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Highlights from ‘Legalization one year later’ and ‘Venture capital opportunitiesin the international cannabis space’

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Phillip Crawley, Publisher and CEO of The Globe and Mail, welcomes Cannabis Professional subscribers and guests.

On September 24, Cannabis Professional hosted more than 100 subscribers and guests at The Globe and Mail Centre in Toronto to celebrate our first year.

The state of Canada’s cannabis industry

This event featured a panel discussion on the state of Canada’s cannabis industry a year after the legalization of recreational usage.

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The line-up
  • Greg Engel, CEO of Organigram Inc.
  • Rosy Mondin, CEO of World Class Extractions
  • John Fowler, founder of Supreme Cannabis
  • Sherry Boodram, CEO of CannDelta
  • Marcy Nicholson, Cannabis Professional reporter, panel moderator

This last year was full of challenges and success. Looking ahead to the second year of legalization, what is your company doing to address the logistical problem?

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Greg Engel:

The big learning from Cannabis 1.0 last fall was it’s really important to focus on core products and bring them in in a sequential manner. That learning has served Organigram well. As we look to how we launch Cannabis 2.0 products, we are looking at it in the same way.

Making sure we are not trying to do everything at once. When we’re bringing products to market, that we’re doing it so that we have sufficient inventory to meet the demand against that product line. Our strategy has really been more depth than breadth in terms of how we bring those products to market.

The second thing is that we understand the dynamics of the market are going to be. We spent a lot of time looking at U.S. data. We have a partnership with a company out of Colorado that gives us a lot of insight into the market.

Making sure we are not trying to do everything at once. Our strategy has really been more depth than breadth.

That, along with what we understand about what the Canadian market demand is, has positioned us, and allowed us to help with the provincial partners – both provincial and private – to help inform them about what the demand is going to be.

Those are two of the key aspects of how you bring products to market.

Do you anticipate bottlenecks in the supply chain?

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Rosy Mondin:

Yes. It’s going to be really interesting. I see a big bottleneck more on the extraction side. We (World Class Extractions) are actually targeting the recreation side. This industry that’s coming out is really what we have been working towards for the last four years.

What we are seeing is that – and we haven't started officially yet, really – people are already contacting us needing extracting help. Hemp farmers in particular, because they all planted their seeds this year, and they have all come to harvest. They have nowhere to get it extracted. There’s no capacity.

We have hemp that’s laying waste in the fields. Normally, with industrial help, you would cultivate it, harvest it, then leave it out to dry. You can't leave it out to dry when dealing with the flowers. They’re starting to mould out in the fields.

We have hemp that’s laying waste in the fields. Normally, with industrial help, you would cultivate it, harvest it, then leave it out to dry. You can't leave it out to dry when dealing with the flowers. They’re starting to mould out in the fields.

We do have processes to deal with the pre-processing of the hemp, but we’re not there yet. We’re going to be coming out later this year with all of our equipment and processes.

But this is the issue. Not only the hemp harvest coming, but the next quarter of cannabis harvest coming. We have all the new product categories coming. Not only where’s it going to get made, but who is going to test it all.

That’s another big bottleneck: getting the labs up to speed with their standards. The problem is, with the labs, they haven’t been able to create the standards because they need products in order to do so, especially with the cookies and all that kind of stuff.

As I've been talking with my lab friends they’re also feeling ‘the cart before the horse.’ They are also trying to get up to speed. They see this big wall of doom. As I said to Health Canada a couple months ago, ‘There’s this big wall of doom coming, you need to hurry up and start licensing labs.’

We are going to have a glut of product that will need extracting, a glut of product that needs testing, but where’s that going to go, we are going to need to be sure they have shelf space for all of it.

There are bottlenecks all the way down the line.

When will edibles be available?

Sherry Boodram:
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Creating these new products is fine. Coming up with different methods and validation and testing is fine. There is also a component of palatability, of taste-testing edible products.

