March 28, 2019

Canopy Growth Corp (TSE:WEED | NYSE:CGC) CEO Bruce Linton on New York State Hemp License, Global Opportunities

Midas Letter
Midas Letter
Canopy Growth Corp (TSE:WEED | NYSE:CGC) CEO Bruce Linton on New York State Hemp License, Global Opportunities

Canopy Growth Corp (TSE:WEED) (NYSE:CGC) (FRA:11L1) CEO Bruce Linton joins James West for a wide-ranging discussion on the cannabis industry. Linton is thrilled with the company’s recent moves, especially Canopy’s multi-year retail partnership with convenience store giant Alimentation Couche-Tard Inc (TSE:ATD.A) (OTCMKTS:ANCUF). As capital continues to move out of the Canadian cannabis market, Canopy is increasingly looking at international opportunities. Canopy values the US space and secured a hemp license in New York State in January. Linton highlights the significance of the New York market and notes that its population, relatively small illicit market, and acceptance of CBD products make it an ideal state in which to operate. He believes intellectual property is the great differentiator in the cannabis space, as it drives new product developments and formulations. Linton is excited about the legalization of edibles, beverages, and vapes in Canada this fall and indicates the rollout process for these products will be much smoother. He’s also enthusiastic about the global medical cannabis space and sees a role for medical cannabis in Japan’s geriatric health care, as well as the potential for China to develop into a significant CBD health and wellness space.


Narrator: Canopy Growth Corporation is a diversified cannabis and hemp company offering distinct brands and curated cannabis varieties in dried, oil, and softgel capsule forms. Canopy Growth operates 10 licensed cannabis production sites, with over 4.3 million square feet of production capacity, including over 500,000 square feet of GMP certified production space.

The company operates Tweed retail stores in Newfoundland and Manitoba, and has entered into supply agreements with every Canadian province and territory.

Canopy Growth Corporation trades on the New York Stock Exchange under the ticker symbol CGC, and on the Toronto Stock Exchange under the symbol WEED.

[stock_chart symbol=”WEED:TSX” align=”left” range=”1Y”]

James West:   And I was kidding; Bruce is not my co-host. He is not moonlighting, alas! He’s moonlighting as my guest.

Bruce Linton: Again.

James West:   Again! Bruce, it’s been, I think, going on six years that we’ve been doing this now.

Bruce Linton: I think we started doing this when you actually didn’t have a business plan.

James West:   I didn’t have a business plan.

Bruce Linton: You were sitting in my lobby describing capturing footage, and what you were going to do with it was unclear. And remember we discussed, that was an expense plan.

James West:   Right. That was almost just back when you never took video of any cannabis cultivation because it was still illegal.

Bruce Linton: No, but I gave you credit, right, like? There’s all kinds of plays around this, and you could have gotten distracted. You could have said oh, I’m going to jump to one of them, or do something. Instead, you’ve done this, and like, you know, when you start getting cranked up on YouTube and all these things, it’s good for us; but I give you credit for having stuck to it.

James West:   Right. Well, thank you; unfortunately, you esteem me far too highly. It just happens to be the only thing that I’m good at. I’m good for an hour and a half of moderately attention span.

Bruce Linton: No, but also, when I’m going to be in Toronto and I’m trying to find the appropriate restaurant – who do I contact? You. And your last recommendation on the small plate Mexican tapas place was amazing.

James West:   [laughter] Oh, good.

Bruce Linton:      And so you are also a very good restauranteur. I’m not even sure if you know your kitchen exists, but you for sure know where the restaurants are.

James West:   That is a whole other story. But enough about me; Bruce, Canopy Growth is – I’m going to come at this from a new angle, because people are always accusing me of, like, you may as well be the spokesperson. How about we say, Canopy Growth’s market dominance is under siege from a broad swath of contenders from around the world, from the competition for capital from the US MSOs and all of the Canadian analysts saying, the action’s in the US MSOs now; the Canadian incumbents, the originals, are all now fully valued, onward and upward, next comes the international opportunity. But they’re basically trying to categorize Canopy Growth as fully valued…and how would you sort of defend that?

