Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Canopy Growth (TSX:WEED): Beware the Disruptive Cronos Group (TSX:CRON)

Published 2019-07-13, 01:00 p/m
Updated 2019-07-13, 01:06 p/m
© Reuters.

© Reuters.

Cannabis producer Cronos Group (TSX:CRON)(NASDAQ:CRON) is going ahead with a disruptive competitive strategy for the pot industry after announcing a planned strategic acquisition on Thursday. The company is evidently demonstrating a serious commitment to a new technology that could smear mud in Canopy Growth’s (TSX:WEED)(NYSE:CGC) face and ravish the stock.

What’s new on Cronos Group? The company announced an agreement to acquire a large, GMP-compliant, state-of-the-art fermentation and manufacturing facility in Canada with fully equipped laboratories and large-scale microbial fermentation production areas with a combined production capacity of 102,000 litres.

This is in line with the company’s earlier announced partnership with Ginko Bioworks to produce cannabinoids like CBD and THC and their rare variants more cheaply from biological fermentation than from the more expensive conventional cultivation and extraction processes.

As highlighted earlier, current market leaders should be concerned.

Why should Canopy Growth be worried? The cannabis market leader has invested billions in infrastructure and processes towards the cultivation and extraction functions, and everyone else in the industry has been going after its market share in recent quarters.

The company incurred increased production costs per gram of cannabis produced until management ultimately stopped reporting on cash costs per gram last year, with then-CEO and now ousted chairman Bruce Linton’s comments implying that the non-standardized cost measures were not that relevant, and proposing that the industry should instead move towards reporting on cost per measure of THC or CBD — a more pure cost measurement metric for produced ingredients.

Canopy is yet to give us an alternative cost measure since abandoning the cost per gram numbers months ago. Given the significantly shrinking gross margins before fair-value adjustments to 16% recently, one can only suspect that the cost per gram produced in-house by the leading giant is awful.

Then here comes a smaller competitor that is making some serious moves to directly produce essential and critical cannabinoids without the massive investment that current leaders have made, and Cronos intends to do this at a large scale, and at a fraction to current average industry production costs.

And the company “intends to use existing cash on hand to fund the acquisition, which is not expected to be material to Cronos Group’s cash position.”

The industry could see early disruption The move by Cronos to acquire fermentation assets instead of outsourcing the service from established beer brewers as previously hinted could be a significant sign that the trials and research at Ginko Bioworks is close to a commercial breakthrough, and this could be big and unsettling news.

CRON may soon be able to mass produce pure cultured CBD, THC and the other cannabinoids “with greater efficiency than is currently possible with traditional cultivation and extraction” and at lower costs by using biological fermentation processes and use them as ingredients in cannabis-infused products and medical offerings.

The company could be able to undercut the competition before it can make a profit and realize returns on investments on the millions invested over the years.

The industry peers should indeed take notice.

That said, we don’t know whether Health Canada will approve and license the technology and processes yet, and the Ginko partnership hasn’t achieved its set milestones yet.

It’s too early to call, and I will be watching.

Fool contributor Brian Paradza has no position in any of the stocks mentioned.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019

This Article Was First Published on The Motley Fool

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.