An Introduction to the Cannabis Market – with Russell Stanley, Beacon Securities (Transcript)

We interview Canada’s No.1 ranked Cannabis analyst, Russell Stanley. This is a great introduction into the rise and decline of Cannabis equities in the Canadian market. And also the hopes and problems of cross-border trading for the expansion in the US market. Russell Stanley discusses the current legal barriers at State and Federal level and how companies are overcoming these.

There is a gradual acceptance of the benefits of medicinal Cannabis and even Adult Use is less demonised. We wonder about the lessons learnt in North America which may be applied to the next big growth area for cannabis, Europe. There are clear parallels between the US and Europe with regard to developing a market but how long will it take?

Please join us for this fascinating conversation in what could be the next big investment class to come to Europe.

Click here to watch the interview.


Matthew Gordon: So we’ve been at a conference this week in London.

Russell Stanley: Cannabis Europa.

Matthew Gordon: Cannabis Europa. And we’ve been talking to the great and the good. Seems to be a lot of people from Canada and the US over for that.

Russell Stanley: Yes, we’re all looking for the next opportunity and Europe appears to be it.

Matthew Gordon: Well, we’re going to get onto that in a minute. I want you to explain to our viewers about what happened in the Canadian market with regards to Cannabis. We’ve seen this rapid ascent. Some huge companies created, almost overnight, with not a lot of revenue.

Russell Stanley: Not yet.

Matthew Gordon: Not yet. And it has come off a bit. Why don’t you tell us a little bit about that?

Russell Stanley: Sure. So Canada as of October 2018, Adult Use is now legal in Canada, otherwise known as recreational. So subject to age restrictions and where you’re allowed to consume it, it’s now legal for an Adult to walk into a licensed store, and buy Cannabis, either dry Cannabis for smoking, or there’s Cannabis oils. This coming October, some additional regulations are expected to become effective that’ll broaden the number of products that are legally available. But that’s been the biggest catalyst over the last year.

Matthew Gordon: And that’s on the Recreational side. But a lot of these companies are also on the Medicinal side?

Russell Stanley: Most of them started off in the medical world. We’ve certainly seen maybe a couple of years ago when the space first started to get investor attention, there were maybe a dozen publicly traded Cannabis companies. Now there has to be +50. There’s over 150 companies licensed to cultivate Cannabis in Canada. And Canada is small market of 37M people. So there will be some interesting dynamics play out in the next several years. But the space has exploded in terms of the number of people growing Cannabis and that’s created some other kind of ancillary industries as well.

Matthew Gordon: I don’t know much about Cannabis. I’m not sure many of our views do either. And that’s why we’re talking to experts like yourself. But it strikes me that the growing, the Producing side of things, there may be margin now, but like most agricultural plays, margin does tend to reduce over time. Do you expect the same thing here?

Russell Stanley: We do. We think that’s a when, and not an if. Cultivation has certainly got challenges. But as one Cannabis producer that came from the produce industry said, ‘Every crop is different, and has a learning experience associated with it, but it’s still a crop’. And that means scale is important. Quality control is important. But once you have those things nailed down, it’s a matter of time before the margins start to erode. So we do expect that to happen in Cannabis as well.

Matthew Gordon: So that’s a that’s a known factor. It’s quite helpful for people to understand that, because you’ve got to think about where you invest. So if you were looking at investing in the Cannabis space, you look at Producers, Processors, Distributors, and obviously the selling.. the Retailers in terms of brands and so forth. So on the producers side, if I look at where this is going to go, I’m going to be slightly more cautious about investing there. Because I don’t think there will be as many players in the market in 10 years time. There are going to be some winners and many losers.

Russell Stanley: There certainly will. And so in our view, I think the key success factor for Canadian licensed producers at this point to succeed within Canada, is the ability to develop value added products. So go beyond the dried flower and develop higher-margin products with some sort of value added associated with. And right now legally, that’s limited to oils and capsules. But we do expect that to expand in to edibles and beverages later this year. So strengthening on that product development front is going to be crucial. And it is already evolving into a shelf space battle. Every Province has its own rules and regulations with respect to Distribution. And it’s critical for Canadian Cannabis companies to have sales relationships into, obviously the core provinces of Ontario and Quebec, but into other markets as well. And so when we look at Canadian producers, we ask how well are they developing products that will be able to sustain higher margins over a longer period of time? And how well are they actually getting those products on the shelves?

Matthew Gordon: Everyone’s looking towards the Canada model as the blueprint for how it could work in the US, could work in Europe. But some companies, almost overnight, became billion dollar businesses with very little revenue. So there’s the hope, the expectation, the sentiment, being driven up. Was that based on fact or was it based on emotion? Were these companies focused on the right things or did it not matter?

