Written By: James West January 23, 2017
Canopy Growth Corp (TSE:CGC) (OTCMKTS:TWMJF) (FRA:11L1) CEO Bruce Linton returns to share his thoughts on the opportunity for Canadian cannabis exports that exists in the gradual spread of legal medical marijuana rules in Germany and beyond. He also shares his views on potential incoming Attorney General Jeff Sessions, and how that might actually turn out to be a boon for Canadian growers as well.
Listen to the podcast interview with Bruce Linton:
James West: Thanks for joining us today, Bruce.
Bruce Linton: Hey, thanks for having me back, James.
James West: Bruce, let’s cover a couple of things today. First, let’s talk about Germany’s approval of medical marijuana coverage by insurance companies. That’s a new development for you guys, and I’m sure it’s going to have some implications for 2017 revenue. What do you think about that?
Bruce Linton: Yeah, so you know, this has kind of been the slow build, and where it comes from, and if people are looking at other countries as well as Germany, it starts by somebody in a country establishing something called the OMC, or Office of Medical Cannabis, which is almost like an indicator that in fact, in the future, there’s likely going to be cannabis available. That happened in Germany some time ago. We knew, and you could see, that these regs were moving through their Parliamentary process, and it appears the next steps are to do a German thing, which is almost like a public reading of them, and then they become how they reorganize or organize the appropriate bureaucracy, and then they’re ready to go.
So I kind of think by March or end of March, they’ll be through those steps, and then they’re going to start saying we need more product, and we need more producers. They currently have no producers in the country, so that’s, I think, why it keeps getting more interesting.
James West: Sure. Would Canopy look to set up production within Germany’s borders, or just look to exploit it from an export position?
Bruce Linton: NO, listen man, I come at this from the perspective of, the reason Smiths Falls in Ontario loves us is, we took the abandoned chocolate factory and turned it into a centre of employment. They don’t perceive anything about what we do other than that; it is creating employment, and there are big parts of Germany where they haven’t had the benefit of the boom. So I would fully expect they’ll be non-tariff barriers that will protect a domestic supply chain, and we’ll be part of that. And I think the things that we’ve learned here, you can really take and apply there.
So our goal is to participate in the markets rather than send product in, because I think that’s a very short term business.
James West: Okay. So you’re basically going to set up a local producer there?
Bruce Linton: Yeah, for sure. It worked for bottling lines for Coca-Cola as an expansion process. Our intent though is, in most countries, to go in where it’s 100 percent corporate store, which is why in November, we acquired the company that had been our export partner, so we actually have our boots on the ground in Germany to work through the process rather than, you know, a JV and everybody’s not aligned.
James West: Right. And so what’s the size of the market in Germany for this medical marijuana?
Bruce Linton: I don’t know, James. There’s about 82 million people, and if the government’s paying for it, do you think marijuana could catch on?
James West: Mm-hmm. That’s a good point, good point. Now, I saw a report from Arcview Research in the United States just issued yesterday that suggested that in North America, consumers had spent $56 billion on marijuana products in 2006. Do you think that’s a credible number, or do you think that’s conservative? Do you think it’s accurate?
Bruce Linton: Well, I don’t know. They had a US election, so that might have triggered quite a lot of consumption. But no, I’m being a little bit – that number is an incomprehensible number, really. Like, 56 billion? I don’t know what would also land in that category as total sums spent. Like I have no idea how does that compare to, you know, all of food category or types of pharmaceuticals. It’s a new number to me, but I would almost need to correlate it with some other consumption pattern items to sort of get a perspective on what 56 billion really means.
James West: Sure, okay. And switching gears a bit here now, we saw a bit of negative press come out surrounding a product recall on Mettrum’s behalf, and that was interpreted by some media outlets as a negative. But what’s your take on that?
Bruce Linton: Well, you know, I think there’s a system in place, and the system is intended to be sure that everybody follows the rules and the resulting product can be a trusted supply chain. So it is too bad that it happened for Mettrum, and it’s happened for Peace and a few others have had recalls, and we’ve got to see the frequency and scope continue to decrease on those. But we want people to trust the supply chain, and when they do, that gets rid of moonshine, or it gets rid of any other kind of alcoholic absence of the same trust or confidence supply chain, which is really what’s going to make people more comfortable trying and buying a product, not just because it’s not illegal.
So, it happened. Our take on it is, if the system catches the results of not following the rules, then that’s a pretty good system.
