By Matt Lamers
Canadian marijuana producers confront major changes that promise to reshape the nation’s MJ industry, ranging from the planned rollout of recreational cannabis next summer to a potential deluge of new growers entering the market.
Among the companies navigating that shifting landscape is Markham, Ontario-based MedReleaf, one of Canada’s most profitable cannabis producers.
The company, which trades as LEAF on the TSX Exchange, recently raised 100 million Canadian dollars ($79.5 million) through an initial public offering and a secondary offering of its shares.
MedReleaf plans to use the funding to expand internationally and boost its production capacity more than fivefold to meet demand for the medical and adult-use markets.
Do you see the potential for a supply shortfall in the recreational market next summer?
Yes, we’re all reading the same studies and surveys that seem to indicate there’s going to be a problem. It will come down to how the government deals with taxation, retail and availability, and product assortment. All will be drivers for how quickly the adult-use market will develop and grow.
Do you think the legalization of adult use might take a bite out of the impressive growth we’ve seen in the MMJ sector?
There is likely going to be some cannibalization, or some slowdown in growth in medical. At the same time, though, we do view them as being two very distinctly different markets.
How do you balance the opportunity between medical and rec from a business standpoint?
The question really is about how we balance inventory and product availability. That’s the question all producers are going to have to wrestle with to one degree or another.
We recently went public and raised CA$100 million. Those dollars are now being allocated to build out capacity.
We’re hoping to have substantially more capacity coming a year from now. We’re hoping that will enable us to serve both markets. It will all depend on how quickly the adult-use market ramps up in terms of our ability, as well as our industry overall, to satisfy that demand.
Right now we are very committed to the medical market. Any excess capacity we do have, as long as it doesn’t come at the expense of serving our medical patients, we’ll find a way to allocate to the adult-use market.
The federal government is sifting through roughly 300 applications for new licensed producers. As those are processed and new companies come online, how will they affect the market?
Most new applicants, when they receive a license, typically create a very limited footprint. The capacity they’re able to put out is usually quite small.
Then it takes them time once they receive all of their required licenses — it’s a graduated licensing process. They’ll receive permission to grow but not to sell. And only once they get a license to sell can they start generating revenue. And then they can start building out additional capacity.
So there’s quite a lag in terms of how the new licensees will be able to supply at scale. From a competitive standpoint, there’s a benefit to being a first mover in the market.
Do you foresee industry consolidation, with smaller growers getting purchased by more established companies?
If they struggle then there will be an opportunity for consolidation and for assets that will be on the market. This is not an easy industry. It’s not easy to service patients, to grow high-quality product. It’s a difficult business.
But there’s no doubt that some of them will figure this out. Some of them will be formidable competitors. Given that there’s likely going to be dozens if not hundreds of new license holders, there’s no doubt that some will stumble.
How do you weigh licensing and partnering opportunities?
You need to be judicious in how you pick and choose. You want to align yourself with a company you think will be sustainable and will have products that make sense to align with your own. There’s no doubt there’s lots of opportunity and you’ll see a lot of deal making going on.
Capital raises in Canada rose about 1,700% in the first half of 2017. Is that sustainable?
The quantum is not necessarily the concern. As the business evolves and grows and as certain companies emerge as leaders, they might need to raise hundreds of millions of dollars to continue to grow – whether that’s here in Canada or even internationally.
I think the concern and the question is the number of companies that have been able to raise substantial dollars, meaning CA$10 million, CA$20 million, CA$30 million.
Is that sustainable? I think that’s the big question. My personal opinion is that’s not sustainable.
What will that mean for the upstarts?
A lot of the upstart companies will find that this business is not easy and they will struggle.
Once a few of them raise the money and they’re not able to execute, I think that will give investors some pause and reconsider whether all companies should be investable just because they have the word “cannabis” in their company profile.
That’s where you’ll start to see investors being more selective and more judicious when they decide where their capital should go.
This interview has been edited for length and clarity.
Matt Lamers can be reached at firstname.lastname@example.org