Russell Stanley: I think it will matter. But I think there was a point in time looking back where it didn’t matter. I think scarcity played a role. A few years ago there weren’t as many investment opportunities available for investors. I want to play Cannabis. Well, how do I do it? Here’s a list of 20 names. That’ll narrow it down in a hurry. We now have far more choice. And that’s good for investors. Hopefully over time, that means that stories with substance survive, and those that fail to execute, or never really had a sound plan to begin with, those will fall by the wayside. And that’s healthy. But scarcity certainly played a role. I think at the outset. We’re now at a point where people are beginning to realize that cultivation is just one part of the story. You need to be able to turn that product into something, and then you need to be able to get it on the shelves. And we’re seeing fewer and fewer companies that are passing those additional milestones. So there were certainly some promises made and some companies have delivered and others haven’t.

Matthew Gordon: And have they suffered?

Russell Stanley: They’re starting to. We’re starting to see what we’d actually call Security Selection. We’re starting to see days where your screen has a mix of green and red. It’s not just all names being painted with the same brush every day. I think we’re starting to see decisions being made about one company not delivering on commitments or promises made to investors, while another company has done a better job of that. And we’re seeing a flow of funds, I think, into those higher quality names.

Matthew Gordon: I find that interesting, because it’s a fairly nascent industry. Canada is two and a half years ahead of everyone. That’s nothing.

Russell Stanley: That’s not very long.

Matthew Gordon: No. If I look back to the technology boom, who the main players were back then, most them not around today. It’s a different sort of industry. I suspect it’ll be the same here. You’ve got people who have not been in this space very long, telling us they are the world’s experts on this topic. So let’s see how that plays out. But the other thing that strikes me is, like any other industry, one company trying to be all things to all men… being a Producer, a Processor, a Distributor and Selling. That’s a tough gig. That’s multi skills required. A lot of money to do that. So people tend to focus and get good at one thing. So who are the bigger players in the Canadian market at the moment?

Russell Stanley: Look at Canopy Growth, the world’s largest Cannabis company. You’d look at Aurora Cannabis. You’d look at Aphria. Cronos. Those are some of the biggest names in the space. Then you get down into the next tier of producers in terms of scale and you’re looking at CannTrust, Hexo and Organigram. These are all companies that are currently involved throughout every step of the chain, as you mentioned. I think over time, all of these companies understand that cultivation is going to become increasingly competitive.

Matthew Gordon: So low margin?

Russell Stanley: Low margin. It’s made sense to be in that business for now, not just because there is margin available, but also because it secures supply. We’ve had an undersupply situation in Canada for quite some time, and that was only exacerbated with the legalization of Adult Use. There wasn’t quite enough product ready for shelves as people had hoped. But like all shortages, become surpluses. It’s a question of when, and not if. And so that day is coming. And I think all of these companies know that cultivation is not really a part of their long-term game plan, and they’d rather spend their time on value-add activities. We’ve also seen, for example, a number of those players look externally to extraction companies. So once you’ve grown Cannabis, in order to convert it to something else, you need to extract it and then use the resulting concentrate as an input into another product. And while all of these companies have built out their own extraction capabilities, a handful of them have gone a step further and employed or recently employed third party extraction companies. Fundamentally, refineries for the Cannabis industry.

Matthew Gordon: That makes sense to me.

Russell Stanley: So we are seeing more specialization. And I think that to your point, that’s going to intensify as certain parts of the supply chain start to develop as cultivation becomes less attractive to anyone who’s not doing it at huge scale and ultra low cost. We’re going to see companies try to extricate themselves from that part of the business.

Matthew Gordon: So to me that says with Producers, there’s going to be a lot of losers. And a few winners. And the winners are going to do things like start putting patents on certain strains or varieties, as they’re doing in agriculture. Today in the US, you can’t grow certain types of potatoes, because the IP resides with one company, so you need to get a license. So that’s one potential area where someone could be looking at making investment. That would make sense. But trying to pick a winner otherwise, is going to be a hit and miss over the next while.

Russell Stanley: It’s going to be a challenge. And it’s complicated by the fact that we think that the best margins are in manufacturing.

Matthew Gordon: Let’s come on to that.

Russell Stanley: But you’re limited in Canada right now to the extent to which you can actually package products in a way that’s appealing. Most people look at the way these Cannabis products are packaged in stores and say it’s a very clinical look. And that’s for regulatory compliance reasons. That’s not a marketing person’s dream to look at that packaging and say that looks good.

Matthew Gordon: Are you talking on the medicinal side with CBD? Or are you talking on recreational?

Russell Stanley: It’s both. With the Adult Use products themselves, there’s a lot of limitations around the way they can be packaged. Primarily to avoid making products attractive to underage.

