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We're here today with Russ Stanley.
He's the Managing Director
of Beacon Securities.
They're a brokerage in Toronto, Canada.
How are you Russ?
I'm great.
Thank you.
How are you?
Not too bad.
So we've been at a
conference this week in London,.
Cannabis Europa.
Cannabis Europa. And we've been talking
to the great and the good.
Seems to be a lot of people from
Canada and the US over for that.
Yeah, well, we're all looking for the next
opportunity and Europe appears to be it.
Well, we're going to get
onto that in a minute.
I want, if you can, to explain to our
viewers a little bit about what happened in the
Canadian market with regards to Cannabis.
We've seen this rapid ascent.
Some huge companies created, almost overnight,
with not a lot of revenue.
Not yet.
Not yet. And it has come off a bit.
Why don't you tell us
a little bit about that?
Sure. So Canada as of October 2018, Adult Use
is now legal in Canada, otherwise known as
recreational. So subject to age restrictions and
where you're allowed to consume it, it's
now legal for an Adult to walk into a
store, a licensed store, and buy Cannabis, either
dry Cannabis for smoking
or there's Cannabis oils.
This coming October, some additional regulations
are expected to become effective that'll
broaden the the number of
products that are legally available.
But that's been the biggest
catalyst over the last year.
And that's on the Recreational side.
But a lot of these companies
are also on the Medicinal side?
It's fair to say.
Yeah. Most of them started
off in the medical world.
We've certainly seen maybe a couple of years
ago when the space first started to get
investor attention, there were maybe a
dozen publicly traded Cannabis companies.
There now have to be 50 plus.
There's over 150 companies licensed
to cultivate Cannabis in Canada.
And Canada is small market of 37M people.
So there will be some interesting dynamics play
out, I think, in the next several years.
But the space has exploded in terms of
the number of people growing Cannabis and that's
created some other kind of
ancillary industries as well.
I don't know much about Cannabis.
I'm not sure many of our views do either.
And that's why we're talking
to experts like yourself.
But it strikes me that the growing, the
Producing side of things, there may be margin
now, but like most agricultural
plays, they do tend to...
margin does tend to be
reduced over time. Do you
expect the same thing here?
We do.
It's we think that's a when,
and not an if. Cultivation
has certainly got challenges.
But as one Cannabis producer that that came
from the produce industry said, 'Every crop
is different, and has a learning experience associated
with it, but it's still a crop'.
And that means scale is important.
Quality control is important.
But once you have those things nailed down, it's
a matter of time before the before the
margins start to erode.
So we do expect that to
happen in Cannabis as well.
So that's a that's a known factor.
It's quite helpful for people to understand that,
because you got to think about where
you invest.
So if you were looking at investing in the
Cannabis space, you can look at the Producers,
Processors, Distributors, and
obviously the selling..
the Retailers of this in terms
of brands and so forth.
So on the producers side, if I look at where
this is going to go, I'm going to be
slightly more cautious about investing there.
Because there is going to
have to be a wholesale....
well, I don't think there will be as many
players in the market in 10 years time.
There is going to be some winners and losers.
There certainly will.
And so in our view, I think the
key success factors for Canadian licensed producers at
this point to succeed within Canada, are
the ability to develop value added products.
So go beyond the dried flower and develop
higher-margin products with some sort of value
added associated with.
And right now legally, that's
limited to oils and capsules.
But we do expect that to expand in
to edibles and beverages later this year.
So strengthen on that product development
front's going to be crucial.
And it's also going to be.. and
is already evolving into
a shelf space battle.
Every Province has its own rules
and regulations with respect to Distribution.
And it's critical for Canadian Cannabis
companies to have sales relationships into,
obviously the core provinces of Ontario and Quebec,
but into other markets as well. And
so when we look at Canadian producers, we
ask how well are they developing products that
will be able to sustain higher margins
over a longer period of time?
And how well are they actually
getting those products on the shelves?
Everyone's looking towards the Canada model as the
blueprint for how it could work in the
US, could work in Europe.
As I say we'll get to that in a second.
But some companies, as I say, almost
overnight became billion dollar businesses with very
little revenue.
So there's the hope, the
expectation, the sentiment, driven up.
Was that, do you think, based on
fact or was it based on emotion?
Were these were these companies focused on the
right things or did it not matter?
I think it will matter.
But I think there was a point in
time looking back where it didn't matter.
I think scarcity played a role.
A few years ago there weren't as
many investment opportunities available for investors.
I want to play Cannabis.
Well, how do I do it?
Here's a list of 20 names.
That'll narrow it down in a hurry.
We now have far more choice.
And that's that's good for investors.