Bruce Linton: Well, I – there’s three parts to your statement, right? Capital is definitely rotating out of the Canadian market, looking for other opportunities, because capital is smart. So did we announce things in the US like our hemp strategy? Yes. Our first hemp locations? Yes. Did we announce who just joined us, Geoff Whaling, who’s been running the hemp advocacy in America for quite some time, worked with us since, I think, about 2013? So you need to be where the action is. It’s Europe, it’s there, it’s becoming South America. I’m not in the capital markets; I find having about $5 billion cash means that I’m not searching for cash, which I think as people do, it’s going to be tougher for them.

And for us, where we’re going is entirely kind of where the cash is going, which is how do we get – so, suppose we make really terrific GMP certified, New York State approved, products, and those products go to stores. Do you think they’re going to go to, like, Larry and Moe’s messy dispensary? They’re going to go into big box and corner convenience. And so when we did these support agreements in Ontario with Circle K, do you think Circle K is like, the biggest or one of the biggest point of sale retailers in America for quick and convenient? For sure. And so we’ve been looking at all this stuff, and I think we’re landing where we want to be; and what we’re going to put on those shelves is going to be driven by intellectual property, because the only place on the planet right now that if you want to run great clinical trials and have a large cohort of patients that you directly hold as your own, it’s Canada. And great science leads to great products, and then when put a brand on it, a great brand has a lot more strength if what’s in the container is smart, different, and protected.

And so I feel like maybe at different plateaus, you know, we’ve got another step to go, but I’m more excited about medical Europe and Q4 rec products in Canada, than I have been in the last several years for what the business is doing, because actually using that intellectual property and differentiating. And I think you’re going to find in cannabis, there are going to be a lot more stratification between the companies. Because if you’re just struggling right now to say I hope my grow works, I suspect your investment in R&D on extraction and getting it to APIs is pretty small. And if you can’t do that, how do you make amazing medical products so you can run Phase II B trials like we are? And then how do you take those ingredients and make great beverages?

You come up to our shop now and you go, Oh my God, that is a huge building you built over there – what’s the for? It’s the bottling plant. We’re going to have five lines ready to go. And I can assure you that in Q4 when those things hit the shelf, people are going to say, I want to try that. I want to have that. It’s not a heavy dose, it’s going to set on quickly, it’s going to have great branding. Between us and Constellation, I think people have no clue how big a wave that could be; and guess where that IP can go? Down to America when legal, and it won’t be too long.

James West:   Sure. So I mean, I looked at the company you took over in Colorado that was also in hemp…

Bruce Linton: Ebbu.

James West:   Ebbu. And so you’ve got, now, the operation in New York as well. Is Canopy now a multi-state operator in its own right?

Bruce Linton: Yeah, I guess in a sense, we are. So we do have good people across multiple US states and we have different purposes for them, from research to, you know, working up to production. But back in the fall, remember when we did that deal? Everybody said, What are you thinking about? Why would you buy that? Well, what’s that do? Well, that has a ton of evolution in terms of IP around the genetics, the processing and creation of outcomes, using the ingredients from hemp. Now after the Farm Bill it’s looking a bit more interesting. And so I think we’re on a really good spot. We’re not trying to be up and down 20 percent a day; we’re trying to build something that just keeps getting better.

James West:   Right. Yeah, there’s very low volatility across Canopy shares, lately. Great, well, so you say you’re more excited about the medical opportunity in Europe; and give me an update, where is Canopy at in Europe right now?

Bruce Linton: So, well, we’re doing two things: one is, we continue to get and seek more approvals so we can have more diversity of products going into Europe, and those are the same ingredients and platforms we’re using to run clinical trials, whether the dog or human, in Canada. And so what we’re trying to do is make sure that as we finish out this year, our Phase II B’s, if they work as they should, will allow us to make claims as to how this combination of ingredients and delivery mechanisms may cause you to sleep.

So you’ll have this Q4 party with better products, and you’ll have this Q4 target finish line for some Phase II B trials, then you can convey those claims into other European markets. So if you have the right product mix is there, any of the right claims, you can start to see why that helps with insurers, doctors, pharmacists, all of that. And so we’re playing, I wouldn’t call it a long game, but I would say we’re playing a game that gets past the topic of just the ingredient.