Matthew Gordon: Like the tobacco market?

Russell Stanley: Very similar. And so the packaging is very similar to tobacco products. And  that’s why, not surprisingly, you’ve seen Cannabis companies recruit people out of the tobacco industry. Because there probably isn’t another industry where people have become very expert at selling a product that their government doesn’t want them to sell. So it’s a challenge that industry has found a way to navigate and create in an increasingly difficult environment. Cannabis in Canada right now faces very similar challenges.

Matthew Gordon: But let’s come back to where I think some of the innovation will make a difference. And that’s in the Processing side. So for the recreational side… What do they actually do? The process the flower and they create what?

Russell Stanley: Right now legally, it’s just oils and capsules filled with oils. Later this year, we’re expecting to see more products hit shelves, specifically edibles, and concentrates for vaping and beverages as well.

Matthew Gordon: So we actually met Howard Lee of www.sorsetech.com last night at the conference. They do that, liquids, which you can pop into beers, whiskeys. Wake up without a hangover. Sounds good.

Russell Stanley: Yeah. It’s the dream. Right.

Matthew Gordon: If only we drank.

Russell Stanley: Yes.

Matthew Gordon: And obviously in regular drinks, makes you feel good and a bit more energy. That’s what I mean about this innovation. They have a proprietary technology that allowed him to do this, where they would license it out to other people. They are in conversation with a large drinks company. One of the world’s largest, top three we’ll call it, to allow them to add this. Do you think those things are going to be faddish, just momentary. Or do you think there’s some longevity to things like that?

Russell Stanley: Specific to beverages there’s a debate. That category is legal in a number of US States that have legalized Adult Use. Even though Canada, from a Federal perspective, is seemingly a few years ahead of the US, from a regulatory perspective. At a product level, in terms of what’s legal in a given State, the US is a good example or a good window on the future for Canada. And so we see beverage products being, with varying degrees of success, in several markets. Some of this technology is around getting the Cannabis product to dissolve properly. So some of it is technology, and some of it is about getting consumers to change habits. If you’re at a dinner party, if you’re always going to be drinking wine, do you want to drink your Cannabis or would you rather eat your Cannabis or vape your Cannabis? There’s a consumer habit, or a user habit there that needs to be it needs to be addressed or marketed around. But that’s an example where branding and where IP could have a tremendous role in value creation for investors. And we’ll see more of that. But the beverage categories had mixed success in the US.

Matthew Gordon: I’ve worked in the beverage space. I’ve also worked with tabacco. And product innovation, which comes from the Processing side, drives the marketing activities. So the extent to which the delivery of the Cannabis, whether it be medicinal or recreational, is important because it gives the marketing and branding people something to work with. So it’ll be interesting to see where these collaborations come from. As you say, people from outside need to come in with the relevant prerequisite skills to help this evolve.

Russell Stanley: It’ll be interesting to see how it plays out. But everyone still learning as they go.

Matthew Gordon: Yeah, I think that’s really important to state here, is that it’s early days. We spoke to maybe six guys last night at a function after the conference.

Russell Stanley: Probably got seven different answers as to why.

Matthew Gordon: I got five different answers, which surprised me, in terms of how companies develop markets. They were talking specifically about Europe. Some of them think it’s going to be a breeze and some say it’s a little bit more complicated than that. But maybe some lessons to be learnt about what you did in Canada, and certainly what’s going on in the States. Each State has got the ability to make this work or not. And then on the Federal level, you’ve got ambiguity. So what’s been happening in the States?

Russell Stanley: The US is a fascinating market. Perhaps like a lot of Canadians, I spend more time looking at the US than I do at Canada. But it’s fascinating market.

Matthew Gordon: It’s a big market.

Russell Stanley: It’s a big market. As a Canadian, we just assume 10 to 1. Whatever an industry size is in Canada, just assume it’s 10 times bigger. In the US, you’re probably in the range. So, huge, huge market. But it is a collection of 50 different markets. Each State has its own way of dealing with it. Importantly, Cannabis is still illegal at the Federal level. Now, medical use in States where medical has been legalized, there is basically an Amendment to the Spending Bill in the US that has been passed a number of times since 2014.

Matthew Gordon: What is the spending bill?

Russell Stanley: Well, basically it the Federal Government’s own spending bill,. There’s been a rider attached to it that protects medical businesses from Federal enforcement. So medical has received this protection from the Department of Justice for several years now. And recently the House passed a version of that rider that extends that protection to Adult Use. So that would be a huge win if that makes it into the final version. But otherwise, it’s still Federally illegal. So roughly 33, 34, 35, depending on how you count them, States have legalized medical use in some way. Illinois earlier this week when Governor Pritzker signed off on the bill there. We now have 11 States that have legalized Adult Use as well. So roughly just over 100M Americans now live in the States that have legalized Adult Use at the State level, even though technically it’s still illegal at the Federal level. Now there’s there’s a couple of bills. Well, there’s several of note, but there’s two pieces of legislation that are making their way through the Federal government’s process that could legalize or at least provide some degree of safety for Cannabis at the Federal level. But until something is done, it’s not done.

