VIDEO: Aphria Inc (TSE:APH) CEO Vic Neufeld on Altria Group Inc (NYSE:MO) Rumours
Aphria Inc (TSE:APH) (OTCMKTS:APHQF) (FRA:10E) CEO Vic Neufeld addresses rumours that the company is in talks with Altria Group Inc (NYSE:MO), one of the world’s largest tobacco producers. Neufeld suggests that with the advent of legalization these types of rumours will increase, as there are a host of products with consumer profiles suitable to cannabis across many sectors. Neufeld discusses Aphria’s Q1 results, including an increase in revenue of 117 percent year-over-year and net income increases of more than 40 percent. Neufeld shares his thoughts on the suitability of pharma investment in the cannabis industry and notes that the difficulty of obtaining patents in the cannabis wellness space might be a barrier for big pharmaceutical companies. Neufeld talks about the possibilities and difficulties of a US uplisting for Aphria.
James West: Hey, welcome back. You wouldn’t believe who I’ve got sitting across from me: it’s Vic Neufeld, the CEO of Aphria. Vic, welcome back.
Vic Neufeld: It’s great to be back, James.
[stock_chart symbol=”APH:TSX” align=”left” range=”1M”]
James West: Vic, all kinds of rumours flying around out there. I want to start with the elephant in the room, which is my favourite place, my favourite pet. There’s a rumour that the company that owns Marlborough Cigarettes is contemplating a relationship with Aphria. Do you have anything to say about that?
Vic Neufeld: Well, I’ve read about it.
James West: You’ve read about it, eh? Where do these rumours keep coming from?
Vic Neufeld: Oh, I tell you. Listen, James: I think your viewers and listeners need to understand something. And I’ve said this a long, long time ago: as our space called medical cannabis grows up, and the advent of recreational gets closer and closer, and now it’s literally days – it’s next Wednesday – you are going to be seeing a greater level of interest and dialogue, conversations, and some are going to be far-fetched, and some could be real. But you’re going to see entry points from different global sectors that have the same sort of consumer attitude when it comes to their entertainment dollar.
James West: Right.
Vic Neufeld: We have heard about Molson-Coors. The Constellation, which is obviously a done deal. Lots of rumours abounding a month ago on Diageo.
James West: Now, you’ve got some people from Diageo working in your universe, don’t you?
Vic Neufeld: Oh, yes. Some very bright people, too.
James West: Really?
Vic Neufeld: Yeah. It’s a great add to my bench strength of who these are.
James West: Does that necessarily default to a relationship with Diageo?
Vic Neufeld: It has networking capabilities, and calls are easier to be made, quite frankly. But there is no preference when those sort of skill sets and leaders are brought onboard. I think people have taken that and connected some dots; good for them, good for my stock price, but I’m not here to talk about Diageo, Molson-Coors, Coke…
James West: Let me ask you this: do you think that the journalists who are originating these stories without quoting sources need to be held accountable more so than they are, in view of the fact that it’s the retail investor who’s actually wandering into these rumours and buying stock on the rumour and then getting hurt when they sell off when people realize, ah, it was just a rumour?
Vic Neufeld: That’s such a great question. That question should have been asked many, many months ago. But let’s not forget: some licensed producers actually propel some of those stories, too. For whatever their own reasons, as you said. They’re blips; they’re up and then they’re down.
When Aphria acts on something, we will release and communicate the facts, not the rumours, suspicions, anecdotals. So I just want to circle back and finish off what I was trying to say earlier: there are many industry, global industry leaders in respective sectors A, B and C, and yes, tobacco is one of them, spirits is one, wines are one. But various beverages, not just beer companies, by the way. The energy drinks, the utility drinks, the post-recovery drinks, the juices – I’m not here to talk about Gatorade versus Powerade, you know, Pepsi/Coke, but there are a host of vertical line extensions of products where the consumer profile and their wants are very synergistic to having certain cannabinoids infused in them.
And so, back to your question: the Altria messaging from the newspaper reporter, she must have been Googling and trolling the internet and found stuff, and posted it.
James West: All right. We won’t do it the favour of further perpetuation by belabouring the point. Let’s move on. Your first quarter results, spectacular – 117 percent increase in revenue year-over-year. How did that happen?
Vic Neufeld: A lot of hard work.
James West: Okay [laughter]. Good sales team, apparently?
Vic Neufeld: Sales team, growing team, quality team, marketing team, and in this case, it was all by professional outreach. It’s just a culmination of having the right leaders, the right people, making things happen. And again, having the passion and the commitment to doing things right.