James West:   Sure. The US market is now sort of very focused on growing hemp, because hemp is legal and CBD derived from hemp is legal.

Bruce Linton: Correct.

James West:   And growing plants that produce a lot of THC is still illegally Federally in most states. Is it most states?

Bruce Linton: Well, it’s Federally illegal in all states, but they’re looking at a couple of things, right? They’re looking at a banking Bill, they’re looking at a States Rights motion, we’ll see what happens. But hemp even gets complicated, right? So hemp –

James West:   Well, that’s just it.

Bruce Linton: Hemp, the reason we’re in New York State is, New York State stepped forward with a guidance and control system which says that in New York State, you can use the letters CBD, and you can give details of the total number of milligrams, but you can’t make medical claims. That led us to the FDA, but in our state, if you want to have products that don’t make a claim, you can identify the ingredients. That is different than most other states.

And so what you’re finding is that even with the Farm Bill, it’s very uneven state-to-state, but a good one like New York, population, not a huge illegal economy, great sales channels: if you’re going to launch things, that’s a great state to start in. There’s four or five others who are following what we think is sort of the good New York lead, and that’s where we want to be next.

James West:   Right. The cannabis – so, the CBD thing; I mean, I’m looking at it in the United States. You’ve got some big players who are clearly banking on the success of CBD, and it’s to the point where now my Cialis and Viagra offers in my email, I’m now being offered CBD gummies and CBD melts and CBD this and CBD that, and it’s like, oh gosh, it seems like the whole market is saturated. But also, historically, with those kinds of products that come on an unsolicited basis, there’s a qualitative issue. You don’t know how much CBD is in there, you don’t know where it came from, you don’t know if it’s CBD or fentanyl.

Bruce Linton: Well, you don’t even know – like, so, you’ll have that riffraff. And then you’re going to see like New York State’s doing, they clamp down on it, because what they really want – and if you want to build a brand, suppose this is supposed to be my sport recovery beverage. How many milligrams of CBD should be in it? Should I be drinking them before, during or after a workout? Do I have to consume them for multiple weeks or multiple days or multiple hours? So what that describes is a proper, controlled set of ingredients run through a process so you can get an outcome.

And guess what? That quality, consistency and committed outcomes, sell. The water you guys so kindly gave me, I think, was almost free; CBD as an ingredient may become almost free. What’s going to happen is, the ones which make the money are going to be the ones which deliver outcomes, because of commitments to actually structure and research, consistent availability, proper packaging. And so I think we’re on a very good track for that kind of approach, and that’s why people like Martha wanted to lean in and actually be an advisor to us, because she doesn’t want to put her name on something that’s just junk and you get an email spammed to you.

No, you know what I mean? It’s got to be real stuff.

James West:   Yeah, no kidding. So Martha’s going to be cooking with Canopy?

Bruce Linton: Martha’s probably the most active current advisor I could want. She was asking me, texting me a few days ago, a week ago, saying, You know, what price point do we want to have this product at? And it’s a product for which I am almost zero domain knowledge, and I said, Let me get back to you. But like, she’s activated.

James West:   Wow. Martha Stewart.

Bruce Linton: Pretty cool. And I just dropped on you, I was texting with her. Come on, James, pick up on that. [laughter]

James West:   Well, I was gonna say, I was gonna say, we’d love to have her on the cooking segment of the show that we’re going to organize in New York City in the next couple of months, but we’ll chase that later. Okay, so where is the fly in the ointment in the whole global cannabis evolution, revolution, from a corporate perspective that really is flying under the radar, but probably has more of an impact on the future returns of big globalized cannabis companies?

Bruce Linton: It’s still coming back to public policy. Right? Like, we’re still seeing very uneven in America. It comes and goes in fits and spurts, you know: is Malaysia going to or not? What does it mean that Thailand did? What’s really the opportunity with Korea? How fast can we get through the next phases in Germany so we can access what are, you know, 82 million people? So it’s always the doctor-gatekeeper thing, right? Like in the UK, it’s the same thing as Canada 15 years ago. Australia is kind of working their way through it so that doctors are now being aggregated in clinics and patients can go see them.

