The cannabis hype is about to come face-to-face with reality.

After Canada legalizes recreational marijuana on Oct. 17, it will only take a quarter or two for clear winners and losers to emerge, according to investors and analysts who follow the sector. This means investors will have to get choosier as the days of highly correlated stock moves draw to a close.

“These have all been concept stocks and they’re going to actually have to be real companies in another few months, which I think a lot of guys are terrified about,” said Greg Taylor, who manages the Purpose Marijuana Opportunities Fund. Taylor prefers CannTrust Holdings Inc., Hexo Corp. and Organigram Holdings Inc., which he says trade at a “more realistic valuation” than some of their bigger peers.

There are more than 135 publicly traded pot companies in Canada, but many believe it’s only a matter of time before that gets whittled down to a handful of survivors, either through consolidation or failure.

“I get asked all the time, is there going to be consolidation? I think there’s going to be disintegration,” Bruce Linton, chief executive officer of Canopy Growth Corp., told a Toronto marijuana conference in August. “Disintegration will happen when people make promises at valuations they can’t possibly meet.”

Few Players

There may only be half a dozen major players left three years after legalization, said Eric Paul, chairman of Vaughan, Ontario-based CannTrust.

The rest “are going to be bankrupt or out of business because their business models don’t work,” Paul said. “This industry is far more brutal than most people understand.”

So what will distinguish winners from losers? A meaningful presence in Canada’s recreational market combined with exposure to the international medical market is one key factor, according to Matt Bottomley, analyst at Canaccord Genuity Group Inc. Aphria Inc., CannTrust and Hexo are some of Bottomley’s top picks.

“I think five years from now you’re going to see the international medical market come from what is probably $1 billion or maybe less today to probably $50 billion or $100 billion,” Bottomley said.

Low production costs will be another essential ingredient for success. “It’s a non-starter if they’re not growing at less than $1 a gram,” said Taylor. Few producers meet that price point though many say their costs will fall as production ramps up.

Some companies are also seeking tie-ups with global food and beverage firms to leverage their financial and marketing clout as more countries and states ease restrictions on pot use. Canopy, the second-largest cannabis company by market value, counts Corona beer maker Constellation Brands Inc. as its largest investor. Hexo has a joint venture with Molson-Coors Brewing Co. and Altria Group Inc., the maker of Malboro cigarettes, is in talks to take a minority stake in Aphria, according to a Globe and Mail report.

For many investors, size matters. Here’s a breakdown of some of the biggest pot stocks and how they plan to join the list of winners, or at least set themselves apart from their competitors:

Tilray Inc.

  • Traded on: Nasdaq
  • Market value: $13.6 billion
  • Q3 stock performance: +745 per cent from July 18 IPO
  • Provincial supply agreements: eight provinces and territories
  • Growing capacity: Total production space across all facilities worldwide expected to reach 912,000 square feet by end of 2018
  • Cost: $3.33 per gram sold in the quarter ended June 30
  • International presence: Australia, New Zealand, U.K., Germany, among others
  • Medical research: First Canadian company to receive approval to import cannabis into U.S. for medical research; conducting clinical trials on the benefits of medical cannabis to treat essential tremor, PTSD, chemo-induced nausea and Dravet syndrome
  • Distinguishing factor: Has an agreement to develop medical cannabis with Sandoz Canada, the Canadian division of Sandoz Global Gmbh, which is a division of Novartis.

Canopy Growth Corp.

  • Traded on: Toronto Stock Exchange, New York Stock Exchange
  • Market value: $14.9 billion
  • Q3 stock performance: +65 per cent
  • Provincial supply agreements: Secured an estimated 36 percent of total Canadian supply committed to date, with annualized delivery requirements of about 70,000 kilograms
  • Growing capacity: 4.3 million square feet of licensed growing space
  • Cost: not reported
  • International presence: Germany, Chile, Colombia, Denmark, Brazil and others
  • Medical research: Canopy has filed over 80 patent applications covering cannabis processing technology, beverage technology, human and animal medical treatments
  • Distinguishing factor: Constellation Brands Inc.’s $5 billion investment in Canopy set off a flurry of speculation about who would be next, and has helped legitimize the industry

Aurora Cannabis Inc.

