Bruce Linton, founder and ex-CEO & Chairman of Canopy Growth Corporation
Geordie Hadden-Paton
Today I'm joined by Bruce Linton, founder and ex-chairman & CEO of Canopy Growth Corporation and member of the Verdite Advisory Board. He's here today to answer a few questions on the current state of the cannabis sector and where opportunities exist for investors. Bruce, thank you for coming and looking forward to hearing your answers.
First up, do you think we are experiencing the end of cannabis 1.0?
Bruce Linton
Cannabis 1.0 is legal production of the plant and that isn't over, because there are a whole bunch of places where it's not yet in production, or on sale, so there's still room for that to develop, but its diminishing.
2.0 is when you turn the product into formats that are enjoyable, interesting and reliable, but not scientifically validated. So a 5mg dose, is always a 5mg dose and a 2.5mg beverage, is always a 2.5mg beverage at tasting.
The third phase is when you actually use science and process to validate benefits. For instance, if you take this capsule or this input, you will get seven to eight hours of uninterrupted non-disruptive REM sleep. The product has gone through a validation process so that you know that you're actually getting a wellness product that could, overtime, become an insurance covered product. Phase three is where you can actually define an outcome.
I would say each of the phases needs more development, and each is a function of both progression of regulatory permissions and competent execution.
GHP: Given your experience and longevity in the industry, what lessons have been learned and how can they be applied to the next phase of growth?
BL: What we've learned in the last few years, is that cannabis has a lot in common with porridge, it can be too hot, too cold and just right. In that when the price per gram of cannabis was extraordinarily high everybody wanted to get into the business. Then when the price per gram fell through the floor and many participants failed as a result. Only the well-managed, balance sheet capable entities were able to sell at a value based price that made sense. So we have already seen several markets going through these phases. One too hot, one too cold, and one just right.
GHP: So what do you expect from this new phase we are now entering?
BL: I think there will be a bit of consolidation for competency and there will be a bit of disintegration for those that just showed up thinking it would be easy. The ones that disintegrate are not going to get bought up because they didn't allocate their capital towards creating valuable enterprises. And that’s the reason an investor needs an experienced team like Chrystal representing their capital. You need sector expertise to know whether or not a company is going to consolidate, be consolidated or disintegrate and those are very different rates of return.
GHP: Thanks. What do you think about the significance of cannabis being designated an essential product during this pandemic?
BL: I think it's remarkable because most those states that declared cannabis to be essential, a year, two, or five earlier marginally passed cannabis as a ballot initiative. To go from a legal ballot, to a pandemic making it essential, there is nothing else in American society which has had such a dramatic change of position and progression, over that period of time.
GHP: Looking at the market now, what excites you and in particular which subsectors do you think investors should be paying attention to?
BL: I think that states that have financial problems are going to seek a solution and some of the solutions will include cannabis. When I say states, I don't mean just US states, I mean globally. Federal and or lower level officials will say “we need income and this is an untapped source”. I think this is an important thing to look for.
Currently, most of the discussion and debate has been about two ingredients that come from a plant with over 100 ingredients, CBD and THC. There will be successful scientific endeavours to determine what the other ingredients are in terms of isolation, activation inside of your body and what benefits they have. And the outcome could be massively disruptive, like treating obesity, dealing with Glaucoma, managing chronic pain to a threshold before treatment goes to opioids and veterinarian care. The science of ingredients is going to be critical.
GHP: What are the key catalysts that will drive the industry forward. You already mentioned science, are there others?
BL: People want to operate in a legal framework and they want to be allowed to choose things as adults that are legal and credibly permissible and they want to buy outcomes not ingredients. So you don't want to hear about milligrams of an ingredient, they want to hear “I will sleep better, that it will be affecting on my REM and my deep sleep pattern”. And so the transition of the discussion is going to go from ingredients which are THC and CBD, to outcomes, with sleep as an example.
GHP: In terms of geographic development, what regions do you expect to see the most growth in the next five years?
BL: The US is the kick-off, we're facing whether or not the Democrats have done enough and if at least one of the Houses shifts, you're going to see cannabis in the US become a really big deal. Europe is close, because you're starting to see really advanced regulation in places like Germany, Denmark and the Czech Republic and so that means that countries like France, the UK and others are going to start having increased pressure to continue moving at a good pace. The wild card for production is South America, but really I would say currently we have less than 10% of global population with rational governance of cannabis.
GHP: In terms of where we are at in the development of the sector, why is now an exciting time to get involved?
BL: Seven years ago would have been more exciting, but also more dangerous. There is a continuum of opportunity where I would say many of the lessons have been learned in small geographies of population like Canada, and now they can be globally applied, as the remaining 90% of the world evolves. So while you may have missed the first mega wave, there are many subsequent waves coming and the comprehensive knowledge of how to harness those waves exists but hasn't yet been fully exploited.
GHP: Do you think there's a preference between public or private investing at this stage in the cycle?
BL: I would have a preference to a bit of a mix. Private has typically more upside as long as founders and entrepreneurs are rational. Investing in private companies you have to be more inquisitive, but I like a majority private as long as you have insightful people doing the investing. But there is still quite a lot of difference in terms of valuation of public companies between the really big and the less big, in terms of multiple of revenue and the valuation of the enterprise. I think there are some serious arbitrage opportunities where some medium sized companies that we've seen will have big gains, but I don't know that I want to buy into any of those really large public companies.
GHP: What are the benefits of a fund approach in the cannabis market and how difficult do you think it is as a private investor to invest?
BL: You can either go to your barber, or your baker, or your friend in the pub for a good investment idea and that sometimes works. Or you can allow people who've been involved in the sector for a significant time and have a combined 40 or 50 years of relevant regulated experience. Absolute capacity to identify, select, and avoid the pitfalls will enhance multiples and returns. Do I want to participate with experts in a field that has few, or do I want to listen to my barber?
GHP: In what ways can investors add additional value to the companies that they put capital to work in?
BL: If it’s a fund and you invest, then you need to look at the rest of the ecosystem and maybe at an acquisition or acquirer that comes around. There may be a licensing opportunity for someone operating in state A, that could use in the state B. You can use the combined entities to offset the total cost of science and have a common license pool of IP, investors can bring key personnel.
I would say that the sector is still young enough that companies don't necessarily openly share and collaborate, but the investors, by cross investing and seeing the bigger picture, can actually do that to their portfolio.
GHP: And finally, what do you think triggers greater institutional and blue chip involvement in the sector?
BL: Well, let's break it down.
There is not a consumer packaged goods company on the planet that doesn't have an internal group contemplating “What can we do with cannabinoids?”. There's no alcohol company that does not have a team looking at cannabinoids. There's no tobacco company that does not have a team that looks at cannabinoids.
I guarantee you, all the pharmaceutical companies are looking at cannabinoids to some degree, but they are currently reluctant to execute based on the existing regulatory landscape.
As soon as the US federal policy shifts, the dominoes will start to fall and all these companies sitting on the sidelines will enter the market, and it will be a terrific boost for existing shareholders. These new entrants are not going to go and start growing their own product, they're going to buy up existing product and businesses that give them an accelerated point of entry. And so they all have a plan and the plan depends principally on things like federal regulation in the US and new markets opening across Europe and globally.
GHP: Thank you Bruce, it has been a pleasure speaking with you today.