Hopefully over time, that means that stories
with substance survive, and those that fail
to execute, or never really had a sound plan
to begin with, those of those will fall by
the wayside.
And that's healthy.
But scarcity certainly played a role.
I think at the outset We're now
at a point where growing Cannabis is...
people are beginning to realize that cultivation
is just one part of the story.
You need to be able to turn that product into
something, and then you need to be able to
get it on the shelves.
And we're seeing fewer and fewer companies
that are there passing those additional
milestones. So there were certainly some promises
made and some companies have delivered
and others haven't.
And have they suffered?
They're starting to.
We're starting to see what
we'd actually call Security Selection.
We're starting to see days where your screen
has a mix of green and red.
It's not just all names being painted
with the same brush every day.
I think we're starting to see decisions being
made about one company not delivering on
commitments or promises made to investors, while another
company has done a better job of
that. And we're seeing a flow of funds,
I think, into those higher quality names.
I find that interesting, because to
me, it's a fairly nascent industry.
Okay. Canada is two and a
half years ahead of everyone.
That's nothing.
That's not very long.
No. If I look back to the technology boom,
who the main players were back then, most them
not around today.
So it's a different sort of industry.
I suspect it'll be the same here.
You've got people have not been in
this space very long, telling us..
are the world's experts on this topic.
So let's see how that plays out.
But the other thing that strikes me is, like
any other industry, one company trying to be
all things, to all men.
So being a Producer,
Processing, Distributing and Selling.
That's a tough gig.
That's multi skills required.
A lot of money to do that.
So people tend to focus and get
good at one thing or the other.
So who are the bigger players in
the Canadian market at the moment?
Well, so the big handful you'd call...look
at Canopy Growth, the
world's largest Cannabis company.
You'd look at the Aurora Cannabis. You'd
look at Aphria.
Cronos. Those are those are some of
the biggest names in the space.
Then you get down into the next tier of
producers in terms of scale and you're looking at
CannTrust, Hexo and Organigram. These are
all companies that are currently involved
throughout every step of the
chain, as you mentioned.
I think over time, all of these companies
understand that cultivation is going to become
increasingly competitive.
So low margin.
Low margin.
It's made sense to be in that business
for now, not just because there is margin
available, but also because
it secures supply.
We've had an undersupply situation in Canada for
quite some time, and that was only
exacerbated with the legalization
of Adult Use.
There wasn't quite enough product ready
for shelves as people had hoped.
But like all shortages become surpluses.
It's a question of when, and not if.
And so that day is coming.
And I think these..
all of these companies know that cultivation is
not really a part of their long-term game
plan, and they'd rather spend their
time on value add activities.
We've also seen, for example, a number
of those players look externally to extraction
companies. So once you've grown Cannabis, in order
to convert it to something else, you
need to extract it and then use the
resulting concentrate as an input into another
product. And while all of these companies
have built out their own extraction
capabilities, a handful of them have gone
a step further and employed or recently
employed third party extraction companies.
Fundamentally, refineries for
the Cannabis industry.
It makes sense to me.
So we are seeing more specialization.
And I think that to your point that's going
to intensify as certain parts of the supply
chain start to develop as cultivation becomes
less attractive to anyone who's not doing
it at huge scale and ultra low cost.
We're going to see companies try to extricate
themselves from that part of the business.
So to me that says with Producers, there's
gonna be a lot of losers. And
a few winners.
And the winners are going to do things
like start putting patents on certain strains or
varieties, as they're doing in agriculture.
Today in the US, you can't grow certain
types of potatoes, because the IP resides with
one company, so you need to get a license.
So that's one potential area where someone
could be looking at making investment.
That would make sense. But
trying to pick a winner, otherwise is going to
be a hit and miss over the next while.
It's going to be a challenge.
And it's complicated by the fact that we
think that the best margins are in
manufacturing.
Let's come on to that.
But you're limited in Canada right now with
the extent to which you can actually package
products in a way that's appealing.
Most people look at the way these Cannabis products
are packaged in stores and say it's a
very clinical look.
And that's for regulatory compliance reasons.
That's not a marketing person's dream to look
at that packaging and say that looks good.
Are you talking on the
medicinal side with CBD?
Oh, are you talking on recreational?
It's both.
With the Adult Use products themselves, there's a
lot of limitations around the way they
can be packaged. Primarily
to avoid making products
attractive to underage.
Kind of like the cigarette market.
Very similar.
And so the packaging is
very similar to tobacco products.
And that's why, not surprisingly, you've seen
Cannabis companies recruit people out of
the tobacco industry.
Because there probably isn't another industry where
people have become very expert at
selling a product that their government
doesn't want them to sell.
So it's a challenge that industry has found
a way to navigate and and create an
increasingly difficult environment.
