VIDEO: Aphria CEO Vic Neufeld on Shopper’s Drug Mart Deal

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Aphria Inc. (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) CEO Vic Neufeld discusses the partnership agreement that was made with Loblaw owned Shopper’s Drug Mart. Aphria has become the first official supplier to the national retail chain in Canada.

 

TRANSCRIPT:

James West:    Vic, thanks for coming in.

Vic Neufeld:   Great to be here.

James West:    Let’s talk a bit about the Shoppers Drug Mart deal. What is the essence of that deal? How are you going to sell marijuana in a Shoppers Drug Mart when it’s not even legal?

Vic Neufeld:   Well, first of all, the journey of getting to where we are today and the announcement a few days ago, has been a long one. Dealing with a sophisticated organization and the executive management team of Shoppers was long drawn out; they dotted every I, crossed every T. Several quality control team for site inspections over the summer. And it evolved to something that was pen on paper, term sheet and several iterations back and forth. At the end of the day, we’re the first licensed producer that they’ve reached out to in a contractual form, to be one of their vendors for medical cannabis.

Twelve SKUs, four dried bud strains in two sizes, and foils. So all twelve are Aphria branded, as we’re selling today on our website, on our online store. And moving forward, as more product innovation comes forward, the more they get an understanding of their patient profile, what needs to be added, what needs to be deleted…so it’s a very typical business model at the beginning.

James West:    Okay. So they’re selling Aphria products through Shoppers Drug Mart online, so they’re observing the regulations where it has to be delivered by mail. Is this a precursor to them actually carrying it on the shelves in the stores when legislation catches up to that?

Vic Neufeld:   Well, two parts. So under ACMPR, only licensed producers are allowed to reach out and actually make a sale and delivery to patients in Canada. Shoppers, many months ago, made an application with Health Canada for their LP status; they are still in dialogue, I’m sure, with Health Canada, and the expectation is that they will get an LP status license.

I don’t think their intention is to be a cultivator buying greenhouses in beautiful Leamington, Ontario. But to be a distributor and reach out through patient education, etcetera, an LP status has to be part of the program under today’s ACMPR, and they have a very robust infirmary online pharmacy portal already.

But to your question, I’m a firm and a long-time supporter that the 10,000 pharmacy doors in Canada should be one of the platforms allowed for medicinal purposes.

James West:    As you’ve always said.

Vic Neufeld:   Always said. And behind the counter, not over the counter – so not next to Jamieson vitamins, but truly behind the counter, where there’s a interaction with a pharmacist, where there’s an education session and counselling, etcetera. That hopefully one day is the movement, but the regulations do not allow that.

James West:    Okay. And what’s Aphria’s strategy in regard to the advent of recreational rules in July next year?

Vic Neufeld:   So for us, medical is the beginning of our journey; it’s embedded in our DNA, it’s part of our quality story. We will not let go of that identity. But I can tell you that we’re almost locked and loaded with our recreational strategy, both the branding and the activation; just ready for the right timing on when we want to do some pre-seeding of the rec brand.

It’s about capacity. It’s a little history for your viewers: today, we have 100,000 square feet of greenhouse grow, capable of about 10,000 kilos. Before Christmas, so in the next two weeks, our Part Three expansion will be completed; that adds another 200,000 square feet of greenhouse grow, and I believe, another 60,000 of infrastructure. We will be at 30,000 kilos at that time.

So before Christmas, completion of Part III, Health Canada will be asked to come and do a site inspection. We’re hoping it’s timely in terms of getting their field inspectors to Leamington. We’re hoping that we can start dropping plants in January with late April, sometime mid-May of harvest. That’s critical. It’s long-winded, but the story really is about capacity. At that time, we’ll have 30,000 kilos on an annualized basis; that’s about 2,500 kilos a month. To service the medical platform, which now includes SDM, assuming in early 2018 they get their licensed producer status, together with our continuing growth of our medical platform, which by the way, last week we onboarded over 1,000 patients.

James West:    In one week?

Vic Neufeld:   In one week. That’s the sixth consecutive week of over 1,000 patients being onboarded, so, making great progress.

James West:    What’s the average consumption per patient at this point?

Vic Neufeld:   We’re still below 1 gram. If you exclude the vets, we are probably somewhere around 0.7, 0.8 grams of usage a day.

