It is no secret the cannabis industry has tanked lately, and even Canopy Growth (NYSE:CGC), the largest pot company in the world by market cap, has not escaped this apocalypse. There are several reasons Canopy and its peers have performed so badly, and the most important might be the fact that the Canadian authorities have been too slow to issue retail licenses.
As a result, Canopy and its competitors have not been able to supply the market with as much of their products as they had hoped, with sales from illegal sources meeting the demand that legal channels are unable to meet. Still, there's hope that Canopy will turn things around eventually, and one of the company's most important weapons in its quest to conquer the cannabis market is its partnership with Constellation Brands (NYSE:STZ). As it turns out, this partnership is finally starting to bear fruit.
Canopy unveils its portfolio of derivative products
The legalization of cannabis derivative products in Canada (otherwise known as cannabis legalization 2.0) such as vapes, edibles, and cannabis-infused drinks officially happened on Oct. 17. The products are set to hit the shelves in legally licensed retail stores sometime this month.In anticipation of that big event, Canopy unveiled the first derivative products it will bring to market, including vaping products, cannabis-infused chocolate, and cannabis-infused beverages.
The company's chocolate products, developed in collaboration with chocolate maker Hummingbird Chocolate, will include several chocolate bars such as Tokyo Smoke Pause, a dark milk chocolate product containing 2 mg of tetrahydrocannabinol (THC) in each square and negligible amounts of cannabidiol (CBD). Canopy's vape products include a lineup of vape pens and their accompanying cartridges and batteries. According to the company, its vape products "exceed safety regulations," and follow a similar design (dubbed "510 threaded") as one of the most popular such device used in established markets such as California and Colorado.
Lastly, Canopy's initial lineup of cannabis-infused beverages will be non-alcoholic and contain a liquid developed thanks to a proprietary process that extracts a clear liquid from cannabis leaves. This lineup will include Tweed RTD (ready to drink), a canned drink with three flavor options each containing 2 mg of THC. Canopy's cannabis-infused chocolate and drinks should be available in early January 2020, while its vape products should be available in late January.
In its press release, Canopy said, "the Company wishes to thank its partner, Constellation Brands, for providing expertise and support in constructing and operating the world-class facility, from building design to equipment selection to staffing requirements."
Canopy's partnership with Constellation Brands was a good move for the pot grower for two major reasons. First, Canopy acquired the cash to pursue its growth efforts. During its latest reported quarter -- the second quarter of its fiscal year 2020 -- the company had a little over 1.1 billion Canadian dollars ($834 million), which is more than almost any of its competitors. Note that Canopy spent quite a bit of money to get its portfolio of derivative products ready. During the six months period that ended on Sept. 30, the company's sales and marketing expenses were about 109 million Canadian dollars, an 86% year over year increase, while its research and development expenses were a little over CA$20 million, a whopping 650% increase compared to the year-ago period.
In both cases, Canopy pointed to the development of its derivative products, as well as marketing effort to raise awareness about these products, as one of the main reasons why these expenses skyrocketed. Second, Canopy is set to benefit from Constellation Brands' expertise as a stable, profitable company that also happens to be a major player in alcoholic beverages. Clearly, both of these factors already played an important role for Canopy during the preparation preceding the announcement of its portfolio of derivative products.
It still has a long way to go
Despite this new development, Canopy still has a lot to do before getting back into the good graces of investors. Shares have lost more than 60% of their value since April, and its most recent financial results, released on Nov. 14, weren't very good. In particular, net revenue declined by about 15% sequentially.
Canopy will also face stiff competition in this market. For instance, Truss Beverage Co., which is a joint venture between pot grower HEXO and beverage maker Molson Coors, is also launching its suite of cannabis-infused drinks, including several flavors of CBD-infused water each with 10 mg of CBD. Tilray is also competing with Canopy in this department thanks to its partnership with Anheuser-Busch InBev, and a joint venture between the two entities called Fluent beverage Company. Fluent Beverage announced it would launch non-alcoholic CBD-infused drinks this month.
Cronos Group, through its partnership with Altria, will likely enter the vape market. The company started making moves to that end: In September, Cronos signed a deal with MediPharm Labs. Under the terms of the deal -- the financial details of which were not disclosed -- MediPharm will fill and package vaporizer devices for Cronos.
Perhaps Canopy's portfolio of derivative products will be successful despite strong competition from its peers, but we probably won't know whether that's the case until about the mid-point of next year when the company reports its earnings for the first quarter of the year (which corresponds to its fourth-quarter for its fiscal year 2020). Canopy will likely be one of the winners of legalization 2.0 thanks to its standing in the Canadian market, its partnership with Constellation Brands, and its superior cash position. Still, given how poorly the company has performed recently, it might be more prudent to wait for its earnings report to see the results from the sale of its derivatives before thinking about buying shares of Canopy.