Cannabis in Canada right now
faces very similar challenges.
But let's come back to where I think
some of the innovation will make a difference.
And that's in the processing side.
So you'd say for the recreational side...
What do they actually do? The
process the flower and they create what?
Right now it's, legally, it's just
oils and capsules filled with oils.
Later this year, we're expecting to see
more products hit shelves, specifically edibles,
and concentrates for vaping
and beverages as well.
So we actually met someone
last night at the conference.
He does that, liquids, which you
can pop into beers, whiskeys.
Wake up without a hangover.
Sounds good.
Yeah. It's dream.
Right.
If only we drank.
Yes.
And obviously in regular drinks, makes you
feel good and a bit more energy.
That's what I mean about this innovation.
But even that guy was saying he had a
proprietary technology that allowed him to do this,
where he would license it
out to other people.
He was in conversation with
a large drinks company.
One of the world's largest, top three we'll call
it, to allow them to add this. Do
you think those things are
going to be faddish.
I mean, just momentary.
Or do you think there's some
longevity to things like that?
Specific to beverages there's a debate.
That category is legal in a number of
US States that have legalized Adult use. Even
though Canada, from a Federal perspective, is seemingly
a few years ahead of the US, from
a regulatory perspective; at a product level, in
terms of what's legal in a given State,
the US is a good example or a
good window on the future for Canada.
And so we see beverage products being
with varying degrees of success in some
markets Some of it's technology around actually
getting the Cannabis product to dissolve
properly. So some of it's technology. And
some of it is perhaps about
getting consumers to change habits.
If you're at a dinner party, if you're always
going to be drinking wine, do you want to
drink your Cannabis or would you rather
eat your Cannabis or vape your Cannabis?
There's a consumer habit, or a user habit there,
that needs to be it needs to be
addressed or marketed around.
But that's an example where we're branding and
where IP could be a tremendous role in
value creation for for investors.
And we'll see more of that.
But the beverage categories had
mixed success in the US.
I've worked in the beverage space.
I've also worked with cigarettes, BAT. And
product innovation, which comes from the
processing side, drives the marketing
activities. So the extent to which the delivery
of the Cannabis, whether it be medicinal
or recreational, is important
because it allows...
it gives the marketing people something to
work with, the branding people, something to
work with.
So it'll be interesting to see
where these collaborations come from.
As you say, people from outside need to
come in with the relevant prerequisite skillset
to help this evolve over time.
It'll be interesting to see how it plays out.
But everyone still learning as they go.
Yeah, I think that's really important to
state here, is that it's early days.
We spoke to maybe six guys last
night at a function after the conference.
Probably got seven different
answers as to why.
I got five different answers, which surprised
me, in terms of how companies develop
markets. They were talking
specifically about Europe.
I think there is...
some of them think it's gonna be a breeze
and some say it's a little bit more complicated
than that.
But maybe some lessons to be learnt about
what you did in Canada, and certainly what's
going on in the States.
Let's get into that, because
I think that's fascinating. Because
you've got...
each State has got the ability
to make this work or not.
And then on the Federal level, you've
kind of got some ambiguity as well.
So what's been happening in the States?
The US is a fascinating market.
Perhaps like a lot of Canadians, I spend more time
looking at the US than I do at Canada.
But it's fascinating market.
It's a big market.
It's a big market. As
a Canadian, we just assume 10 to 1. Whatever
an industry size is in Canada,
just assume it's 10 times bigger.
In the US, you're probably in the range.
So, huge, huge market.
But it is a collection
of 50 different markets.
Each State has its own
way of dealing with it.
Importantly, it's still, Cannabis, is still
illegal at the Federal level.
Now, medical use in States where medical
has been legalized, there is basically an
Amendment to the Spending Bill in the US that
has been passed a number of times since
2014.
What does that mean, that the spending bill?
Well, basically the Federal Government's own spending
bill, there's been a rider attached
to it that protects medical
businesses from Federal enforcement.
So medical has received this protection from
the Department of Justice for several years
now. And recently the House passed a version
of that rider that extends that protection
to Adult Use.
So that would be a huge win if
that makes it into the final version. But
otherwise, it's still Federally illegal.
So roughly 33, 34, 35, depending on how
you count them, States have legalized medical use
in some way.
We're now basically...
Illinois earlier this week when Governor Pritzker
signed off on the bill there.
We now have 11 States that
have legalized Adult Use as
well.  So we've now got 11 States in the US.
So roughly just over 100M Americans now live
in the States that have legalized Adult Use
at the State level, even though technically
it's still illegal at the Federal level.
Now there's there's a couple of bills.