Matthew Gordon: So people are looking at America as the next Canada.

Russell Stanley: We love hearing that by the way.

Matthew Gordon: x10 times, we are looking for ten times. But the reality is it’s taken a lot longer than people have hoped. So what’s happened? You’ve seen a lot of the US companies list on the TSX. But is that’s short-termism?

Russell Stanley: Well, they’ve listed on the Canadian Securities Exchange. So that’s something we should talk about as well.

Matthew Gordon: Let’s do it now.

Russell Stanley: Sure. So the TSX and the TSX-Venture, the Venture being the junior to the to the TSX. Those would be traditional homes for Canadian listed companies. The Canadian Securities Exchange was, until several years ago, virtually unheard of. It had been around for some time, but there really weren’t that many companies. And as an analyst, I had never written a report on a CSE listed company until about two years ago. So the Exchange has really made a name, because the TSX and the TSX-V, have… current policies say they won’t list a company that is violating US Federal law. So these US companies that came public, many of them last Fall, multi-billion dollar market caps, were effectively forced to list on an Exchange that nobody had heard of until the last couple of years. It’s been a fascinating story to watch because CSE is viewed as a very junior exchange. And like I said, I never would have pictured myself writing up companies that were listed there.

Matthew Gordon: But that strikes me as a walk around.

Russell Stanley: Of course.

Matthew Gordon: ‘We can’t do it here but the wording over here is slightly different.’ But the Canadian government have allowed this. They welcomed it. I think certainly Cannabis, in most Provinces, has been accepted for a long time, in terms of growing and use. But American companies have had to come up here because the US government has not made their mind up yet.

Russell Stanley: That’s right.

Matthew Gordon: There’s some indications.

Russell Stanley: There’s been progress. There’s been some wins recently. People will look back and say that was an important turning point when. For example, the House of Representatives, a little earlier this year passed a bill that would allow banks in the US to serve State legal Cannabis companies, without fear of penalty or prosecution. So that would be a huge step. And that one has what you might call ‘political legs’, because that will help take cash off the street. These companies are still largely cash run businesses. You are talking physically about bags of cash that get moved. People being paid in cash. Suppliers being paid in cash. And that’s just not safe. The legislation is called the Safe Banking Act. Its next stop is the Senate. It’s not a slam dunk to get through the US Senate because the Senate is still controlled by the Republican Party. But it does have a lot of support from both Democrats and Republicans in the Senate. So there’s optimism that this legislation could get passed in 2019. And that’s limited to banking, but it would be a huge step, and easily the most meaningful piece of legislation we would have seen relating to Cannabis at the Federal level.

Matthew Gordon: I’d love to get into that, but I got to keep bringing this back to points, which the investor folks watching this might like. A question for you is, you’ve got these American companies coming up onto the CSE. Are they going to stay there or are they going to move back?

Russell Stanley: They will list on a US exchange as soon as they can.

Matthew Gordon: Why?

Russell Stanley: Because they’ll have a broader and deeper investor audience. There are a lot of investors out there that won’t buy a CSE listed company. There are a lot of investors out there that even if they were TSX listed, they would pressure the company to list on either New York or Nasdaq. So they will want to do that to get a bigger listing. It’s their home market. And home field advantage is always something that people prefer to have. Which is understandable. But primarily it’s about a broader investor base, a deeper investor base. There’s still a lot of investors that haven’t touched Cannabis yet that run a considerable amount of money. And until and unless those companies are accepted on a US exchange, they may stay on the sidelines. This is about taking down your cost of capital. And that basically means trying to get your share price up. A good way to do that would be to get a US exchange listing. And we’ve certainly seen that the Canadian companies, which of course aren’t violating any Federal laws, are able to list. They’ve been able to get listings on New York or Nasdaq. They, on average, get a significantly higher valuation multiple than companies limited to the TSX or the Venture. So there is a very clear cost to capital win to getting a US listing. So we’d expect them to go as soon as they can.

Matthew Gordon: So people watching this should also be watching those companies to see when they move. Either get it now or wait till they move. Whatever you want to do. We’re not doing a deep dive on everything today. We want to do a broad sweep across the market today. Let’s get back to Distribution. One the four pillars. Distribution is an area rife with licensing and permitting issues…

Russell Stanley: And politics.

