Podcast: Privateer Holdings, Tilray Founder Brendan Kennedy on Canada’s Recreational Cannabis Timeline

Privateer Holdings is the US$120 million Seattle, Washington-based private equity fund headed by Brendan Kennedy, one of the earliest investors in the legal cannabis sector. He is also co-founder of Tilray and Leafly.com

In this second part of my interview with him, we discuss:

  • evolution of regulation in the U.S. under Donald Trump;
  • timeline to reality of recreational cannabis in Canada;
  • threat posed to the legal cannabis industry by illegal dispensaries in Canada;
  • How Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) foray into the global medical cannabis space is likely to affect its future.

Listen to the podcast interview with Brendan Kennedy:



James West:    Brendan you’ve spoken widely in support of Canada’s approach to marijuana; why do you think there’s such a divide between state and federal levels of acceptance toward ending marijuana prohibition in the US?

Brendan Kennedy:     Oh, you know, I think public opinion has changed dramatically in the US over the last decade. We currently have almost 90 percent of Americans believe that medical cannabis should be legal if it’s prescribed by a doctor, and just over 60 percent believe that recreational cannabis should be legalized, regulated and taxed similar to alcohol and tobacco. And that’s been a big shift, certainly in the recreational side.

And it takes politicians and bureaucrats and policymakers a while to catch up to public opinion. And so that’s the shift that we’re in the midst of. In the US election in November, we saw eight additional states legalize recreational medical cannabis.

James West:    All right. Now, in that election, we also saw Donald Trump get elected, and his nomination for Attorney General is Jeff Sessions, who has been a rather vocal opponent of legalization for even medical purposes in the United States. And in fact, Politico Magazine came out with an article that they titled “Sessions’ Coming War Against Medical Marijuana in the US”. Do you think that Sessions represents an existential threat to legal marijuana in the United States?

Brendan Kennedy:     I certainly think there’s a potential threat, however, I think that the same populist movement that elected Donald Trump in November also legally enacted medical cannabis and recreational cannabis measures in eight states. If you look at a place like Florida, where 70 percent of the voters voted to legalize medical cannabis, it really is a sign. It’s an indication that this is a topic that is supported on both the right and the left, that both Democrats and Republican voters believe that it’s time to change Federal policy in the US.

I also think there are many aspects of cannabis legalization that certainly fit within the Republican party platform. This is a states’ rights issue, this is a small federal government issue, this is a civil liberties issue. I think it would be very politically unwise to unwind the progress given public opinion and the number of jobs that have been created in this industry across the US.

James West:    Okay. I saw you make a comment recently at the Economic Club of Canada Luncheon on December 1st here in Toronto that you didn’t think investors should get too excited about the availability of recreational marijuana anytime soon in Canada, and you expressed an opinion that you felt it was going to be more likely 2019, 2020 until we actually saw recreational marijuana on the shelves. Is that a viewpoint that you still hold at this point?

Brendan Kennedy:     I think no one knows, and what I was expressing is that investors may need to have a lot more patience with their investments in this industry than they realize. The government of Canada is moving quickly, and that’s a good thing, but the one thing we’ve seen over the last six and a half years around the world is that this is complicated. This is far more complicated than people realize, and it’s never been done before. But the federal government has to work with the provinces to implement this program, and when we look at Colorado, when we look at Washington, each of these programs took years to implement once the laws were enacted.

I certainly don’t see any recreational sales until the latter half of 2018. It will take 12-18 months to implement once the law has been tabled.

James West:    Right. Right. Do you think that the marijuana growers, the number of them and the size of them, I mean, we’ve got recently some growers coming out and announcing that they’re about to start construction on 400,000 square feet, 500,000, and now we’ve got, Aphria came out and said ‘we’ve got 200 acres that we’re going to move towards production’. It just strikes me that, well, if 800,000 square feet, roughly, equates to 100,000 kilograms per year, that we’re developing and we’re licensing and we’re establishing a lot more inventory than is required by the market at this point. I’m just wondering how much do you see that negatively impacting the growth of the industry in Canada?

Brendan Kennedy:     I think the big challenge in Canada is that we’re in the midst of watching a transition of a $7 billion black market. And the medical, the ACMPR, is roughly one-seventieth of that market, and additional capacity is going to have to be built for this industry to successfully transition from that illicit market to a fully legal market.

James West:    Right. Okay, so…

Brendan Kennedy:     I think when we look at the overall market in Canada, we think that you need roughly 250 acres of greenhouse to supply the recreational market in Canada, and if you look at a 100-acre piece of property, the most greenhouse you could put on it is something around 40 acres. So there’s still a need for significant infrastructure, probably $1 billion to $2 billion worth of infrastructure has to be built in Canada in order to supply that recreational market.

James West:    Okay. Now one of the things I think you’re most probably best positioned to discuss, given your sort of global perspective, is the issue surrounding price. What we’ve seen in Canada is that the price that ACMPR growers are able to extract from the consumer has been forced downward, both by the fact that the Allard decision kind of took the force out of the government’s position where it was going to create – hold on one sec.

Brendan Kennedy:     Sure. [noise-related interruption]

James West:    Where were we here? Yeah, so the issue of price. Seeing a situation where the growers are getting squeezed because the Allard decision basically kept the door open for appointed growers to continue to produce their own marijuana. We’ve got that being interpreted, that and the government’s position that it’s going to allow recreational marijuana at some point, being interpreted by a street-level marijuana industry who’s opening up dispensaries across the country, there are supposedly over 400 of them now. The government keeps shutting them down, they keep re-opening, the owners and operators get dragged into court but it hasn’t resulted in any kind of conviction yet.

