Marijuana producer Canopy Growth’s earnings drop as it plays the long game

Shares in Smiths Falls-based marijuana producer Canopy Growth climbed five per cent in early trading Wednesday despite missing analysts’ projections on thirdquarter revenues and earnings.

Part of the momentum was provided by a same-day announcement by the Société des alcools du Québec. SAQ said it had signed letters of intent to purchase significant quantities of marijuana from key producers.

Canopy Growth will supply 12,000 kilograms per year, the same amount as Ontario rival Aphria, while Gatineau-based Hydropothecary will sell the SAQ some 20,000 kilograms per year.

Quebec is the largest province to date to sign a multi-year marijuana supply agreement in advance of the legalization of recreational marijuana later this summer.

Canopy Growth also has agreements with three of the Atlantic provinces.

The Liberal government had targeted July 1 as the go-legal date but this will depend on whether the enabling legislation passes the Senate in time.

Marijuana producers across the country have been investing hundreds of millions of dollars to add capacity and broaden product lines.

In Canopy Growth’s case, this is producing quarterly operating losses — revenues from the legal sale of medical marijuana and related products aren’t yet large enough to make up for the extra spending.

Canopy Growth said Wednesday its third-quarter revenues jumped 123 per cent year over year to $21.7 million.

That was below the consensus estimate of analysts who had been expecting revenues of $24.2 million, according to a Thomson Reuters survey.

The company also recorded a sharper-than-expected drop in earnings as its third-quarter adjusted net loss expanded to $7.1 million compared to a loss of $1.4 million during the same period a year earlier.

The company insists this is actually good news. It is creating inventory it expects will be sold quickly in the last half of the year.

“We can’t see a situation where we wouldn’t be (earnings) positive later this year,” the company ’s chef financial officer, Tim Saunders, said Wednesday during a conference call with financial analysts.

Although Canopy Growth’s third-quarter (ended Dec. 31) reflected only sales of medical marijuana and related products, they offered some interesting insight into the future shape of the overall market. For instance, the cost per gram of product sold jumped to $8.30 per gram, compared to $7.36 per gram during the third quarter a year earlier.

This was not because Canopy Growth was raising prices for medical marijuana. Rather, it reflected relatively higher sales of cannabis oils and other marijuana extracts. The company charges more for these more refined products, which made up 23 per cent of total revenues in the quarter compared to just 13 per cent during the same period a year earlier.

Sales in Germany ’s medical-marijuana market also helped to drive up the price per gram. While quarterly revenues in Germany are still little more than $1 million, they are growing rapidly, based on a selling price of more than $12 per gram.

Canopy Growth is juggling a number of priorities in this fastmoving industry: medical and recreational markets, Canadian and international sales, and evolving product lines complete with new patents.

The company said it had 69,000 registered medical marijuana patients in the third quarter, ended Dec. 31. That was up 138 per cent from a year earlier. Canopy Growth CEO Bruce Linton was careful to reassure patients they will have priority over new recreational buyers.

“If you’re a patient July 1, your order will get filled before it goes anywhere else,” he told analysts Wednesday.

Indeed, Linton predicted medical marijuana sales will accelerate “in the back half of 2018” because more and more physicians are prescribing it.

Canopy Growth appears wellpositioned financially to meet the rather extraordinary demands that will be placed on the industry.

If you’re a patient July 1, your order will get filled before it goes anywhere else.