Well, there's several of note, but there's
two pieces of legislation that are making
their way through the Federal government's process
that could legalize or at least
provide some degree of safety for
Cannabis at the Federal level.
But until something is done, it's not done.
So people are looking at
America as the next Canada.
We love hearing that by the way.
x10 times, we are looking for ten times.
But the reality is it's taken a lot
longer than people have hoped, as well.
So what's happened. You've
seen a lot of the US
companies come list on the TSX.
But that's short-termism.
Well, they've listed on
the Canadian Securities Exchange.
So that's something we should
talk about as well.
Let do it now.
Sure. So the TSX and the TSX Venture, the
venture being the junior to the to the TSX,
those are those would be traditional
homes for Canadian listed companies.
The Canadian Securities Exchange was until
several years ago virtually unheard of.
It had been around for some time,
but there really weren't that many companies.
And as an analyst, I had never written a
report on a CSE listed company until about two
years ago.
So the Exchange has really made a name,
because the TSX and the TSX V, have...
current policies say they won't list a
company that is violating US Federal law.
So these US companies that came public,
many of them last Fall, multi-billion dollar
market caps, were effectively forced to list on
an Exchange that nobody had heard of
until the last few years.
It's been a fascinating story to watch because
CSE is viewed as a very junior exchange.
And like I said, I never would have
pictured myself writing up companies that were listed
there.
But that strikes me as a kind of walk around.
People have said...
of course,.
...We can't do it here but the
wording over here is slightly different.
But the Canadian government
have allowed this.
They welcomed it.
I think certainly Cannabis is...
in most Provinces has been accepted for a
long time, in terms of growing and use.
But American companies have had to come up
here because the US government has not made
their mind up yet.
That's right.
There's some indications.
There's been progress.
There's been some wins recently,
that we'd call ...people
will look back and say that was an
important turning point when, for example, the House
of Representatives, a little earlier this year passed
a bill that would allow banks in
the US to serve State legal Cannabis
companies, without fear of penalty or prosecution.
So that would be a huge step.
And that one has what you might call political
legs, because that will help take cash off
the street.
These companies are still
largely cash run businesses.
You are talking physically
about bags of cash.
That get moved.
People being paid in cash. Suppliers
being paid in cash.
And that's just not safe.
The legislation is called
the Safe Banking Act.
Its next stop is the Senate.
It's not a slam dunk to get through the
US Senate because the Senate is still controlled
by the Republican party.
But it does have a lot of support
from both Democrats and Republicans in the Senate.
So there's optimism that this legislation
could get passed in 2019.
And that's limited to banking, but it would
be a huge step, and easily the most
meaningful piece of legislation we
would have seen relating to
Cannabis at the Federal level.
I'd love to get into that, but I got
to keep bringing this back to points, which the
investor folks watching this might like.
A question for you is, you've got these
American companies coming up onto the CSE.
Are they going to stay there
or are they gonna move back?
I think if...
they will list on a US
exchange as soon as they can.
Why?
Because they'll have a broader
and deeper investor audience.
There are a lot of investors out
there that won't buy CSE listed company.
There are a lot of investors out there that
even if they were TSX listed, they would
pressure the company to list on
either New York or Nasdaq.
So they will want to do
that to get a bigger listing.
It's their home market.
And home field advantage is always
something that people prefer to have.
Which is understandable.
But primarily it's about a broader
investor base, a deeper investor base.
There's still a lot of investors that
haven't touched Cannabis yet that run a
considerable amount of money.
And until and unless those companies are accepted on
a US exchange, they may stay on the
sidelines. This is about taking
down your cost of capital.
And that basically means trying to
get your share price up.
A good way to do that would
be to get a US exchange list.
And we've certainly seen that the Canadian
companies, which of course aren't violating
any Federal laws, so they
are able to list. They've
been able to get listings
on New York or Nasdaq.
They, on average, get a significantly higher
valuation multiple than companies limited to
the TSX or the Venture.
So there is a very clear cost to
capital win to getting a US listing.
So we'd expect them to go
as soon as they can.
OK. So people watching this should also be
watching those companies to see when they move.
Either get it now or wait till they move.
Whatever you want to do.
So we're not doing a
deep dive on everything today.
We want to kind of get
broad, broad sweep across the market.
Let's get back to Distribution.
One the four pillars. So Distribution
to me, now this is an area
rife with licensing and permitting issues...
And politics.
...And politics.
It's a very interesting space.
And it is where the timeline is unknown.
Producing - I get.
Timeline? Easy.
The processing, kind of easy, expensive, but
easy, in terms of understanding the
timeline. But with this side of things.
This is where it becomes difficult, not just
for the States, but something we're going to
about in a minute, which is Europe.
How do companies tippy-toe their way around licensing
issues in the States, in terms of
getting this through?
