“That asset group and the channel we sell through will lend itself extremely well to cannabis,” Linton told analysts on Friday.

Since the U.S. farm bill legalized hemp-derived CBD products late last year, Canadian pot companies have been eyeing opportunities south of the border. However, while cannabis is legal in several states, pot remains illegal at the federal level.

Still, the U.S. political climate continues to warm up to cannabis.

A bill that would amend the Controlled Substances Act and effectively make cannabis federally legal in states where recreational consumption is legal is working its way through the legislative process. Also earlier this week, a U.S. House Financial Services subcommittee held a hearing on the proposed SAFE Act, which protects banks that service cannabis companies that comply with state laws.

Canopy, based in Smiths Falls, Ont., last month said it received its hemp license from New York State and announced a plan to spend between US$100 million to US$150 million to establish a Hemp Industrial Park there.

Linton also told analysts that any legislation that would allow for state-level cannabis activities to be legal federally, such as the SAFE act, opens the door further to U.S. market.

“There are a bunch of formulations that could result in us being able to immediately enact our plan in any of those states,” he said.

Linton’s comments on its hemp strategy comes as Canopy reported earnings for the quarter ended Dec. 31, during which revenue soared on its first sales of recreational cannabis, but its loss from operations widened.

Canopy reported revenue of $97.7 million in the quarter ended Dec. 31, or net revenue of $83 million, up from $21.7 million during its financial third quarter a year earlier. That surpassed the $81.2 million in revenue expected by analysts, according to Thomson Reuters Eikon.

The cannabis producer recorded a loss from operations for the quarter that widened to $157.2 million from $26 million a year ago.

Canopy’s net income attributable to common shareholders, including net gains on the fair value of its assets, was $67.6 million or 22 cents per basic share. However, on an diluted basis, Canopy reported a net loss attributable to common shareholders of $121 million or 38 cents per diluted share, deeper than the $66.04 million or 16 cents expected by analysts, according to Thomson Reuters Eikon.

Its adjusted earnings before taxes, depreciation and amortization (EBITDA) amounted to a loss of $75.1 million, compared with a year earlier adjusted loss of $5.68 million.

Linton said Friday that Canopy uses a “long time horizon” for planning and its investments in science and intellectual property is expected to result in larger profit margins down the road. That includes development of new form factors, such as edibles, and clinical trials for medical products.

“Some of (the trials) are expected to have the potential for claims as early as Q4,” Linton said on the conference call. “That does start to put quite a bit more potential for margin, because you’re no longer selling medical marijuana, you’re selling outcomes on cannabinoid therapy.”

Its chief financial officer Tim Saunders said some of the company’s spending during the quarter went towards the build up of production facilities, such as in Quebec, which are not up to full speed. He said he expected gross margins to improve in the coming quarter as more capacity comes online and when edibles are legalized later this year.

Canopy’s strong net revenues were a relief, given the meaningful miss last quarter when it slipped to $23 million in sales, said Cowen and Company analyst Vivien Azer.

“The offset, however, seems to be an absence of production efficiencies as cash (cost of goods sold per gram) continued to climb, and was $5.11 in the quarter,” she said in a note. That’s a “far cry” and “meaningfully higher” than the $2 to $3 seen from Canopy’s peers, Azer added.

Meanwhile, Saunders said he has decided to retire as chief financial officer later this year after assisting with the transition to a new CFO, but will remain on the board of directors as a strategic adviser.

On the Toronto Stock Exchange, its shares closed up $1.53 or 2.5 per cent at $62.81.

Companies in this story: (TSX:WEED)

Armina Ligaya, The Canadian Press


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