Raymond James remains bullish on Cronos Group

The race is on for cannabis companies to take a slice of the US$40-billion biosynthesis pie, says Raymond James analyst Rahul Sarugaser, who argued in a research note to clients on September 4 that Cronos Group (Cronos Group Stock Quote, Chart, News TSX:CRON) is near the front of the pack through its partnership with Ginkgo Bioworks.

On September 3, Berkeley, California-based private biotechnology company Demetrix announced that it has started a 15,000-litre scale production of cannabigerol (CBG) by yeast-driven biosynthesis. Demetrix said it will graduate its fermentation process to “demonstration volumes,” saying that, so far, little is known about the more than 100 cannabinoids aside from THC and CBD that can be found in cannabis and hemp plants and that Demetrix’s biosynthesis is allowing for scientific access to these compounds in
high-purity forms.

“Achieving demo scale production is a significant milestone that proves how fast and effective our team has been in solving some of the biggest challenges in producing cannabinoids with fermentation. We’re well on our way to large scale commercialization,” said Demetrix CEO Jeff Ubersax in a press release.

Commenting on the event, Sarugaser said such so-called demonstration runs are the last step before true commercialization and that based on available information, Demetrix currently has the title for the largest cannabinoid biosynthesis fermentation volume recorded to date.

On the progress of Cronos’ cannabinoid program, Sarugaser said the company has been quiet on details but that he suspects the company will only make an announcement once the process is commercially ready and CRON’s initial cannabinoids are already incorporated into its products throughout the Canadian cannabis market and the US CBD market.

The analyst pointed to a number of elements that give Cronos an upper hand on cannabinoids: along with its bioengineering partnership with Ginkgo, Cronos has full ownership of a large fermentation facility (Cronos Fermentation), a regulatory advantage being a licensed cannabis operator, seller and distributor and an IP advantage through its equity partner Altria, all of which situate CRON nicely to seize control of the global cannabinoid biosynthesis opportunity, Sarugaser said.

“We believe CRON — powered by Ginkgo — is well-positioned to be at or near that front of today's fiercely jockeying cannabinoid biosynthesis pack. While, today, we don't have resolution on CRON's scale of production, we know that the company has been hard at work on its scale- up and downstream process development operations since May (with an increased 2Q20 R&D spend to prove it) and has complete autonomy over a 100,000L fermentation facility. So, CRON could be producing cannabinoids (CBG first) at scales anywhere between 100L and 100,000L today,” Sarugaser wrote.

With the update, Sarugaser has maintained his “Outperform 2” rating for Cronos. Looking ahead, the analyst thinks Cronos will deliver 2020 revenue and EBITDA of $36 million and negative $84 million, respectively, and 2021 revenue and EBITDA of $46 million and negative $28 million, respectively.

CRON finished 2019 down 31 per cent while so far in 2020 the stock is down 29 per cent.