What is the process that they follow?
Every State handles it differently.
And when it comes to Distribution, the most
interesting State is California, which as you
can imagine, is...
Reputationally, yes.
...reputationally. The biggest Cannabis market in
the galaxy, in the known
universe perhaps. But interestingly, and this is
where and why we've seen some
transactions in the Distribution space.
The regulations in California give the local
Municipalities a lot of control over whether
or not they even want
to host Cannabis operations.
And while California, to everyone outside of California,
we would think that the State is
universally supportive of Cannabis.
In reality, the vast majority Municipalities
don't currently allow Cannabis companies to
set up shop.
So actual Distribution is no slam dunk.
They have a separate license for Distribution in
California because the market is so big
and has an added layer of complexity, where
there are some markets where you're allowed
in, some markets where you're not.
And every other State, no other State, I
don't think has a separate license for
Distribution at this point. And
maybe that'll come.
But right now, California is the only one
that has a separate license just to distribute
Cannabis. And so we've seen a couple
of the bigger multi-state operators announced plans
to acquire companies, who are focused
on Distribution in California. Because
it is such a big market and such
an important part of the value-chain or supply-chain
that it's worth focusing on.
And a couple of companies have
built some real scale around that.
But it's no easy feat to actually
get your product onto shelves in California.
As attractive and as big a market as it is.
It's a lot of work to get your product out
of you're out of your lab, and onto a shelf.
So for me when I'm looking at this from
the outside, what are the companies going to make
it? The question I ask myself is, will
regular wholesale distributors be able to take
Cannabis on as a product, whether it be CBD,
THC or whatever, and get it into the various
markets? So it could a regular
wholesale distributor be that person?
Or do you think they'll be specialist
Distribution companies set up because of the
regulation component?
I think we're going
to see specialization continue.
It's important to know that because every
State regulates Cannabis differently in the US
and it's Federally illegal.
It's also currently illegal to move
product from one State to another.
So every State is an island.
Ordinarily outside of that, there would be
sound business reasons for having something
that was a bit more centralized.
You're not going to see that
in Cannabis for quite some time.
So right now, if you're distributing Cannabis
as a standalone business, you're doing it
in California.
And unfortunately, you're not allowed or not
supposed to be moving product outside of
California.
That's fascinating, because it says to me that at
some point when each State gets to the
point where it is legal on the Adult Use and
on the medicinal side, there's a roll up of
these Distribution companies to create
these sort of large...
There's a lot of money to be made.
It seems to me.
There will be.
That's the hardest, you're telling me and I believe
it before, is the hardest piece of the
jigsaw puzzle so far.
I think it is.
Cresco Labs just announced plans to acquire a
company called Origin House, which has a
presence on or has penetration into 70%
or 80% of the dispensaries in California.
Curaleaf has announced plans to acquire a
company called Select, which has similar
Distribution strengths.
So we've seen some of the larger multi-state
operators, look at California and say, 'we
need to get big there.
We need to do it the right way.
So we need the linchpin', so to
speak, the choke point is Distribution.
And they've responded by or moved ahead
by announcing plans to acquire companies that
have focused on that historically.
So it's a fascinating market.
It's obviously big.
And everyone outside of it would think it's a
slam dunk to build a Cannabis business in
California. But that's not the case.
It's a tough market to navigate.
And these two acquisition targets have done
a good job doing it so far.
So let's segue over
to the European discussion.
Again, we spoke some guys last night, as
we said previously, lots of opinions about how
it's going to work or not work.
The people looking at the European Union as
a similar setup to the United States.
And I guess in many ways it is.
You've got independent countries with their
own rules, laws, regulations, etc.,
understanding and development stage in relation
to Cannabis and Cannabis products, hemp
included. A few people have told us it's
going to be relatively easy, just you just
apply for the licenses and we're done.
Think you know what I think by my reaction.
And you've got some other people having
experienced what America's going through, been
through and going continues to go through.
It will take a bit longer to do that.
But the general sense was, they may have
disagreed on timing, but what they're all agreed
on is it's happening.
Yes.
So for people to try and work out who the
winners will be is what I'm trying to get a
sense of here, which is why I want to
stick with those four pillars, as it were.
So on the Distribution side, I mean, it's
even further back than than the US operations
in Europe.
So what are your hopes for Europe?
Where do you see it today?
Where do you think it could go?
Yeah. And this is tough.
I think when I get together with my peers, we
kind of say it is Europe where Canada was
2015, is it 2016, is a 2012?
We don't know.
If I had to say where there's
a consensus, it's kind of 2014, 2015.
And that's sort of...
it'll be interesting.
A number of the Canadian Producers, though.
They've seen the opportunity in Europe.