But it’s just one of these things that, they’re almost all the same activities that we saw play out in Canada; they’re just happening much faster.

James West:   Oh, okay.

Bruce Linton: Because you know the solution, right? If you don’t have doctors who are willing to write an access form, but would refer, do what Canada did: just go out, figure this out, open those up. And so what we’re finding is, the markets are accelerated faster and there are more of them than, you know, we’re approaching April 1st. April 1, 2014, what was that? What was when the selling was to begin. Challenging, because there was no product. But when I think about all the events around 2014, 2015, trying to get a market, everything there is applied everywhere else. And so I think it’s still public policy, but it’s questions with gatekeepers: Doctors, regulators, there’s nobody on the planet who’s not talking about cannabis – they just don’t know how to get to it.

James West:   Sure. BNN and Bloomberg published a story that suggested that the poor quality of legal cannabis was driving users to the black market. How much of that is true?

Bruce Linton: I imagine there’s uneven quality. I think what drives people to the illicit market is that there’s no place to go and buy the product. So if there’s a guy you know down the street and there’s no store – because we’re seeing across the country the provinces that have stores, have much better sales throughput. And it’s because you can walk in. you can say Hi, good to see you again. This is the one I got last time, this is what I liked or didn’t like, what would you recommend? And all of a sudden you’re in a dialogue with somebody who’s been properly trained, that can take you to a progression of the sale.

When you’re online clicking around, you can lose your confidence pretty quickly. You can make a wrong turn, and you’re gone.

James West:   True.

Bruce Linton: And so what we see is, the key factor is having points of sale with trained people. Ontario opens a bunch starting in a week. Alberta is opening more. We’re seeing them work down East. So I just think the product format probably is a bigger issue. So in Q4, when we actually get to have beverages and vapes and all those things…right now the stores contain what will be the least exciting variety of products that will ever be for sale in Canada legally. Like, we’ll look back on it and say wow, it’s good they let you have really limited choices, but by the time we get to Q4 and the other products are there, the illicit market doesn’t have the optionality of different things that we will have.

They might have stronger or dirtier, like if you like dirtier stuff, you’ll be able to get it from them, but if you like actually safety-tested, we’ll have it.

James West:   My biggest complaint with the available recreational cannabis that comes in the mail, without exception, is that the life cycle from the point at which it was harvested to the point at which I’m smoking is too long, and different aspects of that process mandated by the legal framework, like irradiation, causes the cannabis, the quality of the smoke, the quality of the end product, to be low.

Fortunately, there’s a whole generation of people who are getting, who are coming up, who that’s the only weed they’ve known. But for those who are making these complaints about the quality, what are the chances that Canopy is going to drive the elimination of the requirement for radiation and a shortening of the time frame from harvest to the time it’s in your hands, so that there’s still that perfect moisture and flavour and terp profile?

Bruce Linton: So, most stuff now isn’t being irradiated, but it’s being delayed, right? So it’s very infrequent that we’d have to irradiate, but what happens is –

James West:   Really?

Bruce Linton: Yeah, the process of releasing is quite long, right? You think, you’re bang on, right? From the time you harvest it until the lab results come back in and you can package it and they ship to warehouse. But I think what you’ll find is the supply chain kinks.

But what we’re talking about right now is dried cannabis in a container.

James West:   Right.

Bruce Linton: Matters a lot less when it’s liquid cannabis in a bottle. If it’s a vape cartridge, gel caps. So what I think you’ll start to find is that the format shifts to things which are easier to be shelf-stable, and that the supply chain time shrinks on the dried cannabis. So this is, we got a start; things are rolling. The warehouses are all working way better, stores are working way better, I would say the processes are working way better. So I think you’ll probably find that you shrink that time to market by half, maybe, by the time we’re at the end of the year and change the format.

James West:   Okay, good. So it’s just an evolutionary growing pain?

