Neptune Wellness Solutions Inc (NASDAQ:NEPT) (TSE:NEPT) (FRA:NTU) CEO Jim Hamilton discusses the company’s 2019 plans. Neptune received its Health Canada licenses in early January and is pushing ahead with commercialization. He notes that in developed cannabis markets, approximately 70 percent of products are extracts and this robust extraction market suits Neptune’s core competencies perfectly. Neptune continues to be a significant player in the health and wellness space and this makes it well-suited for the cannabis sector, which increasingly emphasizes the importance of wellness products. Hamilton discusses the size of the CBD market in the US and notes that Neptune’s lengthy experience in food production and extraction is a perfect fit for the emerging edibles market. Neptune has a multi-year supply agreement with Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) for extraction and product development.
James West: and now I’m here with CEO of Neptune Wellness, Jim welcome back.
Jim Hamilton: Jim, the Jims are together once again, right?
James West: Jim Squared, of course.
Jim Hamilton: You’ve remodeled since I’ve been here.
James West: Oh, well I did have to some work done – oh, you mean the office?
Jim Hamilton: Actually I noticed the drum set. Is it going to be the Today Show soon? Are you gonna –
James West: Well, actually, there’s going to be a live entertainment component – think of Jimmy Kimmel meets cannabis online.
Jim Hamilton: Good. I’m all in for that.
James West: Excellent.
Jim Hamilton: Well, thanks for having us back.
James West: Of course. Jim, on January 7th you announced that you had receive da license to process cannabis from Health Canada, kind of key milestone give your brines model. Why don’t you tell me the significance of all that?
Jim Hamilton: Jim, it’s a really great thing. I was here, I think, back in mid-December, we talked about convergence of commercial agreements with great companies like Canopy, the site readiness, and also the license – and, to a degree, the frustration that goes with the license. I think we came in around 19 or 20 months, which is not as good as some but a lot better than others, but we are so happy to have it behind it and now it’s full speed ahead with commercialization.
James West: Okay, so now, how is that going to change the immediate sort of revenue picture for 2019 for Neptune going forward?
Jim Hamilton: Well, I think, maybe just to talk a little bit about fundamentals, Jim, I think as I see them, we see them at Neptune for the business, I think to be in the extraction/purification/formulation side of the equation is a very powerful place to be. I think at when you look at many developed markets, you see anywhere between 60 and 80 percent of the products based on some kind extracted formulation. When you look at the pending legislation with 4Health Canada now opening things up to, you know, topicals and concentrates, and consumables, edibles – I mean, this is all great news. I think the demand profile domestically here in Canada will be quite robust, and when I think when you look at the demand profile for extraction not only in the United States but also in the rest of the world, it’ll be very robust.
For us, I mean, we’ve talked about 200 metric tonnes of extraction capacity being online by the end of March, construction complete, etcetera, but I think its important for your viewers to know that we also have the capacity to go to 6,000 tonnes in our facility. It’s really a world-class, world-scale facility, and we’re very excited by that and we think the wind is behind our backs, and we’re looking forward to 2019 in a really great way.
James West: Yeah, you bet. Okay, so now, the product focus for Neptune is going to be on wellness products, obviously, and that kind of puts yo in a different place relative to the sale of THC.
Jim Hamilton: Not really, Jim. I mean, I hate to say we’re agnostics – we’re actually very passionate – but our model is fundamentally B2B, and we will, and an example is our long-term contract with Canopy, I mean, the end use with our products that we work with Canopy will go into a variety thinking form medical to beverages. So we will engage and work with great companies in any world that makes sense for them. We are a B2B company, first and foremost.
James West: So the core competency, then, of Neptune, is the extraction and production of pharmaceutical and food-grade cannabinoids as ingredients?
Jim Hamilton: Yeah, we’ve been doing it for 20 years. I mean, we have a facility, I think you showed a video of it in our last segment with your group here –
James West: We’ll show it again. [laughter]
Jim Hamilton: Okay, but it’s CGMP, Health Canada, food-approved facility. Now cannabis approved facility, and that facility is there to collaborate, work and support with great brands, and those brands will clearly be existing licensed producers. But I think as legislation and markets evolve in future, it’ll be food producers and other great marketers of products that we’ll collaborate with and work with to help support their brands in this great new segment.