So my question is that, if this situation persists where people want to access marijuana for less than $1 per gram and only home growers can do that, is that a threat to the commercial viability of medical and, in the future, recreational marijuana?

Brendan Kennedy:     I don’t think so. I think that we look at it slightly different. We see falling prices around the world in places that have legalized medical or recreational cannabis, and certainly falling prices in places – prices fall the most in places where scale is allowed. Certainly in Canada, the regulatory burden of the ACMPR creates significant costs for LPs, and the only way to offset those costs are through scale. But ultimately, we believe that legalization and scale are two of the key things that really drive the black market out of existence. It’s very difficult for a black market grower to compete with a company that’s operating at scale. You can’t grow a product in a barn in British Columbia that competes with a product that’s grown in a million square feet in Ontario; it’s very difficult.

James West:    Okay, all right. So do you think that the publicly traded ACMPR growers are in a tougher position in that they have the twin burdens of both the ACMPR compliance as well as being a public company compliance?

Brendan Kennedy:     It’s not a burden that I would cherish at this point. On the other hand, they’ve all raised significant capital over the last 6 to 12 months, and they’re deploying that capital in Canada in order to further supply the medical market and they’re deploying that capital, I believe, in anticipation of recreational legalization. They’re comparing the supply chain and the distribution chain for recreational cannabis legalization, and certainly having liquidity that’s available through being public has certainly enabled those companies to raise money, those companies to build additional facility, and we also see a number of M&A transactions that have occurred over the last 12 months.

James West:    Mm-hmm. So you think Canada’s lead in the medical marijuana and, probably, in the recreational marijuana space – do you think that’s going to put Canada in a position where it’s going to set a global leadership role? Arguably, it already has, and be able to maintain that, in that nobody’s going to be able to catch Canada once we’ve got a head of steam up here, and we’ve got all these million square foot growing facilities producing low-cost, high-quality marijuana that is passing, you know, that is Federally regulated, qualitatively protected, and I mean – I just look at the pace of it relative to everywhere else in the world. Is there any other country that can come close to where Canada is headed?

Brendan Kennedy:     I think it’s a wait and see approach. I don’t honestly know. If I look back 60 years ago, you could have said the exact same thing about Israel. If I look back 20 or 30 years ago, you could have said the exact same thing about the Netherlands. Ten or fifteen years ago, you could have said something similar about Jamaica.

We’ve seen a lot of progress in Canada over the last five years. There’s a transition that needs to take place for what you’re predicting to occur. This is an industry that needs to be embraced by the Federal Government of Canada from an international trade perspective. This is an industry that needs to be fostered. I would say that we’ve seen a lot of change around the world. I’ve been in probably 15 – at least 15 countries in the last 12 months, and Germany will legalize medical cannabis, it looks like, in January. And 80 million wealthy Germans will have access to medical cannabis, a population that’s more than twice the size of Canada. And the Germans are moving very quickly.

James West:    Sorry, did you say 80,000?

Brendan Kennedy:     80 million.

James West:    Right, okay.

Brendan Kennedy:     80 million Germans will have access to this product. Australia legalized medical cannabis about eight months ago, and is in the process of accepting licenses for their program. So we’re seeing rapid change. We’re in the midst of a global paradigm shift around medical cannabis and cannabis legalization, and we’ll see if Canada can maintain this momentum and be a centre of excellence for this industry.

James West:    Okay. Last question: Teva, the $37 billion pharmaceutical firm that’s based in Tel Aviv, recently signed an agreement to market a marijuana inhaler, marking the first time that a major global pharma company has agreed to market a medical cannabis product. Do you think this is a watershed seminal moment in medical marijuana, where it has now gone to the size of globalized pharmaceutical?

Brendan Kennedy:     You know, certainly Teva is of a size and scale that is unlike anything this industry has seen before. We’ve been impressed by GW Pharmaceuticals and their commitment to producing pharmaceutical products based on compounds found in cannabis. I think we’ll see more of the same over the next few years, where pharmaceutical companies are looking at some of the clinical trials being conducted involving cannabis around the world, and see this as a new opportunity, although a very different opportunity that doesn’t involve novel drug compounds, which is the more typical path within the pharmaceutical industry.

James West:    Yeah. Do you think that pharmaceuticals might come down the value chain and start growing it themselves?

Brendan Kennedy:     I think that’s very unlikely. If you look at pharmaceutical products that are derived from plants, you can certainly identify similar models, and certainly there are poppy companies, roughly four or five around the world, that produce significant, almost 100 percent of the sort of alkaloids that are derived from poppies that are used for products like morphine and OxyContin. Some of the pharmaceutical companies are involved in that part of the value chain, but most of those companies are independent and private.

There’s also a product called lutein, which is extracted from marigolds, and that’s a pharmaceutical product, and most of the companies just buy inputs. I don’t think pharmaceutical companies will be growing cannabis; I don’t think they’ll be extracting cannabinoids from cannabis. I think they’ll just be buying inputs, they’ll be buying APIs, active pharmaceutical ingredients, from producers, cultivators and processors.

James West:    Okay, Brendan, that’s great. Thank you so much for your time today.

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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