Matthew Gordon: …And politics. It’s a very interesting space. And it is where the timeline is unknown. Producing – I get. Timeline? Easy. Processing, kind of easy, expensive, but easy, in terms of understanding the timeline. But with this side of things. This is where it becomes difficult, not just for the States, but something we’re getting to in a minute, which is Europe. How do companies tippy-toe their way around licensing issues in the States, in terms of getting this through? What is the process that they follow?

Russell Stanley: Every State handles it differently. And when it comes to Distribution, the most interesting State is California, which as you can imagine, is…

Matthew Gordon: Reputationally, yes.

Russell Stanley: …reputationally the biggest Cannabis market in the galaxy, in the known universe perhaps. But interestingly, and this is where and why we’ve seen some transactions in the Distribution space. The regulations in California give the local Municipalities a lot of control over whether or not they even want to host Cannabis operations. And while California, to everyone outside of California, we would think that the State is universally supportive of Cannabis. In reality, the vast majority Municipalities don’t currently allow Cannabis companies to set up shop. So actual Distribution is no slam dunk. They have a separate license for Distribution in California because the market is so big and has an added layer of complexity, where there are some markets where you’re allowed in, some markets where you’re not. No other State has a separate license for Distribution at this point. And maybe that’ll come. But right now, California is the only one that has a separate license just to distribute Cannabis. And so we’ve seen a couple of the bigger multi-state operators announce plans to acquire companies, who are focused on Distribution in California. Because it is such a big market and such an important part of the value-chain or supply-chain that it’s worth focusing on. And a couple of companies have built some real scale around that. But it’s no easy feat to actually get your product onto shelves in California. As attractive and as big a market as it is. It’s a lot of work to get your product out of your lab and onto a shelf.

Matthew Gordon: So for me when I’m looking at this from the outside, what are the companies who are going to make it? The question I ask myself is, will regular wholesale distributors be able to take Cannabis on as a product, whether it be CBD or THC, and get it into the various markets? Could a regular wholesale distributor be that person? Or do you think there will be specialist Distribution companies set up because of the regulation component?

Russell Stanley: I think we’re going to see specialization continue. It’s important to know that because every State regulates Cannabis differently in the US and it’s Federally illegal. It’s also currently illegal to move product from one State to another. So every State is an island. Ordinarily outside of that, there would be sound business reasons for having something that was a bit more centralized. You’re not going to see that in Cannabis for quite some time. So right now, if you’re distributing Cannabis as a standalone business, you’re doing it in California. And unfortunately, you’re not allowed or not supposed to be moving product outside of California.

Matthew Gordon: That’s fascinating. It says to me that when each State gets to the point where it is legal on the Adult Use and on the medicinal side, there’s a roll up of these Distribution companies. There’s a lot of money to be made.

Russell Stanley: There will be.

Matthew Gordon: You’re telling me and I believed it before, that is the hardest piece of the jigsaw puzzle so far.

Russell Stanley: I think it is. Cresco Labs just announced plans to acquire a company called Origin House, which has a presence in or has penetration into 70% or 80% of the dispensaries in California. Curaleaf has announced plans to acquire a company called Select, which has similar Distribution strengths. So we’ve seen some of the larger multi-state operators, look at California and say, ‘we need to get big there. We need to do it the right way. So we need the linchpin’. The choke point is Distribution. And they’ve responded by announcing plans to acquire companies that have focused on that historically. So it’s a fascinating market. It’s obviously big. It’s a tough market to navigate. And these two acquisition targets have done a good job doing it so far.

Matthew Gordon: So let’s segue over to the European discussion. Again, we spoke some guys last night. Lots of opinions about how it’s going to work or not work. Some people are looking at the European Union as a similar setup to the United States. And I guess in many ways it is. You’ve got independent countries with their own rules, laws, regulations, etc., understanding and development stage in relation to Cannabis and Cannabis products, hemp included. A few people have told us it’s going to be relatively easy, you just apply for the licenses and we’re done.

Russell Stanley: (Laughs) Think you know what I think by my reaction.

Matthew Gordon: And you’ve got some other people having experienced what America’s going through, been through and continues to go through. It will take a bit longer to do that. But the general sense was, they may have disagreed on timing, but what they’re all agreed on is it’s happening.

Russell Stanley: Yes.

Matthew Gordon: People are trying to work out who the winners will be. So on the Distribution side, it’s even further back than the US operations in Europe. So what are your hopes for Europe? Where do you see it today? Where do you think it could go?

Russell Stanley: Yeah. And this is tough. I think when I get together with my peers, we ask is Europe where Canada was 2015, is it 2016, is a 2012? We don’t know. If I had to say where there’s a consensus, it’s kind of 2014, 2015. A number of the Canadian Producers see the opportunity in Europe. It’s obviously a much larger population base than in Canada.

Matthew Gordon: Ten times.