Under the cannabis regulations, you could have a research license, you could do research, but when you cross over to the point of doing testing or doing research with human subjects, it falls under the office of clinical trials, which is human testing. It’s a grey area that no one wants to touch at Health Canada.

They will say something like, “Here’s your license for research, your protocol is great. If you do palatability testing, you may want to contact the office of clinical trials.’

That’s what they say when you get your license. And the people who get their license, ask “Should we do that? They said may.”

If you’re putting these products out into the public, and people are going to be consuming them, the taste of a product is a pretty important component of it.

John Fowler:
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I think someone will get a 2.0 product for Christmas, most likely. I’m not sure there’s going to be a lot of them.

In our dealings with provinces and the federal government, they said it’s not meant to be a shotgun start like October 17 was last year.

What’s more important, in my opinion, it wasn’t really until this summer that we started to see real market dynamics. If you look to the first six months of legalization, any old company could be the top seller in a province for a given week – but they just delivered on a Monday and sold out by Friday. I think a lot of conclusions were made early on, and you’re like, “Who are these guys? How is this happening?”

By the time we hit the summer, and companies were hitting their stride, you started to see what your usual sell-through would be, you know your position in store, if people engage with your price-point or not. Similar (with edibles), we’re probably looking at the spring or summer where we have something approaching a fully-supplied market. (Then) we can start saying, “These are the product categories that work, these are the ones that don’t, these are the brands that are rising, these are the ones that are not.”

I’m sure it will be fun, and you will write a great story about who buys the first edible in Canada. What is going to be more meaningful is, how does this market look in the next summer when you are actually placing bets on who is going to win over the long run.

Rosy Mondin:

Just like with legalization as a whole, it’s an evolution. You can’t expect it to be perfect out of the gate. It’s going to continue to grow. Legalization 2.0 is really part of this evolution. The way I see it, it is really the full scope of legalization. That is, I think, the majority of the products that most consumers will want, as opposed to dried flower.

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Retailers are saying the items that sell out the fastest are high-THC flower. What are you doing to meet that demand, or do you think that the dynamic will change when edibles come online?

Greg Engel:

There’s no question that there’s demand for high-THC product. Part of that demand is also how the retail staff are dealing with new consumers, or educating consumers. I think having a more fulsome explanation about different products available.

We’ve had experiences where you put a high-THC product into a certain market, it’s a number-one seller. But as consumers, I look at the comparable beverage and alcohol. People don’t go in and buy the 80 proof. There is a range of products that they are looking for.

As consumers get more nuanced and understanding of it, it does come down to education with the retail staff. A big part of our efforts is being sure that they understand the experience that people are looking for – and there’s a broad range there. There are a lot of new consumers where the last thing they are looking for is a high-THC product.

It depends on the market. As a company, we have shifted to more one-time offers, where you are cycling more of a craft-beer approach, but having your core strain.

Consumer preferences

John Fowler:

There will be consumers who are chasing bang for the buck. There are many people who remember, at some point in their life, they bought a strong beer. They didn’t buy it because it tasted good. They bought it because you could get it wicked cold, and if you drank it quickly, it gave you a good buzz.

As you got a little older, most of you that drank a bottle of wine last night, couldn’t tell me the alcohol content of that bottle of wine, nor have you made a purchase decision based on alcohol content in the last few years.

Unfortunately, most of the cannabis that we sell in this country is just not very good in the legal market. It is not enjoyable to a consumer that has had access to, historically, some of the world’s best cannabis in this country.

What they’re getting at is: “high-THC” often means it will also taste a little better and was grown a little better because not only do you have a genetic that can give you that. You also have to grow it decently well. It’s a bit of a patch, in terms of finding quality.

I think what we will find is that people want great flavour. The great thing about cannabis is that have a puff, and if it’s not strong enough, you can have a second one. We will see that evolution happen much, much faster than people expect. I think the cannabis consumer is a lot better educated than we give her credit for.

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On the topic of vaping, what are you doing to tell the public that these products are safe?

John Fowler:

For us, it’s two parts: the hardware and the software.