Bruce Linton: James, the fact that October 17th worked as well as it did had at least one of us somewhat surprised, right? Like, if I was on the show last year at this time saying at the end of March I came on your show, did you talk about October 17th? No, you didn’t know about it. Did you talk about, will the government actually pass it? Yes. When? Don’t know. So, like, I like to remind people that it was July 1st when we kind of heard that for sure it was going on, but we didn’t even know it was October 17th for another several weeks, and then the provinces still had to fight about who got to keep what amount of the taxes before they would actually play. So they were still trying to paint the warehouses and get things going at the end of September.

It actually worked remarkably well, given those variables; so I think the rollout of drinkables, edibles, vape-ables, is going to be so much more smooth, because there’s so many platform benefits already existing.

James West:   Sure. So in your, from your position at the top of the industry, do you think that Health Canada is on track for October 17th release of edibles, beverages, candies, vapes?

Bruce Linton: I think the rules will be there; I don’t know that people will all be ready evenly to produce them, and that’s fine for Canopy. But I would say it feels relatively unhurried compared to where we were last year at this time.

James West:   Mm, interesting.

Bruce Linton: Well, we know that we’re targeting October 17th; last year at this time we had no idea October 17th was a particular relevant date.

James West:   Right.

Bruce Linton: We had no idea who had warehouses, who didn’t. We didn’t have any stores ready to sell stuff last year at this time; now by the time this rolls out, there will be hundreds across the country. Very, very, you know, this is like an incremental change where all the values created in the new products we get to put in, but all the work’s been done to get the first ones out. Big deal.

James West:   Sure. Switching back to the international stage just because now I’ve got some questions again there, some countries really haven’t made much noise about cannabis medically, and you would kind of hope or think that boy, if those countries went legal, it would be a tremendous catalyst to the entire industry. I’m thinking of China and Japan, for example. I haven’t heard any noise out of there. We have a studio in Tokyo, and I’m wondering if there’s anything I can to do catalyze a cannabis revolution in the Japanese context sooner?

Bruce Linton: So where we’ve had more dialogue has been about in Japan, different than China. So in Japan, interesting geriatric care. So how do – we’re doing a 500-person study now in Ontario, where much of the focus is on how do we diminish the current usage of certain pharmaceutical products that may contribute to, like, reduced cognitive function? Drug-on-drug, that sort of thing. That’s a discussion you can actually have with certain, you know, segments of the Japanese business leadership; it’s very different than ‘let’s talk about a party’. I didn’t meet anyone that wants to talk about that.

But geriatric care, I think, might be the soft spot, the entry point. China has a lot of interest in hemp, right? They produce a lot of hemp. They try to have patents around hemp. So I don’t think – hemp’s not the taboo, so I could see a CBD wellness outcome there, because there’s at least two states that produce massive amounts of hemp.

James West:   Yeah, well, I’ve got a conversation going with a woman who was born in, I can’t remember, the province name, or rather I can’t pronounce it, and she says that they’ve been producing, extracting CBD from hemp for as long as she can remember, and her relatives suggest it’s been centuries. And so it’s interesting. You talk to some people in China and they say, Oh, no, that’ll never happen here…

Bruce Linton: Well, I’m not sure that you’re going to see a lot of THC-derived things happening really quick. I’m not sure that that’s on the agenda. But CBD, hemp, are not – I don’t think that they’re so terrifying. For a long time, they classified it as bird seed, and that was a way to actually produce it and sell a bird seed. So I’m optimistic. I think then when you start having CBD from hemp and you start having fibre, you start looking at the protein. Like, this is a super accessible, high-value protein. I find anytime you have around a billion or more people hanging around, they often get hungry.

James West:   Right!

Bruce Linton: And so you could have a diversity of benefits that might justify its existence, and make it welcome. So I wouldn’t, you know – where we’re seeing the least, there are questions like, will the governance of cannabis be, in certain jurisdictions, commercial law or sharia law? Like, those are the sort of macro policy discussions people have to have, because if it lands one way, it’s a big difference than the other.

James West:   Sure.

Bruce Linton: And so I think it’s actually not going to be sharia law, it’s going to be commercial law. And if that becomes the case, you know, Malaysia, Thailand, they could become pretty important actors, depending on how they take this down.