James West:    Okay.

Vic Neufeld:   So back to my Part Three completion, April/May of 2018, in commercial harvest salable product in the vault, we will be at a point now to carve out what do we need for the continuation of a medical platform, which again, knock wood, expectation Shoppers will have their 12-month forecast submitted to us with five-month hard rolling POs, and the rest will be for the recreational model.

We, like many licensed producers, have been in dialogue with all the provinces. Will we be able to service every province, is still a question mark, and I tell you because Part III gets us to 30,000 kilos. We have not recalibrated how much we want to segregate or isolate for the medical platform versus recreational, but we’re going to be very diligent in understanding what provinces do we want to commit to, because once we commit, we will deliver. We’re not going to sell 60,000 kilos when we’re only capable of producing 30,000.

James West:    Right.

Vic Neufeld:   And so, with the LCBO, Manitoba, Alberta, etcetera, etcetera, we have certain metrics that we are applying to the rec model versus the medical model. But capacity: back to that point, it’s our Part Four, and our Part 4 expansion moves us incrementally another 700,000 square feet. At that time, we’ll be in excess of 100,000 kilos. So now, the situational issue of how much medical versus recreational kind of goes by the wayside, because on that sort of volume, and we feel it’s going to be the biggest annualized harvest in Canada at that point in time, will be very much aligned with almost every province at that point in time.

James West:    Okay. So, tell me what you think is going to happen in this industry. We have an estimated total demand scenario, assuming all of the dark market came to the legal market, of 600,000 kilograms per year, post-July 1st, 2018. You look at all of the publicly traded cannabis LPs right now, there is funded capacity for 2 million kilograms per year. What effect is that going to have on the market? What effect is that going to have on Aphria’s profitability?

Vic Neufeld:   So the sell-through to the recreational consumer is still an unknown. Many are buying today from Joe on the street corner, organized crime; the percentage of what can be brought above-ground, purchasing from legal recreational models province by province, is still a question mark. I think as we chatted earlier, Colorado, I think they’ve moved about 70 percent to aboveground channels; still 30 percent buying from illegal activity sources.

I think that’s a great yardstick, or at least some target that the government should strive to, but it’s going to be a function of the price point. As we understand it today, with the most recent amendments of the rules a few weeks ago, they are going to allow pre-rolled, but not vape pens yet. I think vape pens in short order after July of 2018 will be part of the journey, and then after that will be infused foods.

So three phases. And good for them, to be cautious; again, safety, security of the consumer is of paramount importance. But it’s the vape pens; once you get to that level, that’s when really the margins become healthier. You’re adding another form of intake that is more upscale, more professional, and that’s where I think more licensed producers will be able to financially survive on their income statement.

Where it goes after that, it’s all about the pocketbook, again. You know, I’ve laid out the scenario many times to whoever would listen to me.

James West:    Sure.

Vic Neufeld:   But also to provincial regulators, without mentioning names. The ultimate price out of the box 2018 has to be somewhere around $10. And why is $10? That’s what Joe is selling for.

James West:    $10 per gram?

Vic Neufeld:   Yeah. When you back out the proposed $1 excise, back out HST, and the 30 or 40 percent operating costs, assuming its cost recovery is the provincial model, you’re looking at something about $5 a gram selling price from an LP into provincial channels of recreational. That’s out of the box. Joe on the street corner, entrepreneurial-minded, will not want to lose 70 percent of his customer base; he’s going to now reduce his price. It’s 9. It’s 8. The flexibility that LPs need to bring to the table from a price elasticity is going to be of paramount importance until those disrupt-able products come into play, because the government’s objective is to thwart, mitigate…they’ll never eliminate, but mitigate the underground, illegal supply chain.

So there’s got to be a very important focus at retail level province by province on what that selling price is. And there aren’t too many licensed producers that can survive, on their income statement, something that’s $5.00 or below that. Aphria can, because we are the lowest cost producer, and Part 3 will just drive further costs out, and Part 4 will absolutely bring us to a cost per gram that is just unbelievable.

James West:    Wow. That’s great, Vic. Okay, let’s leave it there. We’ll have you back for our live debut next year. Thanks for joining us today.

Vic Neufeld:   Excellent. Thanks for the invite.

 

 

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