  • Traded on: Toronto Stock Exchange, with a planned listing on the New York Stock Exchange by the end of October
  • Market cap: $13 billion
  • Q3 stock performance: +33 per cent
  • Provincial supply agreements: Consumer brands sold by Aurora, its subsidiaries and strategic partners will be available in 11 provinces and territories representing more than 98 per cent of the Canadian population
  • Growing capacity: More than 500,000 kilograms a year of funded production capacity
  • Cash cost of sales: $1.87 per gram of dried cannabis in Q4
  • International presence: 18 countries on five continents, including production facilities in Denmark and operations in countries including Australia and Brazil
  • Medical research: Examining the therapeutic impact of cannabidiol on chronic pain, anxiety and depression in collaboration with Montreal’s McGill University; working with the Canadian Football League Alumni Association to study the benefits of medical cannabis in treating chronic pain
  • Distinguishing factor: Aurora has been on an acquisition spree, buying at least 10 companies in the past two years; has a 25 per cent stake in Alberta liquor retailer Alcanna Inc., which will begin selling cannabis on Oct. 17

Aphria Inc.

  • Traded on: Toronto Stock Exchange
  • Market cap: $4.7 billion
  • Q3 stock performance: +52 per cent
  • Provincial supply agreements: All 10 provinces and the Yukon
  • Growing capacity: Expected to reach an annual production capability of 255,000 kilograms by early 2019
  • Cost per gram: As of May 31, cash cost to produce dried cannabis per gram was $0.95 and all-in cost of goods sold per gram was $1.60
  • International presence: Australia, Germany, Italy, among others
  • Medical research: Through its Argentina-based subsidiary, Aphria has partnered with a pediatric hospital for a clinical study focused on treating refractory epilepsy in children; Aphria is also producing and supplying high-yield cannabis extracts for Australia’s Medlab to be used in a human trial to test pain management
  • Distinguishing factor: Wholesale agreement to supply Emblem Cannabis Corp. with 175,000 kilograms of cannabis over a five-year period, providing near-term revenue certainty; reportedly in talks with Altria Group Inc. about a possible stake sale

Cronos Group Inc.

  • Traded on: Nasdaq, Toronto Stock Exchange
  • Market cap: $2.26 billion
  • Q3 stock performance: +68%
  • Provincial supply agreements: Ontario, British Columbia, Nova Scotia and Prince Edward Island
  • Growing capacity: About 7,000 kilograms annually; expected to rise to 40,000 kilograms when new facility B4 is fully planted and operational
  • Cost of sales per gram: $7.12
  • International presence: Australia, Israel, Colombia, Germany, Poland
  • Medical research: Has a patent pending for an extraction technique that focuses on cannabinoid separation
  • Distinguishing factor: Joint venture with U.S. cannabis retailer MedMen Enterprises Inc. to develop branded products and open stores across Canada; partnership with Ginkgo Bioworks Inc. to genetically engineer cannabinoids

Hexo Corp.

  • Traded on: Toronto Stock Exchange
  • Market cap: $1.65 billion
  • Q3 stock performance: +65%
  • Provincial supply agreements: Ontario, B.C. and Quebec, including a deal with Quebec’s alcohol authority to supply more than 200,000 kilograms over five years, estimated to be worth $1 billion
  • Growing capacity: 310,000 square feet of production capacity, producing 25,000 kilograms of dried cannabis, with construction on another 1 million square feet set to be complete by year-end
  • Cost: $0.88 weighted average cash cost of dried inventory sold per gram
  • International presence: Eurozone processing, production and distribution center in Greece
  • Medical research: Nothing yet
  • Distinguishing factor: Joint venture with Molson Coors Canada Inc. to develop cannabis-infused beverages

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.



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