James West: Yeah. You bet. Now, there was an article published by Bloomberg last week which caught my attention as well, that was highlighting the crashing prices of marijuana in the legalized states because of the advent of massive grow-ops that are completely automated driving the price down because there’s an excess of product in the market. Now, to what extent do you think that risk’s happening in Canada, or to what extent might that be Canada’s opportunity given the lower dollar, our lower cost of production which we’ve always had to deal with?
Bruce Linton: I think the basis of the issue is in America, there’s no filter on who can become a grower effectively. If you can scrape together the capital, you can become a grower. And so there was a very high price. So initially, the price of cannabis in the US states was extremely high, and the transfer price, and then it started to come down because too many people went in because the price was too high. They have just way too many suppliers, so pick a small state, will have more than 1,000 growers. So it’s not just the big growers, it’s the number.
In Canada, it’s a pretty restrictive process to become part of the supply chain, and I think for the next three years or so, there’s probably going to be more of a demand exceeding supply than supply exceeding demand. So I don’t think that’s the issue, and I find in Canada, because we have larger companies, we can actually do a lot more research and vertical integration. When you start to extract from the dry cannabis the oils and start to create those either into medically identified products or branded consumer packaged goods, really, the discussion about the variability of the cost of your base material isn’t as relevant as, do people buy the brands or the indications you’ve gone against, which will probably defend the margin.
James West: Mm-hmm. Okay, so then, in 2017, what are the big events that are going to happen for Canopy?
Bruce Linton: Well, I think it’s the sector, right? We’ve got legislation hitting Parliament; what it says and when it times it and how close to the Senate will be relevant. We’ve got Germany, Brazil, which means you really have Europe and South America looking to create opportunities for production and supply and proper medical structures.
We’ve got, in Canopy Health operations, a kickoff to do a number of indications for which we wish to get medical-related intellectual property filings, and so those should become kind of interesting. Last year we went from the sector having 30,000 or 40,000 patients to finishing the year with more than 100,000. And I would think that the pace at which people become comfortable with this as a therapeutic option, probably isn’t slowing. And so you have the base market, is it going to triple again? I don’t know, but certainly growing at quite a substantial rate because of the common discussion and comfort of the topic.
James West: Right. Right. Okay, and turning back to the States for a moment, Jeff Sessions threatened to become the Attorney General of the United States. With Trump’s inauguration today, is that an opportunity for Canada and a threat to recreational marijuana in the United States, from where you sit?
Bruce Linton: I think it’s going to keep things pretty scattered and broken in the US, which gives the Canadian MC the chance to just get a lot more substantial knowledge and expertise, which will be helpful for us. And I do think that within Trump’s first term, they will look at medical and they will take a really dim view on rec. I think they’re going to divide the two.
I don’t think Sessions is the only actor you’d want to look at; I think it would be pretty important to keep track of who they put in to run the DEA and what budget they give the DEA, because it’s not had much, and whether or not they end up for the drugs are that takes a different approach than under Obama. Because it wouldn’t take too long for the cost of capital in some of these rec plays in the US to go up quite a lot if the Feds started squeezing it all.
James West: Right. Now across the board, valuations of Canadian marijuana plays have flattened out a bit since the big enthusiasm, the big lift in November. Do you see that as a reflection of the wait and see attitude of the investment community towards when are we going to see this recreational marijuana on the shelves? Do you think it’s just a sign that the market is fully valued? Or do you think it’s some other factor?
Bruce Linton: I think there was a pretty good run-up and then they sort of stabilized, and so now I think most folks are starting to take maybe a ‘What’s this going to look like in 6, 12 and 18 months’ rather than ‘If I buy it this morning, will I make some money this afternoon’. And so I don’t feel that’s particularly a bad thing, because there are some folks who probably would like to be in the business and running it and then finish maybe by lunch today, but there’s a handful of us that intend to be creating quite a lot of value in the longer-term businesses. So I do like when I have lots of volume; I don’t need all the shares in my pool to trade every week. There’s some balancing act, and I think we’re probably starting to see a little bit of that, and then it’s not bad, because things can actually build from a bit more analysis and a little less hyperactive trading.
James West: You bet. Okay, Bruce, let’s leave it there. Very informative as usual. Thanks for your time today.
Bruce Linton: Thanks, James. Talk soon.
James West: All right. Bye for now.
Bruce Linton: Bye.