Canopy Growth (CGC) Signals a Major Shift in Strategy

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October 16, 2019 2:43pm NYSE:MJ


In the wake of recent performance downgrades from Wall Street analysts, Canopy Growth Corp. (CGC) today announced its divestment of AusCann, signaling a potential shift in the company’s growth strategy.  

Thus far, Canopy Growth has exhibited an aggressive acquisition strategy — much to the malaise of investors concerned about cash burn. Even today, the company announced the completion of its previously announced acquisition of the global cannabinoid-based research company, Beckley Canopy Therapeutics.  

“The acquisition comes at a time when commercial opportunities across Europe are ramping up,” said Canopy Growth CEO Mark Zekulin.

“Spectrum Biomedical has completed all necessary approvals to import cannabis into the UK market and is proud to facilitate patient access to safe cannabinoid-based medicines there. Consolidating our UK-based operations will allow Canopy to simultaneously improve its research and commercial capabilities across the continent.”

Beckley Research & Innovations (“BRI”) and Canopy Growth formed Beckley Canopy as a joint venture in January 2018 for the purpose of researching and developing clinically validated cannabis-based medicines. BRI emphasizes a strong focus on intellectual property protection.

Analysts applaud the divestiture, but remain bearish

Just a few days ago, Jeffries analysts downgraded CGC stock from “hold” to “underperform.” But now Jeffries analysts seem to be more optimistic about the company’s divestiture announcement.

 “The decision to divest our position in AusCann, which we obtained three years ago in exchange for support provided, will allow us to sharpen our focus on our wholly-owned operations in the market, while continuing to collaborate with our partners at AusCann,” said Zekulin.

Jeffries analysts Owen Bennett and Ryan Tomkins have voiced support for the move, meanwhile adding the caveat: “We do wonder how much more cleaning up may have to come.”

“With Bruce Linton (the old CEO) often saying in interviews past a key part of his and Canopy’s strategy was ‘go into a market, spend and dominate, and then do the same again’, we wonder how many assets that have been acquired are indeed noncore, especially as the cash Constellation gave Canopy often meant money was no object. Further, we wonder how much Canopy would get for these assets when it sells them?” the analysts wrote.

Part of Canopy’s spending spree was made possible by the injection of $4 billion from Constellation Brands (STZ), the brewer of Corona – the same company that ousted former-CEO Bruce Linton earlier this year. It seems Constellation too, may not have been content with how CGC was spending its money.

Canopy Growth was down to C$2.3 billion in cash by the end of last quarter. To put things into perspective, the Australian market is expected to be just 1% of the Canadian market next year. CGC unloaded its 13.2% stake in Australian producer AusCann for C$6 million ($4.8 million).

Seaport Global analysts echoed this discontent yesterday by downgrading CGC stock from “buy” to “neutral.”

“We see a headwind for the Canadian cannabis market ahead, based on sizable industry supply that will aim to funnel into a limited retail store set. We expect pricing and margins to drop considerably,” said analysts Brett Hundley and Luke Perda in a note to investors.

 


Canopy Growth Corp. (CGC) was trading at $19.75 per share on Wednesday afternoon, down $0.35 (-1.74%). Year-to-date, CGC has declined N/A%, versus a 12.17% rise in the benchmark S&P 500 index during the same period.


About the Author: Eric Bowler

eric-bowlerEric Bowler is an accomplished journalist providing in-depth insights for more than two decades. Over the past several years his focus has been on the marijuana industry, with a special interest in cannabis growth stocks. His daily coverage of the industry keeps him on top of the key trends with the goal of helping investors make well-informed decisions.


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