It's obviously a much larger
population base than in Canada.
Ten times.
So a number of Canadian companies have made
efforts to work their way into Europe.
I think that the potential mistake or the risk
that a number of them are going to bump
into is the belief that it is a common
market and that it's simply a matter of
establishing a beachhead in one country and then
the whole market opens up for you.
And I think what many of us suspected and
certainly we concluded from our from our time
here in Cannabis Europa is
that's not the case.
You heard about Brexit?
Yeah. Yeah.
It's a bit of a bit of...
We weren't sure if anyone had heard of that.
We've seen the headlines.
So that's a case in point.
So it's going to be a really
complex market for companies to navigate.
And a lot of Canadian LP's.
have been chasing Germany, for example,
and see that as the....
But there's a couple of companies in
Germany, cannabis companies, who work in Canada.
Primarily Canadian companies that
have made inroads.
I think Aurora Cannabis is a standout there.
Cronos as well.
So there've been some Canadian
companies that have made moves.
A number of them have participated in
the RP process around around establishing
cultivation in Germany.
So it's a huge market.
What do you think of that?
Do you think that first mover advantage will help
them or do you think at some point,
like other industries, people are going going to
come and take him out, build their own
system?
I think that Cannabis as a product is so
politicized that there's always going to be a
degree or at least
the excuse for nationalism.
And so I think that if you're a company
from any country other than the country you're
trying to target, you're going to have
to do it very carefully. That's
usually going to mean partnering
with a local provider.
And then you've got to get the
right partner and the right economics.
So I think Germany could be a huge
market opportunity, but it's got to be done
carefully. I think that it's an earlier stage
market, for example, from a standpoint of
what Cannabis can be prescribed for.
Based on what I'm hearing, I think physicians
are a little more cautious in prescribing
Cannabis than perhaps they are
in some other markets.
So there's a number of
different factors at play.
But from a corporate perspective, Canada's is far
more clear in how business is done in
Cannabis. And in a lot of
other markets that's still evolving.
So you probably need a local partner, even
if it's not forced by regulation, then you're
still going to need a local partner just
for practical business purposes, because it's a
different market.
You used the word, nationalism.
Okay, nationalism is great.
But then you break that
down into conservative, liberal...
which the Canadian market
is perceived as being...
We over here in the UK,
we're a bit more conservative.
You've got a lot of countries
across Europe in the same way.
Waves of populism
happening, nationalism, etc..
But fundamentally under that sits these kind of
conservative views in a way that perhaps
Canada and California are less so.
So do you think those
things are inhibitors too?
Because that affects politics and politics is
where the decisions get made, right?
I think so.
I think that one of the items...
so there's a compound in Cannabis called CBD, for
example, and we'll use that as a good
talking point here.
CBD is a compound of Cannabis.
The second most common one after THC.
CBD does not...
So explain those two things for everyone.
THC. CBD.
THC is what gets you high, so to speak.
That's the psychoactive component.
It is believed to have some medicinal
properties, it doesn't just get you high.
But that is when people...when
you commonly think of
someone smoking Cannabis.
That it, THC.
It's THC.
And that's the thing people
most people rail against.
Because it's a drug.
It's a gateway drug.
It's viewed as a gateway drug.
It's an intoxicant.
There are concerns.
Most of the most of the concerns in Canada,
in the US, are around legalizating that, are
around road safety.
So we're not saying necessarily that
it is a gateway drug.
It's perceived as such.
It is perceived as such. And there's the other
compound is CBD, which has a number of
potential medical applications.
In fact, a drug was approved
by the FDA last year.
That's used for a couple of
rare forms of pediatric epilepsy.
That's based on CBD.
CBD doesn't get you high.
It's non psychoactive.
It's purely medicinal.
I've used a tennis elbow. It
worked within a half an hour.
It was amazing. We've seen videos of
people with various ailment, made to
feel a lot better than they were. It may
control shaking or involuntary spasms.
It's known for anti-inflamitory properties.
So I think a lot of people
are starting to learn about it.
It's come very trendy in
certain parts of the US.
We've seen a number of big box retailers
start to embrace the product where they can.
But it's still very misunderstood.
And to bring it back to your
question around politics and around voters.
There are a lot of people that still
don't know that CBD doesn't get you high.
So they see a CBD product on a shelf.
Or someone offers them a CBD product to try and
they think no thanks, I don't want to get
high.
This is terrible.
This is terrible but I saw a clip
of a Sheriff in the United States.
Those are always great clips.
Great clips where he went and closed down
14 health stores because they were stocking CBD.
Because he thought CBD was THC.
He was a sheriff of
the town, seemingly educated guy.
Local head of law enforcement.
There you go.
