Canopy Growth: Getting Ready for Cannabis 2.0

Canada is gearing up for Cannabis 2.0, a second legalization phase scheduled for October 17. Subsequently, according to Deloitte, cannabis-infused edibles and other alternative products will become legal in the country. The new law opens a market worth 2.7 billion Canadian dollars annually. Of this total, Deloitte estimates the edibles market is worth 1.6 billion Canadian dollars.

Prominent cannabis players such as Aurora Cannabis (ACB), Canopy Growth (CGC), and OrganiGram have been developing capabilities to target this opportunity. On June 21, Aurora announced its strategy to expand in edibles, vapes, and concentrates. As part of this strategy, it has been developing new and enhanced production, packaging, distribution, and logistics facilities.

What Canopy Growth is planning

At the Barclays 2019 Global Consumer Staples Conference, Canopy Growth identified Cannabis 2.0 recreational legalization as a major catalyst for the company in the next 12–18 months. Recreational cannabis products currently approved in Canada include oils, soft gels, and dry buds. However, Cannabis 2.0 is set to significantly broaden the range of available products, improving competition and differentiation among players.

At the conference, Canopy pointed out that other cannabis companies have opted for an indirect route. They are mostly entering into licensing arrangements with existing vape technology players. Unlike most competitors, Canopy has opted to enter the recreational Cannabis 2.0 vape product market on its own. And to enter the market, the company has built a robust team of scientists, engineers, and researchers to focus on vape products. Canopy also expects to play a key role in converting the illicit cannabis market into the legal cannabis market.

How is Canopy Growth preparing for Cannabis 2.0?

In its first-quarter earnings call, Canopy Growth highlighted its focus on launching new cannabis formats and increasing its physical store count in Canada from 460 in September to 600 by March 2020. The company plans to launch edibles, beverages, and vapes after Cannabis 2.0 legalization.

In the earnings call, Canopy said it filed 56 patent applications for researching and developing vape oils and devices, pre-rolled joints, and cannabinoid isomers in the first quarter. At the end of the first quarter, the company’s patent portfolio comprised 110 patents and 270 patent applications. Through various deals, it secured significant intellectual property that could play a key role in product differentiation.

Vaping devices and beverages

In its earnings call, Canopy Growth identified some vaping device design and functionality limitations. These shortcomings include safety issues, battery life, and rolling off flat surfaces. The company aims to offer new devices without these limitations to improve customers’ overall experience. To that effect, the company plans to launch around 15 SKUs (stock-keeping units) for new vape technologies in December. The SKUs will offer different formats, cartridges, flavors, strains, and price points.

Canopy, in its earnings call, said it expects cannabis-infused beverages to become a prominent consumer product category. To expand in the market, the company plans to focus on beverages’ taste, quality, bioavailability, dose control, calories, and drug interaction. Canopy plans to reveal more details about its upcoming beverage products in the third quarter. Additionally, the company is benefiting from its collaboration with Constellation Brands. To learn more, read Canopy Growth Pops 30% on Constellation’s $4 Billion Investment.

Financial implications of Cannabis 2.0 for Canopy Growth

At the Barclays 2019 Global Consumer Staples Conference, Canopy said it’s targeting a $1.0 billion annual run rate and 40% margin by the end of fiscal 2020’s fourth quarter. The company expects to achieve these goals through 200–300 basis points of incremental productivity and Cannabis 2.0 opportunities. However, developing edible and alternative products would require startup costs that could impact the company’s fiscal 2020 margins.