The negatives headwinds were the heavy metals issues in the California market earlier this year. For us, that really drove our partnership with Pax Labs. Having a trusted partner that’s been in the market for a long time, who will really stand behind their hardware. We know we are giving every consumer the best hardware we can. Understanding, in the short-run, that we are not hardware experts. We didn’t feel comfortable manufacturing our own tech. There are many great companies out there, we just happened to choose Pax to work with.

For us, our ethos has always been focused on the whole plant. It appears that many of the issues are with cutting agents that are used to make margin on low-priced products. If you’re buying a $20 vape pen in Colorado, that vendor only made ten bucks. How are they making margin?

Our premium strategy affords us the luxury of being able to invest in great hardware. But also in really good fill that is 100% cannabis-derived and naturally derived, which we feel give better assurances. And working with partners that have experience, like PAX, and our fill partners to make sure that we feel we can deliver product that we can confidently stand behind.

Greg Engle:

I think there’s a huge opportunity for us, as an industry, and also for regulators to educate consumers about the potential risks around illicit product. Some of the risk is around heavy metals. We’ve seen that with lost-cost hardware out of China that’s coming in and isn’t tested. Not only do they leak, but there’s a health risk. It’s also the cutting agents that are being used.

There’s also a side of understanding that all the product that we sell and are going to bring to market will go through rigorous testing. That’s the education opportunity. For people to to understand, this is heavily regulated.

When you speak to people in the nicotine industry, what they are seeing is that all these claims being linked to their products, but primarily it is knock offs. It’s counterfeit product that is being sold on the market under their names. That’s one of the concerns here.

For us as an industry, educating consumers around potential issues they need to watch out for, and why there is a difference between the legal and illicit market. Health Canada is very focused on this right now, but we are yet to see a lot of education.

We’ve seen the majority of the sort of ‘social responsibility focus’ to date being on the risks of drug-impaired driving versus the effect (of the product) — what are you looking for? There's a huge opportunity in people understanding the differences in the product.

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Are you expecting a glut of product? What do you expect it to do to prices?

Rosy Mondin:

If every man, woman, and child were to consume CBD you would need something like 30-35,000 thousand acres total. Take that to half, because not everyone will, that’s about 15-20,000 acres. Right now, in North America, there is over half a million acres under harvest right now.

So, yes, there will be a glut of product.

This isn’t a bad thing. Because now we get to look at what’s next. What do we do will all that hemp, and what are the by-products we can make with hemp. There are so many opportunities that come out of it. It’s not just about that CBD.

There will be a glut of products. There is an opportunity to capture a lot of money, for companies to make a lot of revenue, but then … you will have to be able to compete on a low price.

John Fowler:

The only protection companies have is brand-building.

If you had a glut of flower because you grew an undifferentiated product that nobody wanted to buy, and you convert it into a generic distillate, you have the exact same problem in a different format. I think we are going to see that.

The reality is: the investment you have to make to do large-scale ethanol extraction is pretty small, and there’s low barrier to entry, everyone is going to do it.

So whether you’re doing flower or vapes or ethanol, the most important thing is understanding “How do you live in an oversupply world?” We are going to get there, if we’re not there already. And making sure you have a brand that is communicating your value to consumers. So that you have confidence you will continue to get paid what you need to make your business work, and that you have a strong exchange of value with your customers.

The outlook for venture capital

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The line-up
  • Narbe Alexandrian, CEO of Canopy Rivers
  • Mark Rendell, Cannabis Professional reporter, moderator

Tell us about some of the under-explored area around cannabis and venture capital.

Narbe Alexandrian:

The two areas people aren’t talking much about are biosynthesis and the plant science.

Biosynthetics, you can actually teach a bio-organism call it an algae or yeast, to learn how to create cannabinoids. They can learn how to create CBD or THC or CBN or CBG and you can actually push other process in to get rid of all the other toxins and everything else. You can just isolate that specific cannabinoid. This is how aspirin is created – it’s created off a bark. But you don’t see any cultivation for aspirin whatsoever. That’s done in a lab, and they create that for the pharmaceutical setting.

