David George-Cosh

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The head of Cronos Group Inc. doesn’t think it’s fair to view Canadian cannabis producers today as traditional publicly-traded companies.

Instead, he thinks it’s better to compare pot companies to the tech sector where generating meaningful revenue may be overshadowed by creating something more disruptive. That might explain why Cronos has a $9-billion valuation but only generated $5.6 million in the quarter, despite getting a $2.4 billion investment from tobacco maker Altria Inc. in December for a 45 per cent stake in the cannabis producer.

“Maybe the analogy we're looking at is it’s a marathon not a sprint,” said Mike Gorenstein, chief executive officer at Cronos Group, in a phone interview with BNN Bloomberg. “We're trying to allocate resources and we think about where the value is. … We're really focused on the product development side more than the cultivation ramp side.”

While Cronos may lag behind several of its peers in terms of the capacity it can deliver to the recreational cannabis market, Gorenstein said the company is focused on launching a series of consumer products tied to its Altria connection. The company also plans to develop more “disruptive intellectual property” to make cannabis far cheaper to produce than with traditional cultivation.

“I think because we have such a new industry, we have investors and analysts [viewing it through] so many different lenses and so many frameworks of what's the right way to look at it,” he said. “Should we look at [a cannabis company] as a mature public company? Or should we look at them as a resource, mining, or agricultural ingredients company? Should we look at them as consumer-packaged goods companies?”

“Our long term focus as a public company is just making sure you have the right strategy to deliver different options in the market.”

Gorenstein’s comments come as Cronos reported a net loss of $11.6 million, or six cents per share, in its fourth quarter. That compares with a profit of $2.1 million in the same quarter a year ago. Net revenue totalled $5.6 million in the last three months of 2018; up from $1.6 million a year earlier, but well below analyst expectations of $10.8 million.

However, the company ended Tuesday with a market cap still around $9 billion, a sign that investors see the investment from Altria as a stamp of approval, and that Gorenstein and his team are on the right path.

“I think we all agree that where we are, from our revenue-multiples perspective, [it] wouldn't make sense to evaluate a company today,” Gorenstein said.

“If you were to base us on purely Canada, that would be very different than any of the internal visions we have. But not only are the regional markets that we expect to be the biggest value drivers [for Cronos] long term not available, but the actual product formats in markets, including Canada, are not available.”

Meanwhile, analysts were fairly negative following Cronos’s quarterly results, with investment bank Jefferies LLC reiterating its “underperformance” rating on the company’s stock. Jefferies also highlighted that it expects results over the next year “will disappoint.”

“With capacity remaining limited, in our view, its main recreational brand still receiving muted reviews, and unclear derivative infrastructure, we struggle to see how sales will materially pick up throughout 2019,” Jefferies analyst Owen Bennett wrote in a research note.

BMO Capital markets analyst Tamy Chen notes that the next quarter will be “critical” in assessing whether Cronos has the ability to grow its domestic production at scale while managing any supply chain hurdles.

That doesn’t appear to faze Gorenstein who remains unconcerned about racing to be the biggest cannabis grower in Canada. Instead, he’s casting an eye to the upcoming launch of cannabis derivative products such as edibles and vape pens that should be available this October. Those products should also incorporate some of Altria’s consumer know-how, notably in the vape-pen and pre-rolled joint category, which Gorenstein said is currently under development.

“We’re now in a position, more so than ever, where we can be patient and focus on long-term value rather than putting all of our attention into an agricultural model,” he said.

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formaton 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