Canopy, Aurora CEOs chart different paths to U.S. market

The CEOs leading two of Canada’s largest cannabis companies are following different paths to the American market on the heels of Joe Biden’s win in the presidential election and a series of state-level votes that pave the way for expansion south of the border. While Canopy Growth (WEED.TO)(CGC) is touting years of U.S.-centric investment, rival Aurora Cannabis (ACB.TO)(ACB) is confident it too can best the competition if cannabis becomes permissible to sell under U.S. federal law.

Both companies have been swept up in the pot stock rally following the U.S. presidential election. Four states (Arizona, New Jersey, Montana and South Dakota) also voted to legalize recreational cannabis. Mississippi approved medical use.

Canopy CEO David Klein is feeling good about his company’s U.S.-centric focus. Canopy was the first Canadian licenced producer to make serious inroads into the United States. First, with a $5 billion investment from Corona beer-maker Constellation Brands (STZ) in 2018. Then, a first-of-its-kind deal in 2019 saw the company secure an American cannabis footprint with an agreement to purchase New York-based Acreage Holdings (ACRG-AU.CN) once pot sales are federally legal in the U.S. Canopy also has a strategic investment in TerrAscend (TER.CN), another multi-state cannabis operator.

“We have a clear path to win the U.S.,” Klein told Yahoo Finance Canada on Monday. “I think my biggest takeaway from the election is the momentum that’s building throughout the country at the state level.”

Speaking on a conference call with analysts following Canopy’s second quarter financial results on Monday, Klein said he is “extremely bullish on Acreage as they work to drive profitability and growth in their core states.” Canopy expects to gain control of the company 60 days after pot sales are permitted under federal law. Acreage has already licenced some of Canopy’s recreational products, and plans to launch a selection of its pot beverages next summer.

Each company is already growing U.S. business without THC cannabis. Aurora has exposure to the U.S. market through its purchase of CBD distributor Reliva LLC earlier this year for about US$40 million. Canopy sells the non-intoxicating cannabinoid under its First & Free brand, as well as Martha Stewart gummies and Biosteel sports drinks.

Aurora CEO Miguel Martin sees his company’s “portable” and “non-sexy” investments in genetics, trademarks and intellectual property among its advantages compared to the U.S. pot firms operating in legal states.

Toronto-listed Canopy and Aurora shares jumped again on Monday after the companies reported financial results before the opening bell. Aurora shares climbed more than 136 per cent last week, and continued to show strength after the company reported mixed first-quarter results on Monday.

More than a third of Americans now live in states where pot has been approved for legal purchase by adults. While U.S. cannabis firms have the first-mover advantage, Martin said Aurora has valuable “muscle memory” from navigating complex federal frameworks in Canada and European countries, in addition to years of research and scientific investment.

“If you look at a company like Curaleaf, that’s a big company in multiple states that is trying to be as thoughtful as they can... but they haven’t operated in a federal construct,” he told Yahoo Finance Canada in an interview. “We would have a lot of advantages.”

Massachusetts-based Curaleaf (CURA.CN) operates in 23 states with 95 dispensaries and 22 cultivation sites.

Aurora has not charted as clear a path to selling cannabis with intoxicating THC in the American market as a number of its Canadian peers have. However, Martin said the company is well-positioned to move stateside when the law allows.

“At a time in which there would be legislation in the U.S., we would be clearly in a position to go in alone, [through] M&A, or through a partnership to be a viable part of the U.S. [market],” he said.

While the undecided control of the Senate could pose lingering challenges for cannabis reforms, Klein said he is encouraged by the latest showing of state-level support.

“[Some of] these are typically conservative areas of the country, and so I think that just speaks to the general acceptance of cannabis as a legal product,” Klein added.

The wins, he said, will put greater pressure on the U.S. lawmakers to support federal reforms that will transform the current patchwork of state-level jurisdictions to a full-fledged national legal market complete with interstate commerce, improved access to banking, and the ability for American pot companies to list on major U.S. stock exchanges.

While Martin eyes U.S. expansion, he admits he is “not satisfied” with the past performance of Aurora’s Canadian recreational business.

Aurora booked $67.8 million in sales in its first quarter, up slightly from $67.5 million the prior period. Recreational sales fell by about three per cent to $34.3 million. Medical marijuana revenue improved by about four per cent to $33.4 million.

Aurora reported an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $57.9 million on Monday. The company booked legal settlement and contract termination costs of $47.4 million, much of it tied to ending its contract with the UFC.

Canopy reported record net sales of $135.3 million, up from $76.6 million in the same quarter a year earlier, for the period ended Sept 30. Klein attributed this to rising recreational sales in Canada, and strong revenue from Canopy’s dry herb vaporizer subsidiary and skin care line.

The company reported a net loss of $96.6 million in its second quarter, compared with net income of $242.7 million a year ago.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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