Russell Stanley: So a number of Canadian companies have made efforts to work their way into Europe. I think that the potential mistake or the risk that a number of them are going to bump into is the belief that it is a common market and that it’s simply a matter of establishing a beachhead in one country and then the whole market opens up for you. And I think what many of us suspected and certainly we concluded from our from our time here in Cannabis Europa is that’s not the case.

Matthew Gordon: You heard about Brexit?

Russell Stanley: Yeah. It’s a bit of a bit of…

Matthew Gordon: We weren’t sure if anyone had heard of that.

Russell Stanley: We’ve seen the headlines. So that’s a case in point. So it’s going to be a really complex market for companies to navigate. And a lot of Canadian LP’s have been chasing Germany, for example, and see that as the….

Matthew Gordon: But there’s a couple of Canadian companies in Germany, cannabis companies.

Russell Stanley: Primarily it’s Canadian companies that have made inroads. I think Aurora Cannabis is a standout there. Cronos as well. So there’ve been some Canadian companies that have made moves. A number of them have participated in the RFP process around around establishing cultivation in Germany. So it’s a huge market.

Matthew Gordon: What do you think of that? Do you think that first mover advantage will help them or do you think at some point, like other industries, people are going going to come and take them out, build their own system?

Russell Stanley: I think that Cannabis as a product is so politicized that there’s always going to be a degree or at least the excuse for nationalism. If you’re a company from any country other than the country you’re trying to target, you’re going to have to do it very carefully. That’s usually going to mean partnering with a local provider. And then you’ve got to get the right partner and the right economics. So I think Germany could be a huge market opportunity, but it’s got to be done carefully. I think that it’s an earlier stage market, for example, from a standpoint of what Cannabis can be prescribed for. Based on what I’m hearing, I think physicians are a little more cautious in prescribing Cannabis than perhaps they are in some other markets. So there’s a number of different factors at play. But from a corporate perspective, Canada’s is far more clear in how business is done in Cannabis. And in a lot of other markets that’s still evolving. So you probably need a local partner, even if it’s not forced by regulation, then you’re still going to need a local partner just for practical business purposes, because it’s a different market.

Matthew Gordon: You used the word, nationalism. Okay, nationalism is great. But then you break that down into conservative, liberal… which the Canadian market is perceived as being… We over here in the UK, we’re a bit more conservative. You’ve got a lot of countries across Europe in the same way. Waves of populism happening, nationalism, etc.. But fundamentally under that sits these kind of conservative views in a way that perhaps Canada and California are less so. So do you think those things are inhibitors too? Because that affects politics and politics is where the decisions get made.

Russell Stanley: I think so. So there’s a compound in Cannabis called CBD, for example, and we’ll use that as a good talking point here. CBD is a compound of Cannabis. The second most common one after THC. CBD does not…

Matthew Gordon: So explain those two things for everyone. THC. CBD.

Russell Stanley: THC is what gets you high, so to speak. That’s the psychoactive component. It is believed to have some medicinal properties, it doesn’t just get you high. But that is when people…when you commonly think of someone smoking Cannabis.

Matthew Gordon: Thats it, THC.

Russell Stanley: It’s THC.

Matthew Gordon: And that’s the thing people most people rail against. Because it’s a drug. It’s a gateway drug.

Russell Stanley: It’s viewed as a gateway drug. It’s an intoxicant. There are concerns. Most of the most of the concerns in Canada, in the US, around legalizating that, are around road safety.

Matthew Gordon: So we’re not saying necessarily that it is a gateway drug. It’s perceived as such.

Russell Stanley: It is perceived as such. And there’s the other compound is CBD, which has a number of potential medical applications. In fact, a drug was approved by the FDA last year that’s used for a couple of rare forms of pediatric epilepsy. That’s based on CBD. CBD doesn’t get you high. It’s non-psychoactive.

Matthew Gordon: It’s purely medicinal. I’ve used it for tennis elbow. It worked within a half an hour. It was amazing. We’ve seen videos of people with various ailments, made to feel a lot better than they were. It may control shaking or involuntary spasms…

Russell Stanley: It’s known for anti-inflammatory properties. So I think a lot of people are starting to learn about it. It’s come very trendy in certain parts of the US. We’ve seen a number of big box retailers start to embrace the product where they can. But it’s still very misunderstood. And to bring it back to your question around politics and around voters. There are a lot of people that still don’t know that CBD doesn’t get you high. So they see a CBD product on a shelf. Or someone offers them a CBD product to try and they think no thanks, I don’t want to get high.

Matthew Gordon: This is terrible but I saw a clip of a Sheriff in the United States.

Russell Stanley: Those are always great clips.

