Investors made it clear last week that they no longer trust CannTrust Holdings Inc. The company’s regulatory breach may further erode consumers’ trust in the legal cannabis market as well.
The company’s stock plunged 48 percent over the five trading days since regulators found it grew pot in unlicensed rooms and provided “false and misleading” information to inspectors, erasing $228 million Canadian, or $174 million, in market value. CannTrust halted all sales and shipments of its products, and the Canadian government may suspend or even cancel its license in response.
“This is a pretty simple problem that’s going to lead to a lot of lost revenue for this company, you can already see it in the stock price,” said Allison Kopf, founder and chief executive officer of Artemis, a cultivation management platform that helps pot growers ensure they’re compliant with regulations.
CannTrust’s sales halt is only going to exacerbate the already chronic problem of product shortages and high prices in Canada’s legal pot market.
Statistics Canada reported last week that the price gap between legal and illegal pot is growing. In the second quarter, the average price of a gram of cannabis in the illicit market fell to $5.93 Canadian from $6.23 Canadian in the first quarter, while the average price in the legal market rose to $10.65 Canadian from $10.21 Canadian. That’s the widest gap since recreational use was legalized last October.
Not surprisingly, the share of respondents who said they bought from illegal sources rose to 59 percent from 55 percent, with 34 percent citing the cost of legal pot for their decision.
According to Cowen & Co. analyst Vivien Azer, 52 percent of pot products are currently out of stock in Canada’s largest provinces, up slightly from June. CannTrust had the fourth-highest amount of product in the market after Canopy Growth Corp., Aphria Inc., and Aurora Cannabis Inc., meaning the shortages are likely to get worse before they get better.
Former CannTrust employee Nick Lalonde told BNN Bloomberg TV that the company put up false walls to hide the plants and then took photos of the unlicensed rooms and sent them to Health Canada, the government department responsible for cannabis oversight.
“They were following regulations for about a month, and then all of a sudden they stopped following regulations and started cutting corners and breaking rules,” Lalonde said.
The breach may have been related to a significant amount of turnover at CannTrust around the time the problem began last October, said Charles Taerk, CEO of Faircourt Asset Management, which held a small position in the company until last Tuesday.
Peter Aceto, former head of Tangerine Bank, was named CEO of CannTrust on Oct. 1, replacing co-founder Eric Paul. In addition, senior vice president of production and biotechnology Michael Ravensdale departed in November. Paul remains chairman.
“This is a head-scratcher,” Taerk said. “Two or three years ago, when it became a public company, it was looked on as medically focused, and it had a lot of science and research and pharmaceutical people on the board, it had a good pedigree, but they’ve also had management changes over the last year.”
The fallout has damaged the rest of the pot sector, with the Horizons Marijuana Life Sciences Index ETF losing 8.6 percent last week, the biggest weekly decline since December. The drop was particularly steep on Friday, with Canopy Growth down 8 percent, Cronos Group Inc. falling 6.3 percent, and Aurora Cannabis losing 6 percent.
It’s likely CannTrust won’t be the last company to report a regulatory breach unless the industry steps up its corporate governance and compliance technology, said Kopf. In CannTrust’s case, better tracking of its plants may not have prevented the breach but it would have made it easier to determine which products came from the unlicensed rooms, potentially preventing the halt on all sales and shipments.
“This a massive issue that’s actually really easy to fix,” she said. “Link up your data, trace it through the supply chain, and make sure you’re following regulations. It’s not that difficult of a problem solve, you just have to commit to doing it and invest in doing it.”