Not everything is right in life, so when you hit an obstacle, the team comes together and you try to form solutions, and solutions that are doable and sustainable so you don’t fall into that same sort of up and down situation, like all LPs are having right now in terms of filling the provincial regulator leads.
James West: Okay. Net income increased by more than 40 percent.
Vic Neufeld: That’s a few good bucks.
James West: Margins going up, as cost of production goes down; is that the essence of that story?
Vic Neufeld: Yeah, but we also had some great investment increases in value quarter-to-quarter, it’s mark-to-market pricing. So we’ve made some great strategic investments.
As you well know, in the quarter, we also moved our Liberty Health Science shares and recognized the gain on that. Way back in the day, one of the original investors in Tokyo Smoke, then another acquisition, then Hiku, and eventually Canopy. We saw the benefits and the strengths of the Gertner Family way back when, so we were part of their early journey, and when they hooked up with Canopy and the Canopy/Constellation share price, we took it for a ride, and we had a tremendous gain there, also.
James West: Okay, so some of these are one-time gains based on investments, okay.
Vic Neufeld: But if you look quarter after quarter after quarter, we constantly have gains, so I think we’re pretty good investors in our space where there’s strategic as well as financial wins.
James West: Right. Okay, so now, tell me about the, you know, what’s going to change for Aphria on Wednesday?
Vic Neufeld: Five more brands that are being packed and shipped out of Leamington, Ontario, to all the provincial regulators. I think if one understands the vision of Aphria, being a leader, Canada medical, absolutely going to be hitting it out of the park when it comes to brand identity and consumer friendliness, two of my five brands; and then globally, also, what we’re doing in the global footprint, there’s nothing really going to happen other than a lot more leaders coming onboard. And that drives the bus, James. I mean, I’m not going to sit here and tell you that I’m the boy wonder – I have a lot of strong people in various departments, and I’m still thin. So we are on the march.
James West: Metaphorically. [laughter]
Vic Neufeld: Yeah, yeah, metaphorically. So whether it’s another Diageo, somebody from the beer industry – again, I’m searching and seeking the right skill set, the right chemistry, the right areas of discipline that they bring to the table, so that we can continue to grow. The speed of yesterday was fast; the speed tomorrow is going to be even faster. If we start looking just at the Canadian space, medical and rec, then the global footprint and eventually the US of A footprint, there’s so much. And if you’re not on top of your game, you’re going to strike out.
And all three of these geographies are very important to our vision.
James West: Okay. I’m curious as to, from your perspective as a former large healthcare executive, how – like, we haven’t really seen a big investment from Big Pharma, except for if you consider the Novartis partnership with Tilray, that sort of thing. But, and I look at Aphria and I think, well, Aphria strikes me as the most perfectly poised to make that kind of an arrangement, just by virtue of your past. But still, nothing. Is that – you know, I don’t want to generate more speculation on a rumour, but is that a reasonable sort of perspective to have looking from the outside into Aphria?
Vic Neufeld: It is. Pharma, let’s not forget, pharma really has the scripted side: the opioids are pain management relief, where certain forms of medical cannabis are very well suited to be an alternate replacement. But there’s also the consumer health side to a number of these global pharma players. We’re referring it to as health and wellness, where again, cannabis-infused products can come to play.
I mentioned earlier as an example, as a placeholder, post-workout. You take a vitaminized water, etcetera. Well, it may be now infused with certain elements of CBD for quicker recovery on a strenuous post-workout. Again, Gatorade, Powerade, certain of those sort of utility drinks that are health-conscious, with electrolytes, whether melatonin…it goes on and on. So I won’t belabour that point.
But when you go back to Pharma, it’s just not the Rx scripted side, it’s also their consumer health side. Most of them have some very dominant, whether it’s Bayer, J&J, Novartis I think is now out except for their eye-care products, nutritional-based eye care – they are there, and they’re looking. The problem with pharma, more from the scripted side, very little can be patented. And if certain organizations think they can patent it, trust me, I think there’s tremendous challenges that are going to be coming forward.
So the investment of time, energy and money to get to that stage without patent-ability, is not shutting the door on pharma, but very much so cautioning them, because it’s not part of their DNA.
So therefore, and as you have read and will continue to read, two major, major new drug discovery programs that we have been supportive of and funding for over two years now – MedLab out of Australia, and Dr. Guy Chamberland being Tetra out of McGill University, on different pathways of bringing forward the clinical. And this is what pharma is looking and waiting for: who can drive the bus forward where there is true FDA acceptance? Whether it’s FDA in the US and in the EU, and ultimately, Health Canada.
Just that reading and understanding and following some of the evolution…very transformational where they’re at in terms of the flow of clinicals. I mean, one is already entering clinical Phase 3.