Biosynthesis is something we’re really focused on. But it’s a ways away. We’ve talked to probably 50 companies in the space at this point. We do think some of them are up to really great findings, from an academic perspective. To really put it into perspective, it takes about two years to mass-produce that so that you can really compete against the cultivars. It takes a while to actually bring the cost down so you can effectively compete.

The second area that we are really interested in is the plant science.

If you talk to the Monsantos of the world, they’ve bulletproofed so many crops (corn, maze, soy, cucumber, lettuce, tomatoes) so that their genetics can be grown anywhere around the world and it’s the same product you’re getting every single time.

We haven’t done that in cannabis. It’s going to take awhile to do that in the cannabis space because it’s so new.

We weren’t able to do research on it until a year ago. We weren’t able to cultivate it for a little before then (other than for medical purposes). You can’t get that deep on the research until you get that legalization perspective.

When we talk to those companies, they look at cannabis, and they say, “This is an awesome opportunity for us. We actually own the genetics, we can build bulletproof genetics, we can do everything without tinkering with the actual genetics.”

Those are the two areas that other people don’t really focus on.

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Narbe Alexandrian, CEO of Canopy Rivers, in conversation with Cannabis Professional's Mark Rendell at The Globe and Mail Centre.

What are the opportunities you’re looking at?

Narbe Alexandrian:

We’ve developed a five-wave process that we’ve seen many geographies go through.

Typically, in a brand-new geography you see cultivation really step up. Licenses are scare. If you’re a first-mover, you have that advantage. It takes about 18-24 months to get going. If you have the license first, you have that advantage. If you’re license number 200, you don’t. The value of that license doesn’t really stand.

The second stage is ancillary. The extractors, the technology, media platforms that push the cultivators, the farmers, forward. We think the ancillary industry is about three times that of the core cultivation industry. Then you have the consumer packaged goods industry which we’re starting to see right now. If you look at the OCS, even the US catalogue of products, it’s the Sears catalogue of products. They all look the same. Rarely do you see a brand really speaking to the consumer, saying this is the persona we’re going after. This is the “Yoga Mom” [persona]. It’s not our customer base, because I might buy it and I’m not flexible at all, but the “Yoga Mom” itself, is who you are going after – it’s peaceful, serenity – that’s what you’re going after. The value you are trying to generate. That’s what you seeing in the U.S., especially on the west coast.

The fourth wave is medical, we think it’s the biggest. We just haven’t seen it come out yet.

The fifth wave is mass market. In 10-15 years, your Coke and Pepsis beat up the small entrepreneurs trying to get into the space. When we get there, it’s going to be very scary for entrepreneurs.

Are you still seeing opportunities for the kinds of VC investing you want to be doing in Canada?

Narbe Alexandrian:

Absolutely. I definitely think so.

The thing you take for granted in Canada, is that this is the hotbed for innovation. Right now, we have the leg up against anyone else in the world. We can innovate on product. Right now, if you look at the product in California, it’s known for brands. But if you walk through the facilities, they are sub-standard compared to what you see in Canada.

In Canada, we actually have a leg up. We have an advantage to create new forms of CBD and THC consumption. It’s not CBD in hummus, but it’s CBD that you can inject — not inject like for pleasure, but inject for serious arthritis patients that have issues with their joints, so that the only way they can get that solved is to go straight to the joint.

You can see all these new innovations come out from Canada. We really, truly have the ability to corner the market and own it, so long as we can find a way of getting into the U.S. and pushing our product into this massive population versus trying to play in this small playground of 30-odd million people.

Where are people accessing capital in the lull that is happening right now?

The same thing happened in the tech industry. During the dot com boom, public companies dried out. It wasn’t really hot to be a public company anymore. Now the focus is more on the private markets, there’s no need to go public, stay private. Why do we keep pushing these companies to go public too soon?

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