Matthew Gordon: Great clips… where he went and closed down 14 health stores because they were stocking CBD. Because he thought CBD was THC. He was a sheriff of the town, seemingly educated guy.

Russell Stanley: Local head of law enforcement.

Matthew Gordon: There you go. Confusing to them. Going to be confusing to people here who are not aware of this.

Russell Stanley: He’s front and center on the issue. So to anyone who’s one step removed from that. Yeah, it’s very easy to be misinformed.

Matthew Gordon: You’d think. Which comes on the fourth pillar. Which is the Selling side of things. So first thing that needs to happen is education.

Russell Stanley: Yes.

Matthew Gordon: Okay. So we are clearly saying there’s medicinal, where there is probably going to be a lot of wholesale selling going on. So that’s sales people getting in cars and talking to wholesalers of this product, either into doctors…

Russell Stanley: Right into doctor’s offices in some cases sure…

Matthew Gordon: Or WholeFood type establishments or health establishments, where they may be selling these types of products for people. And then there’s going to be direct a public, retail marketing. That education process. Someone got to pay for it. It’s going to take some time. Not going get it right immediately. Again, there is a time lag here. Any innovator who is trying to break into the market, it’s going to take time to do that. Someone’s going to pay for that.

Russell Stanley: Someone is going to pay for it. At first, it’s going to be early adopters who are willing to pay up for the product.  They’ll be effectively subsidizing that by paying up for the product. Sometimes because they like trying new products. Some sometimes, if you’re like one of my friends, you just want to tell people about the new product you’re trying. So some of that will be just economics playing out where the first people out of the gate who are buying the product are going to pay up for it because there won’t be that many providers of it. There won’t be that many suppliers. So they’ll be able to price it appropriately to try to recover some of that spend. So you’re right. I do think that’ll be a problem. And the other risk is that if you don’t make it easy for people to spend money on education, you’re probably going to make it easy for people to mis-educate. And that’s a tremendous risk. You’re no doubt going to have products that are making health claims that are either unsubstantiated or just plain nonsense. And that’s a risk in any health product or any product we’ve seen that’s purported to have health benefits. There’s going to be somebody out there spinning a web of of interesting tales like…

Matthew Gordon: Snake oil.

Russell Stanley: And what it can do for you. We do think these products have a lot of potential health benefits, but there is going to be some aggressive selling out there, some aggressive claims made. And regulators are going to play a huge role in terms of what they’ll allow. The risk from a commercial standpoint is that regulators are going to take a ‘start strict and then relax over time’ approach, which is what we’ve seen to some extent in Canada, where CBD products are effectively required to be packaged the same way THC products are. And what that means is that the public have to self educate, or otherwise the public doesn’t necessarily come to understand that they are very different compounds.

Matthew Gordon: You’ve got two tracks going on here. I can understand Recreational is going to be a marketing-fest. Millions and millions of dollars spent on packaging and creating brands and reaching… via online programs like the vape, Jules. They did a great job. To Millennials… in fact millennials, they’re getting old now…

Russell Stanley: They are.

Matthew Gordon: Millennials are getting old now.

Russell Stanley: We’re going to have to come up with a new name.

Matthew Gordon: We need a new name.. an audience who are sold to on Instagram, or social media generally. I can see where these innovative products will be able to do that. We’ve had loads of those types companies approach us. Companies, which have got amazing branding skills, but no business acumen whatsoever. They’re going to be billionaires (sigh).

Russell Stanley: So that never happens, correct?

Matthew Gordon: That’s just regular Retail, marketing, branding, selling. I get that. The bit that interests me, and it’s probably going to be a bigger market, is the medicinal use. So have the pharmaceutical companies worked out how they monetise this? The pharmaceutical companies spend a lot of time and money lobbying. Tens of millions of dollars in the US because they don’t want entrants coming in. Competition. Do you see some of these bigger cannabis companies being taken out? Or maybe they already have been, partially or entirely, by pharmaceutical companies looking to corner certain parts of the market.

Russell Stanley: We’ve seen a handful of what we’d call partnerships between between the major pharmaceutical companies and it’s really right now, it’s limited to Canada.

Matthew Gordon: They’ve got distribution. So that’s exciting.

Russell Stanley: They’ve got the product. To come back to your question around how Big Pharma is responding. So far they’ve been extraordinarily cautious. And to your point, they do spend, who knows how much money on lobbying. But a lot of that is spent defensively. They’re spending it trying to protect market share, or defend themselves in some other way, protect themselves from new entrants, defend their IP portfolio. It’s not necessarily spent on offense, which is going out and finding a new market opportunity. I wonder if culturally they haven’t seen or they aren’t as focused on the growth opportunity yet. It might require more product development that directly threatens their position. For example, pain medication. If we see more traction for Cannabis product as alternatives to opioids. If we see those products really start to take share away from traditional pain medication, then that’s when you might see big pharma start to become more involved in the Cannabis space. It unfortunately might come not as a proactive growth maneuver, but rather as a response to someone eating their lunch for them.