Once you get to that, and you get a DIN – a drug identification number in Canada, or FDA approval like GW Pharma did – when you get to that level, you now have entered the big leagues, and therein lies the patent-ability, because it’s all your clinical studies, all your protocols, that are followed. That’s when you’re really going to get the ears perked up of the Novartis-es, the Sandoz, the Sanofis, the J&Js, the Bayers, etcetera, etcetera.
James West: So then, the Big Pharma DNA, more or less, in many respects, they let smaller companies develop drugs through the FDA trial process and then, if they’re successful, they make an acquisition. They don’t like to take on the risk and the expense of the drug development phase, because it negatively affects the share price if it’s not successful, thereby increasing their cost of capital? Is that sort of the –
Vic Neufeld: Absolutely correct. So I’ve used this expression in the past, I’ll repeat. It’s like Gold Corp, Barrick. They look at exploratory mining companies as their go around the world and search for a new gold mine, copper mine, silver mine. And once you get to a certain level and it’s a proven, or about to be proven, then they swoop in, and they do pay a premium at that point in time. But they de-risked a lot of capital and human efforts, and that’s exactly hat’s happening here.
It’s not about MedLab in Australia taking this in market globally; it’s an R&D company. It’s full of rocket scientists that have really latched on to the structures of various cannabinoids that can bring forward an alternative treatment to drug A, B, and C, with patentability. And then, it just isn’t pharma, though; it’s also the biotech companies who truly are more risk-takers when it comes to entry points of this nature.
So, from an Aphria perspective, we’ve got two funded assets for over two years; there’s no ROI on it, there is no revenue, it’s all in incubation. But once you get to that level and you strike success, and both our down pathways that are very exciting, and there’s been no obstacles that were insurmountable – that’s when you hit home runs in a very meaningful way.
James West: Okay, so we’ve got four questions here from Facebook users who we promised we’d ask and see if you care to answer them. Colin McGill says, We’d love to hear about cancelling supply agreement with Namaste. Did Quebec apply pressure to the situation?
Vic Neufeld: We are not cancelling supply agreements with those entities that have proven themselves to us, and have aligned their interests with our interests. You have to understand, James: by May-June of 2019, when our two major supply agreements kick in, we’ll be on a path of in excess of 20,000 kilos a month. That’s a completion of Part 4, Part 5 expansions, retrofit of Aphria Diamond. We’re at 2.5 million square feet of greenhouse, 500,000 of infrastructure. We’re capable of producing far more than the Canadian market, whether medical and/or recreational, will require from us – unless, of course, we’re going to be trying to get 50 percent of the rec market in Canada, which would be just an irrational target for any licensed producer.
So no, those two, because they come onstream and the takeoff agreements are when we are in a capacity mode of significant, significant, and this is not conjecture and speculation or fancy press releases; we will be delivering that much harvest. That’s the confidence I have in my team, and they need to.
James West: Okay. I’m going to skip these two, because they’re –
Vic Neufeld: By the way, the margins on those two wholesale supply agreements are significant.
James West: Okay.
Vic Neufeld: They’re north of 50 percent, and this is wholesale, meaning there’s no costs below the line. It’s a secondary strategy, but it’s very profitable.
James West: Okay. And then the second question that I think is appropriate – the other two are not quite, so I’m going to skip those for now – will Aphria trade on a US exchange soon?
Vic Neufeld: Hopefully. It’s been on our radar as one of our objectives; there’s been a lot on our table. Our vision has changed 18 times in the last 18 months, it’s always growing, growing, growing. But when you look at up-listing to a major US exchange, it’s part of a growth, maturity. You know the expression, more eyeballs, more institutionals…but when you look at who we are in the US, what I’ve done with my Liberty shares and other opportunities where the capital structures are in full compliancy with the TSX 5, as well as any US regulatory body with oversight…once you understand where we’re going, there, and being first to market when the CBD Hemp Farm Bill comes alive with Trump’s signature before Christmas – then CBD sourced from cannabis, which ultimately will lead to THC sourced from cannabis, medical, nationwide federally – now you can cross state borders.
When you look at parking these sort of US assets, it makes sense for us to have some sort of visibility on a US exchange. And so it’s the objective, but unlike other licensed producers, James, when I press release, it’s based on facts. Have you ever heard a bride-to-be and a groom-to-be pre-announce a wedding date without an engagement?
James West: Good point.
Vic Neufeld: No. The answer is no.
James West: That’s right. Okay, well, that’s great, Vic. We’ll leave it there for now and we’ll come back to you in due course as usual, and thanks very much for coming in today.
Vic Neufeld: My pleasure. Thanks again, James.