Right. Confusing to them.
Going to be confusing to people here
who are not aware of this.
He's front and center on the issue.
So to anyone who's one
step removed from that.
Yeah, it's very easy to be misinformed.
You'd think. Which comes
on the fourth pillar.
Which is the Selling side of things.
So first thing that needs
to happen is education.
Yes.
Okay. So we are clearly saying there's medicinal,
which there's is probably going to be a
lot of wholesale selling going on.
So that's sales guys getting around the cars
and talking to wholesalers of this product,
either into doctors...
Right into doctor's offices
in some case sure.
Or WholeFood type establishments or health establishments,
where they may be selling these
types of aids for people.
And then there's gonna be direct a public,
to retail marketing, as we'll call it.
That education process.
Someone got to pay for that.
It's going to take some time.
Not going get it right immediately.
Again, this is a time lag here.
So, again, like any product
that's trying to get into...
any innovator who is trying to break into the
market, it's going to take time to do that.
Someone's going to pay for that.
Someone is gonna pay for it.
At first, it's going to
be... it's effectively going
to be early adopters who are willing
to pay up for the product.
They'll be effectively subsidizing that by willing
to pay up for the product sometimes
because they like trying new products.
Some sometimes if you're like one of my friends
you just want to tell people the new
product you're trying.
So some of that will be just economics playing
out where the first people out of the gate
who are buying the product are going to pay
up for it because there won't be that many
providers of it.
There won't be that many suppliers.
So they'll be able to price it appropriately
to try to recover some of that spend.
So you're right.
I do think that'll be a problem.
And the other risk is that if you don't
make it easy for people to spend money on
education, you're probably going to make
it easy for people to mis-educate.
And that's a tremendous risk.
You're no doubt going to have products that
are making health claims that are either
unsubstantiated or just plain nonsense.
That's frankly, I think the
risk in any sort of...
And that's a risk in any health product
or any product we've seen that's purported to
have health benefits.
There's going to be somebody out there spinning
a web of of interesting tales like...
Snake oil.
And what it can do for you. We do
think these products have a lot of potential health
benefits, but there is going to be
some aggressive selling out there, some aggressive
claims made. And
regulators are going to play a huge
role in terms of what they'll allow.
The risk from a commercial standpoint is that
regulators are going to take a 'start
strict and then relax over time' approach, which
is almost what we've seen to some extent
in Canada, where CBD products are effectively required
to be packaged the same way THC
products are.
And what that means is that the public
doesn't necessarily, or they have to self educate,
but otherwise the public doesn't necessarily come
to understand that they are very
different compounds.
It's interesting, because you've got
two tracks going on here.
I can understand retail is
going to be a marketing-fest.
Millions and millions of dollars spent on
packaging and creating brands and reaching...
via online programs like the vape, Jules.
They did a great job.
And that's to Millennial, in fact
millennials, they're getting old now...
They are.
Millennials are getting old now.
We're going to have to come
up with a new name.
We need a new name..
audience who are sold to by Instagram,
or social media generally, sold to.
I can see where these innovative products
will be able to do that.
We've had loads of those
types companies approach us.
Companies, which have got amazing branding
skills, but no business acumen whatsoever.
They're going to be billionaires (sigh).
So that never happens, correct?
But I can see why that would work,
because that to me, that's just regular retail,
marketing, branding, selling.
I get that right.
The bit that interests me, and it's probably
going to be a bigger market, is the
medicinal use.
So have the pharmaceutical companies worked
out how they monetize this?
Because they legislate like anything.
They spend a lot of money, legislate...
not legislating what's the word...
Lobbying?
Lobbying, apologies. The pharmaceutical companies spend
a lot of time lobbying.
Tens of millions of dollars in the States
because they don't want people coming in,
entrants coming in.
Competition, all of that.
Do you see some of these
bigger cannabis companies being taken out?
Or maybe they already have been,
partially or entirely, by pharmaceutical companies
looking to corner certain
parts of the market.
Because if these products become more and
more accepted in terms of anti-inflammatory or
whatever people are saying they can do.
We've seen a handful of what we'd
call partnerships between between the major
pharmaceutical companies and it's really right
now, it's limited to Canada, Canadian...
They've got distribution right.
So that's exciting.
They've got the product.
To come back to your question
around how big pharma is responding.
So far they've been extraordinarily cautious.
And to your point, they do spend, who
knows how much money on lobbying. But
a lot of that is spent defensively.
They're spending it trying to protect market
share, or defend themselves in some other
way, protect themselves from new
entrants, defend their IP portfolio.
It's not necessarily spent on offense, which is
going out and finding a new market
opportunity. So I think that I wonder if
culturally they haven't seen or they aren't as
focused on the growth opportunity yet.