Matthew Gordon: You say that but, we’ve seen lots of instances where… let’s take insulin. It’s about a $1 bag here. In the States it’s over $350. It’s nuts. From something which was given away for free by the guy who invented it. If pharmaceutical companies do get involved, they make a lot of money on their orphan drugs. They have got some big brands which they’ve created and they charge a lot of money for as well, for relatively minor issues. Is there a danger that if pharmaceutical companies get involved, the pricing of Cannabis products or associated products, could get out of control?

Russell Stanley: There is risk there. And to bring back to one of your earlier questions around IP, the real risk would be if you can patent just about everything, and then Big Pharma gets involved then yes, that’s the scenario we could see. And when it comes to Cannabis it very difficult to patent a strain.

Matthew Gordon: It is possible though.

Russell Stanley: I think it is possible. There’ve been some isolated cases where some things have been done. There’s also been relatively little work done on IP in general, because until just recently there were limited options for actually enforcing your IP portfolio.

Matthew Gordon: But we have spoken to a company, well I won’t say where from, but a company which has got a strain which they have got the intellectual property for, is very fast growing, very high THC component to it. The ability extract high levels. And they have got a patent on it and they are restricting people on using it.

Russell Stanley: So there is a risk there. It’ll be interesting to see the way it plays out. I think it’s going to prove tougher to build IP around around it. One of the interesting points that came out of the luncheon that we just attended was the view that Big Pharma loves to deal in active pharmaceutical ingredients. They love a white powder that is one compound. And a lot of what people benefit from or feel when they consume Cannabis is the result of what you might call the ‘entourage effect’. Which means it’s not just one compound. It’s the 100 or so compounds and terpenes and other various constituents within Cannabis that are having an impact. So it’s a group effort. It’s a team effort, rather than just one compound doing the work. So from both an R&D product development standpoint, and from an IP, intellectual property standpoint. Those are two things that are very different beasts for traditional Big Pharma to get involved in. So it’ll take time for that type of scenario to evolve, if it ever did. So the risk is there. But I just don’t see it being imminent.

Matthew Gordon: We’re bit tight for time. You’ve got somewhere else to be in a second. But you have agreed to talk to us on a regular basis.

Russell Stanley: Yes. And I know you’re going to hold me to it.

Matthew Gordon: Oh I am Russ, I am. But if I could finish with one question. So if we agreed that there are four blocks. So you can be a Producer, Processor, Distributor or you can Sell Cannabis products, whether it be medicinal or Adult Use, any variant there of. Which space with you play in?

Russell Stanley: Well, that’s a that’s a great question and a very tough one to answer. I’m going to go with Producer for now.

Matthew Gordon: For now?

Russell Stanley: For now.

Matthew Gordon: But in five years?

Russell Stanley: In five years at that point. I think retail is going to be a real opportunity as well.

Matthew Gordon: Where do the margins sit? I mean, today…

Russell Stanley: Right now, if you’re making the product, that’s where margins are best. It would seem that gross margins… if you control your inputs or have low cost inputs, and you’re making a branded product out of that, you’re doing gross margins in some markets of +60%, +70% percent. It’s great business.

Matthew Gordon: Will that hold?

Russell Stanley: I think that it’ll hold for the winners of the branding war. If you can develop the Coca-Cola of Cannabis, whatever the product might be, whatever format it is. Then you’re going to be able to continue to produce some great margins. There will be some losers along the way, but that field is wide open. There isn’t a Coca-Cola of Cannabis yet. So that’s why I’d say that’s where I’d love to be fighting right now, because there isn’t an 800lbs gorilla in that area yet. And so it’s a relatively wide open field. Eventually, and maybe it’s not five years out, maybe it’s less than that. Maybe it’s three years out. You’re really going to want to be as close to the consumer as possible. And that’s where retail is going to be increasingly important.

Matthew Gordon: If I look at our retail experience, in terms of marketing, you’re going to have lots of people trying to just insert themselves into that food chain.

Russell Stanley: Absolutely.

Matthew Gordon: It will be interesting to see who the winners are there. Can there be a Coca Cola in this space? We shall see. Russ thanks for your time. Appreciate the insight. It’s a very good first introduction to Cannabis, certainly to the UK audience. And for those wider afield perhaps haven’t looked at Cannabis as an investment option.


Crux Investor and Beacon Securities are working together to provide you intelligent investor insight with which to make your Cannabis investment decisions.

Russell Stanley, MD of Beacon Securities, is the No.1 Cannabis Analyst in Canada.

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