Cronos Group isn’t using a banned pesticide, says PI

A warning from Health Canada to Cronos Group (TSXV:MJN) is a simple misunderstanding, says PI Financial analyst Jason Zandberg.

On May 6, Cronos Group reported that its wholly owned subsidiary LP, Peace Naturals Project was notified on May 4, by Health Canada that upon testing a random cannabis leaf sample, trace levels of piperonyl butoxide (PBO) were discovered at 0.78 part per million.

“Our first priority is the health and safety of our patients. We take safety testing seriously and are working closely with Health Canada to determine next steps. We are committed to demonstrating that Peace and the ACMPR are the global gold standard for safe, regulated cannabis,” said Cronos Group CEO Mike Gorenstein,

Zandberg says he takes issue with Health Canada’s assessment.

“We disagree with Health Canada’s implication that Peace Naturals products tested positive for unauthorized pesticides for the following reasons,” says the analyst. 1. PBO is not a pesticide. PBO is actually an ingredient in a sanitation product approved by Heath Canada which is used to sanitize facilities between growing cycles – it is not a pesticide and was not used as one. 2. PBO does not represent a heath concern – in our estimation, a patient would have to consume over 75kg (per person) of product for the levels of PBO to create any adverse reaction. 3. The substance was found on a mother plant leaf due to an old HVAC system that has since been replaced. It has been determined that Peace Naturals HVAC system collected some of the PBO during the sanitation cycle which was transferred on to a mother plant that was subsequently tested. This HVAC system has been upgraded and no longer poses a threat to cross-contaminate plants.

Zandberg says that while he agrees with the oversight Health Canada has implemented, this is a wrong-headed application of its power.

“Health Canada has instituted a strict random testing program which we applaud but also recognize testing results can be misunderstood,” he argues. “We believe the use of banned pesticides need to be eliminated from the market but Cronos has not tested positive for pesticide use and we are confident that the Company’s GMP certified facility produces the highest quality medical cannabis.”

In a research update to clients yesterday, Zandberg maintained his “Buy” rating and one-year price target of $4.25 on Cronos Group.

Zandberg thinks Cronos Group will post EBITDA of negative $541,000 on revenue of $9.06-million in fiscal 2017. He expects these numbers will improve to positive EBITDA of $12.1-million on a topline of $42.7-million the following year.