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April 20, 2020, 1:27 p.m. EDT

Which cannabis companies are going to survive coronavirus? Here’s how to tell

The sector was already shaky before COVID-19, but companies must now have the right mix of cash, pot and sales channels to make it to the other side

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By Max A. Cherney

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Stockpiles of weed

Once considered to be an albatross around the neck of Canada’s largest producers, excess inventory is now desirable.

According to a note from Jefferies’ Bennett, companies with immense inventory will be at an advantage if there are supply shutdowns, in terms of cash flow, much like producers with a large capacity benefited during the early days of recreational legalization in Canada.

Raymond James analyst Sarugaser said his bank has observed a cultivation and processing slowdown across the industry as weed companies implement social-distancing measures and spend more resources ensuring clean work places.

“Now, it seems that large accumulated inventories may prove to be an indicator of resilience during the COVID-19 era,” Sarugaser wrote in a recent note.

All figures in millions of Canadian dollars Aurora Aphria Canopy Cronos Hexo Organigram Tilray
Finished Inventory $50.7 $78.2 $4.4 $9 $18
Work in Progress $129.9 $472.2 $29.5 $28.8 $54
Total Inventory $205.5 $225.8 $622.6 $38 $93.5 $113.4 $87.9

Source: Jefferies

Production capabilities

Companies without a lot of product on tap must grow it. But growing, processing and transforming cannabis into products, whether that means packing flower for smoking or making products such as edibles or vapes, is now more complex because of the different way companies must operate during the pandemic.

See also: As cannabis industry stays largely quiet on coronavirus, this CEO has been sounding the alarm

Few major producers have made public disclosures or reported financial results since March. Aurora Cannabis Inc. /zigman2/quotes/210559470/composite ACB -5.22% /zigman2/quotes/203734337/delayed CA:ACB -4.86%   has long touted the level of automation at its flagship Aurora Sky facility in Alberta: “The level of automation at Sky-class facilities is definitely an asset at all times in terms of increasing the reliability and efficiency of our operations,” a company spokeswoman told MarketWatch for this story.

Other cannabis companies have said little about the effects of social-distancing and other safety measures on their cannabis production.

Mitch Baruchowitz, managing partner at Merida Capital Partners, a cannabis-focused private-equity firm, said the larger U.S. multistate operators such as Cresco Labs, Green Thumb and Curaleaf already have a fair amount of automation and an advantage over smaller operators who still rely on human labor for various aspects of cannabis production.

One other advantage shared by all cannabis companies is that they are forced to operate wall-to-wall within states, and tend to source production inputs such as soil and other raw goods from local vendors, Baruchowitz said.

In Canada, as a second generation of cannabis product sales begins in earnest — including edibles, vapes and drinks — companies that already have products on the market are at a distinct advantage, according to Sarugaser. Weed businesses that were formulating new products will be delayed because it will be impossible for companies to set up production lines, refine the products and complete quality assurance testing, among other things, while the emergency measures are in place.

Read: Aphria yanks forecast due to coronavirus after strong increase in cannabis sales

Retail channels

One of the longstanding excuses for lackluster sales that Canada’s largest cannabis companies have given investors is that bricks-and-mortar pot stores have been slow to open. Ontario has received the lion’s share of the criticism, but other provinces have had their issues too. As Canada responded to the pandemic, Ontario again befuddled investors: across most of the country and in the U.S., weed wass considered an essential business. But Ontario shut down stores, only to reverse course days later and allow curbside pickup or delivery for the 52 open stores — though the online government-run pot store was always open for business.

“In sum, we see the stalling of in-person cannabis retail as one of the key mechanisms holding the Canadian cannabis market back from expending toward market equilibrium and further accelerating the attrition of the poorer operators,” Sarugaser wrote.

While curbside pickup presents its own complications for cannabis retail operators, Canopy Growth has shut down its corporate-owned pot stores in an abundance of caution, while other retailers remain open.

Don’t miss: Pot shops are considered ‘essential’ businesses in most states where it’s legal, but the rules are shifting

See also: Pot smokers stock up for pandemic on ‘the vice of choice when alone’

In the U.S., in every state where recreational pot is legal, cannabis is considered an essential business and sales continue to hum along — albeit with the required social distancing, delivery, or various click-and-collect systems in place.

That’s apart from Massachusetts. There, the governor has shut down all recreational cannabis operations, saying that because it is one of the few states in the northeast with legal pot, he is concerned people will travel from out of state to buy weed and potentially spread the virus. The decision doesn’t look likely to change, as a legal challenge to the governor’s order was defeated this week.

Companies with exposure to Massachusetts retail such as the Illinois-based Cresco Labs Inc. /zigman2/quotes/205276242/delayed CA:CL -1.05%   /zigman2/quotes/200392306/delayed CRLBF -1.72% , Green Thumb and Curaleaf stand to suffer.

Cannabis Watch: See all of MarketWatch’s marijuana coverage

/zigman2/quotes/210559470/composite
US : U.S.: NYSE
$ 6.53
-0.36 -5.22%
Volume: 6.95M
Sept. 18, 2020 4:00p
P/E Ratio
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Market Cap
$774.12 million
Rev. per Employee
$94,401
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/zigman2/quotes/203734337/delayed
CA : Canada: Toronto
$ 8.62
-0.44 -4.86%
Volume: 3.05M
Sept. 18, 2020 4:27p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$1.02 billion
Rev. per Employee
$123,163
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/zigman2/quotes/205276242/delayed
CA : Canadian Securities Exchange
$ 7.55
-0.08 -1.05%
Volume: 114,278
Sept. 18, 2020 3:59p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.66 billion
Rev. per Employee
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/zigman2/quotes/200392306/delayed
US : U.S.: OTC
$ 5.71
-0.10 -1.72%
Volume: 250,474
Sept. 18, 2020 3:58p
P/E Ratio
N/A
Dividend Yield
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Market Cap
$2.01 billion
Rev. per Employee
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Max A. Cherney is a MarketWatch reporter based in San Francisco. Follow him on Twitter @chernandburn.

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