James West:   Sure. So you have conversations, you’ve had a conversation in the Japanese context about CBDs and the geriatric lifestyle improvement?

Bruce Linton: Yeah. If you go around in the world enough, you meet some people from every culture, and it was in the last two weeks where we had a pretty good discussion about do you think it’s ever going to occur – and this is from a very senior business leader – and what would you try, if I tried you on for this onramp, how would you react? And you know, I suspect in the next six weeks or so, five weeks, I’d probably end up having a stopover in Japan, now that you bring it up.

James West:   Really?

Bruce Linton: Now, I’m very happy with that, because I like eating in Japan.

James West:   Yes! [laughter]

Bruce Linton: But you know, it’s kind of like everything Canopy has done. Let’s talk again in a year or two. We’ve got to lay down track.

James West:   So you can be a guest in the Tokyo studio! [laughter]

Bruce Linton: I’m a James groupie. I’m going to go wherever James goes, that’s my goal.

James West:   Just travel around in a jet plane. Okay, so what about the Middle East? Now, the Middle East is another area where I really haven’t heard anything, and it strikes me, you know, as an area with its own challenges, culturally and shall we say, just, lifestyle-wise.

Bruce Linton: Yeah, but why don’t we think about animals, right? Where is the highest concentration of high-value horses? Probably around…

James West:   Saudi Arabia?

Bruce Linton: Right. I just think people have to open their mind up and say, it doesn’t have to take the same path everywhere, but you can actually perhaps get acceptance and adoption. So then it goes back to companies like Canopy, which we’ve been doing our animal health work. So I don’t think there’s going to be a uniform public policy and a uniform on-ramp, but I don’t think there’s necessarily going to be Stop signs anywhere; you just have to be thoughtful about how you approach them, and you might have a cascading effect that if Malaysia found a just and structured way by which medical cannabis could become an accessible product, I think that comes out of the conversation.

James West:   Sure.

Bruce Linton: But the key thing is, like, every actor has to go there with respect and try to have the rules develop rather than say, Well, it’s not been made illegal, so I’m going to do it. No, no, no, no: make it so that it is legal, make it so that it is regulated. Because you know, you see in Italy right now, there’s a whole bunch of people selling cannabis like hemp, because it’s not illegal. But it’s not legal. There’s no governance. Like how, you know. So I think if we want to have a long-term success, what we have to do is continue to advocate. Governments, should you please take some time to write down some rules?

James West:   Right.

Bruce Linton: We’d like to interface with you, we like those rules. Because if we do that right, then we’re in every market. We have less likely bad outcomes because people aren’t getting away with selling junk that’s put through the wrong process. And you know, back to your mail order stuff, we want to avoid that becoming the norm.

James West:   Sure. Does Constellation have an immediate plan to exercise their full ownership of Canopy, and for Canopy to become Constellation’s – or for Canopy to become Constellation Brands, or vice-versa?

Bruce Linton: So we are their marijuana play, period. And they’re our beverage partner, period. So there’s no – everything we want to do comes through our space and through our play, so it’s kind of like, they’re there. Now the question is if and when do they exercise, and these things all have termination times, etcetera. But it’s not like we’re, you know, going, Could you put the money in because we’re finding that the $4.5 billion or $5 billion isn’t sufficient.

What we’re doing is, April 8th is our budget date; we present to our Board, and it’s been a really beautiful exercise. I would say one of the best things that’s happened is, as we mature, being able to grab resources on global plan and looking at CapEx, OpEx, things like applied science, and pooling all of these things, so that the discipline where we are, when I compare it to where we were last year and the year before, our discipline in terms of structure and execution and how we’re going to measure our quarterly roll, is unbelievable. And so I think that that program will probably make all the companies that are big, very comfortable.

And so they’re comfortable as an investor, they might want to put more in. But if they’re comfortable in our discipline, so would other big funds, probably, because these little funny, fast-moving marijuana companies are exciting, but scary.

James West:   Sure, sure. Okay, Bruce, well, you know I could talk to you for hours and hours on end; probably the audience could listen, but I don’t want to take too much more of your time. Thanks again for coming by!

Bruce Linton: Hey man, and congrats to you. Thanks.

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