Cronos Group is in the major leagues with Ginkgo deal, GMP says

A new deal for Cronos Group (Quote, Chart TSX:CRON, Nasdaq:CRON) is a “game changer” that vaults the company up a level, says GMP Securities analyst Martin Landry.

On Tuesday Cronos and Massachusetts-based Ginkgo Bioworks announced they would partner to produce cultured cannabinoids, which they believe have multiple medical uses, including for the treatment of chronic pain and nausea.

“Legal cannabis is a multibillion-dollar industry with no signs of slowing down, but providers will need to innovate to keep up with demand for better products, including those taking advantage of rare and difficult to extract cannabinoids,” Ginkgo Bioworks CEO Jason Kelly said. “Engineering strains of yeast that can produce these cannabinoids via fermentation is a perfect fit for our organism design platform and we are excited to be working with Cronos Group as they lead the way to high-quality cannabinoid treatments.”

Landry says this deal is a game changer partly because cultured cannabindoids could be an attractive source of active ingredients for pharma companies looking for raw materials. The analyst say there is a lot to like about this development.

“With Ginkgo, Cronos has entered the major leagues in cannabinoid research. Under a scenario where Ginkgo succeeds in producing cannabinoids at scale, this technology could be a game changer to reduce production costs. In addition, it could be a major differentiation factor for Cronos in terms of product offering, being able to offer large quantities of rare cannabinoids in a cost effective manner. Finally, we like the structure of the deal which gives Cronos the optionality to benefit from this production technology with limited downside risk should Ginkgo’s work not achieve expectations.”

In a research update to clients today, Landry maintained his “Buy” rating, but raised his one-year price target on CRON from $10.00 to $17.00, implying a return of 16 per cent at the time of publication.

The analyst thinks Cronos Group will generate EBITDA of $4.3-million on revenue of $42.8-million in fiscal 2018. He expects those numbers will improve to EBITDA of $49.4-million on a topline of $160.7-million the following year