James West: Sure, you bet. So in terms of the feedstock for your extracts, you are somewhat reliant or completely dependent upon the LP universe as it exists today?
Jim Hamilton: You know, Jim, I think that’ a really interesting question. When we first started talking about our model, you know, a year and half ago in New York, I remember the kind of emotion I received about not being a cultivator, my God, how can it be? We have no competence in cultivation; we’re not good cultivators, we think we’re good partners for cultivators, but initially we see ourselves collaborating, Jim, with LPs, where we will help them and process their materials.
And as the raw material landscape improves with new capacity coming online, I think that model may change a little but, but initially, that will be where it’s at. And I think we also have to consider the whole CBD market here, as well, Jim, and I know this increasingly part of the conversation, and recent announcements with Canopy, etcetera, but again, being wellness/nutrition products people, we’re quite struck by the size of the CBD business right now in the United States. You know, it’s greater than the vitamin, the market today, and I think it’s going to get greater than the Omega-3 fish oils very, very soon.
James West: Wow.
Jim Hamilton: And we will see demand through the CBD of business development that will be quite striking and is quite positive for not only marketers but also those in the extraction part of the equation.
James West: So is it the game plan, then, for Neptune Wellness to be the brand that consumers see, or is it to white label the ingredients and let the brand take the takeover?
Jim Hamilton: Jim, our model is what it’s always been which is to support great marketer with he infrastructure to get them going. So we are a B2B company supporting other LPs in this business and brands, by the way, multinational brands who will choose to participate in this business in some way or fashion.
James West: Right. The brand aspect is very interesting to me Because you’ve all these, you know, you’ve got like Green Growth brands who’s coming up with a pedigree of creating great brands and in-store experiences as destinations; and then you have got the Tilray partnership with Authentic Brands where they’re actually going to write cheques to the Authentic Brands, in the hopes that they actually are able to project Tilray’s brand.
Jim Hamilton: Yeah, look, Jim, I think a lot of us feel a bit constrained within the regulatory frame that exists in Canada today. I think we should expect that, like with a lot of businesses and with societal acceptance that will realize with time. But let’s not get too myopic about Canada his is a global phenomenon, and we will see global consumer brands at play here, I believe, over the long term. Hence the interest of, I think, many consumer product companies looking at this business right now.
And I think ultimately when we think about the vertical, if you will, about what is extraction and purification and formulation, I think what’s really important there, there will be a very robust demand over the near-term horizon because of all of the reasons we discussed. But I think ultimately, we’re going to be differentiation be a huge driver in terms of the collaboration agreements and the alignments that exist that will come in the whole supply chain.
So when I mean differentiation, I mean ultimately, it’s not enough to do extraction; but we have to look at delivery systems, we have to look at the clinical science, like we did with our Omega-3 krill business.
There is a great analogy here between nutrition products, Jim, insomuch as the greatest margin and the greatest markets in my experience is where there’s a conversation with the consumer. In this business, there’s a conversation, whether that’s a practitioner or whether that’s at the retailer. And where there’s a conversation, you can help those retailers be successful, or those practitioners, with differentiated deliver forms, greater bioavailability, clinical research, and so forth. We think, and that’s what we’re working on today, and our recent agreement and announcement with Lanza is an example of us executing against that.
James West: Sure. As a non-cultivator non-producer, you are never going to be held hostage to the idea of commodity price competition, and I think for the shareholders of Neptune, that’s got to be a very bright and warm place to be, relative to all of the other LPs, who at some point are going to be competing on commodity price levels.
Jim Hamilton: I think healthy paranoia is essential to any business, Jim [laughter]. I mean, economic ultimately Trump. I think we can debate on the timeline, I think the demand profile for extracts, purification, formulation, will be very robust in the near-term, not only domestically but globally, and the differentiation and the separation of the winners and losers long0term will be on the science and delivery forms, etcetera. And that’s what we’re committed to.
James West: Wow. Sounds fantastic, Jim. Well, I can’t tell you I am about 2019, both for you and for me, so thanks very much for joining me again. We’ll come back to you very soon.
Jim Hamilton: And Jim, thanks. Will we see the band, next time?
James West: Cross your fingers – could be. It’s taking a little while for all the equipment to arrive, and we don’t even know if we have people who can play them yet, so we’ll see.
Jim Hamilton: Thank you.
James West: Thank you.
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