No one can fault Canopy Growth’s (TSX:WEED, NYSE:CGC) Bruce Linton for not dreaming big.
Even with Canada’s recreational cannabis market about to open in a few short months, the CEO of the world’s largest marijuana company is already thinking beyond dried bud to pharmaceutical patents and grabbing a slice of the market share in the yet-to-launch cannabis beverage industry. In fact, Linton predicts that even if the price of pot drops to practically zero, Canopy will still be making money.
The first half of July has been a busy one for Smiths Falls, Ontario’s Canopy Growth, which has launched a Latin American subsidiary, acquired a Colombian medical pot company and announced a deal to purchase retail cannabis chain Hiku Brands over the past two weeks. Canopy’s share price has climbed back to the highs hit in early January, something that the other big licensed producers like Aurora Cannabis and Aphria aren’t yet even close to accomplishing.
But while much of the current talk within the sector is about shoring up supply agreements with the various Canadian provinces — and Canopy is no slouch there, with interests in every region from coast to coast — concerns are now being raised that licensed producers will have a hard time generating those hundreds of millions in projected earnings, simply because the profit margins for pot, like other cash crops before it, will soon become razor thin.
No problem, says Linton, who spoke to CNBC’s Jim Cramer last week about his company’s research division and its upcoming clinical trial.
“It’s a real clinical trial, where we’re running [cannabis] against the first indication which is primary insomnia,” says Linton. “But it leads to a whole bunch of other platform stuff which can turn into intellectual property, which, if the price of cannabis drops —if it became almost free— I don’t really mind because what it is is an ingredient. And if I put that ingredient into a formulation and that formulation causes you to sleep better and I can take that to the 29 countries that are running [medical marijuana] as a legal thing, that’s big, big stuff.”
Linton says he’s also focused on the cannabis beverage market, which in Canada likely won’t arrive until a year after the October 17 rec legalization date. The key, Linton says, will be in making effective use of Canopy’s partnership with wine and beer giant Constellation Brands, who acquired a 9.9 per cent stake in Canopy Growth last fall.
“What we really want to do is that when we exit prohibition, it’s elegant. We have about nine months of simple products and then in the second half of 2019, when we start putting beverages on the shelves with Constellation, then it just grabs market share,” he says. “Constellation doesn’t have exposure in Canada much because they don’t have brands up there, they don’t have products. So, we’re going all in to take as much market share as we can.”
“We’re talking about going into a bar and having a ‘Tweed and tonic,’ and it’s something like a category creator just like, what’s a Red Bull? A Red Bull is a Red Bull. What’s a Tweed and tonic? It’s its own standalone,” Linton says. “At the end of the day, if you think about the active ingredients available in creating a single beverage, it’s not a lot of cannabis, which means, if the price of cannabis actually falls, my margin increases.”