And so it might require more product
development that directly threatens their position.
And, for example, pain medication.
If we see more traction for
Cannabis product alternatives to opioids. If
we see those products really start to
take share away from traditional pain medication,
then that's when I think you might see big
pharma start to become more involved in the
Cannabis space.
It unfortunately might come not as a proactive
growth maneuver, but rather as a response
to someone eating their lunch for them.
You say that but again, we've
seen lots of instances where...
let's take insulin, it's about a $1 bag
here, in the States it's over $350.
Right. It's nuts.
From something which was given away for
free by the guy who invented it.
If pharmaceutical companies do get involved, they make
a lot of money on their orphan
drugs. They make this they've got some big
brands out there which they've created and
they charge a lot of money for
as well, for relatively minor ailments.
Is there a danger that if pharmaceutical
companies get involved, the pricing of Cannabis
products or associated products, could
get out of control?
There is risk there.
And I think to bring back to one of
your earlier questions around IP, the real risk would
be if you can patent just about everything,
and then the big pharma gets involved then
yeah, that's the scenario we could see.
And when it comes to Cannabis it
very difficult to patent a strain.
It is possible though.
I think it is possible. There've
been some isolated cases where where
some things have been done.
There's also been relatively little work done
on IP in general, because until
just recently there were limited options
for actually enforcing your IP portfolio.
But we have spoken to a company, well I
won't say where, but a company which has
got a strain which they have got the
intellectual property on, is very fast...
very high THC component to it.
The ability extract high levels. And
they have got a patent on it and
they are restricting people on using it.
So there is a risk there.
It'll be interesting to see
the way it plays out.
I think it's going to prove tougher
to build IP around around it.
One of the the interesting points that came out
of the luncheon that we just attended was
the view that big pharma loves
to deal in active pharmaceutical ingredients.
They love a love a white
powder that is one compound.
And a lot of what people benefit from or
feel when they consume Cannabis is the result of
what you might call
the entourage effect. Which
means it's not just one compound.
It's the 100 or so compounds and
terpenes and other various constituents within Cannabis
that are having an impact.
So it's a group effort.
It's a team effort, rather than
just one compound doing the work.
So from both an R&D product development
standpoint, and from an IP, intellectual property
standpoint. Those are two things that are
very different beasts for traditional big
pharma to get involved in.
So it'll take time for that type of
scenario to evolve, if it ever did.
So the risk is there.
But I just don't see it being imminent.
Okay. So I know we're bit tight for time.
You've got somewhere else to be in a second.
But you have agreed to talk
to us on a regular basis.
Yes. And I know you're going
to hold me to it.
Oh I am Russ, I am. But
if I could finish with one question.
So if we agreed that there are
four blocks, these four blocks. So
you can be a Producer, Processor, you can
be a Distributor or you can Sell Cannabis
products, whether it be medicinal or
Adult Use, any variant there of.
Which space with you play in?
Well, that's a that's a great question
and a very tough one to answer.
I'm going to go with Producer for now.
Okay.
For now?
For now.
But in five years?
In five years at that point.
I think retail is going to
be a real opportunity as well.
Where do the margins sit?
I mean, today...
Right now, if you're if you're making
the product, that's where margins are best.
It would seem that gross margins...
if you control your inputs or have low
cost inputs, and you're making a branded product
out of that, you're doing gross margins
in some markets of 60%, +70% percent.
It's great business.
Will that hold?
I think that it'll hold for
the winners of the branding war.
If you can develop the Coca-Cola of
Cannabis, whatever the product might be, whatever
format it is, then you're going to be
able to continue to produce some great margins.
There will be some losers along the
way, but that field is wide open.
There isn't a Coca-Cola of Cannabis yet.
So that's why I'd say that's where I'd love
to be fighting right now, because there isn't
an 800lbs gorilla in that area yet.
And so it's a relatively
wide open field. Eventually, and
maybe it's not five years out,
maybe it's less than that.
Maybe it's three years out.
You're really going to want to be
as close to the consumer as possible.
And that's where retail is
going to be increasingly important.
So that's interesting, because if I
look at our retail experience.
Certainly in terms of the
marketing side of things.
You're going to have lots of people trying
to just insert themselves into that food
chain.
Absolutely.
It will be interesting, again, see
who the winners are there.
Can there be a Coca Cola in this space?
We shall see.
Russ thanks for your time.
Appreciate the insight.
It's a very good first introduction to
Cannabis, certainly to the UK audience.
And for those wider afield perhaps haven't
looked at Cannabis as an investment option.
We'll get into some detail next time we
speak on a couple of topics around investing.
That'll be great.
Thanks for your time.
Thank you for yours.
