While Canopy Growth Corp. (CGC) listed on New York Stock Exchange this week, CEO Bruce Linton's focus is very much on the company's home market of Canada.
Ontario-based Canopy is a producer and seller of primarily medical marijuana in Canada, with subsidiaries and operations spread around eight countries. With Canada's government poised to legalize recreational marijuana use this ummer, Canopy is getting ready for the busiest year in its six-year history.
"I'm going to have a potentially 12-15 times increase in my market size in a period of 14 months," Linton said in interview with Real Money, speaking from Montreal. "For the first few years of operation, it was purely medical -- that was the only market."
The company's revenues currently derive primarily from direct-to-patient sales. Over the next two years, Linton expects Canada's recreational market to drive his company's growth.
Canopy is hoping to seize this opportunity to boost its market share by 10%, according to Linton's estimates. "I think we can be better than 30% market share on recreational, because we're going to have the product and we'll be able to sustain the demand over the next 12-14 months," he said.
With legal provisions expected to be cleared in July, the cannabis producer's biggest headache will apparently be execution. But Canopy has been preparing for this moment for years: building up sales, marketing, regional logistics and scaling up its technology.
The company launched in 2012 and was publicly listed in Canada in 2014, becoming the first cannabis company to become publicly traded in North America. In the last few years, it has expanded its list of international investors and high-profile partnerships to range from hip-hop artist Snoop Dog to New York-based alcoholic-beverages conglomerate Constellation Brands Inc. (STZ) . Constellation bought a 9.9% stake in Canopy in October. It will also have an opportunity to buy another 9.9%, partially in August and partially in 2019.
Bigger than Beer?
Canopy has licensed or is finalizing licenses for about 6 million square feet of marijuana-growing land, which the company estimates can produce enough cannabis to supply 40% of total Canadian demand. Once legalized, the country's cannabis market could rival the alcoholic beverages market in size. Canada's current illicit cannabis market is worth between $7 billion to $10 billion, according to CIBC World Markets estimate. By contrast, the country's alcohol industry, including beer and wine, only ranges from $5 billion to $9 billion.
"If we have the right products and the right legal tools, [and the people] who are buying illegally shift to this, it's already bigger -- and that doesn't include people trying products because it's no longer illegal, which is a significant segment of the market," Linton said. "Canadians can be dull and boring, but it's really because we delight in following rules. When things are federally legal in Canada, it's a different cultural confirmation."
Not Coming to America
However, Thursday's premiere on the New York Stock Exchange doesn't mean Canopy's cannabis is coming to the United States any time soon.
"I find that U.S. exchanges are more regulated than the Canadian ones, and I'm trying to show that we're following every state and federal law," Linton said. "There is a lot of different directions, so I don't know if and when it will change. We'll be ready when it does."
Other countries where Canopy has operations or partnerships are Germany, Czech Republic, Denmark, Spain, Jamaica, Brazil and Colombia.
Tim Ramey, a Pivotal Research Group analyst who follows Constellation Brands, said Canopy has already been a good investment for STZ. Canopy is "appropriately cautious in that they are not doing anything in the United States until cannabis is fully legal at the federal level. It's a super-bad idea for anyone in the wine or spirits business to do anything in the United States with cannabis until it's fully legal."
In the meantime, market watcher Alan Brochstein, a partner at New Cannabis Ventures, said listing on the NYSE will help Canopy with marketing, public relations, fund-raising and accessing a broader pool of capital.
The Red Bull of Cannabis
Canopy plans to launch a cannabis-derived drink it has been working on for the last three years in the second half of 2019, when it becomes legally permissible in Canada.
The drink will have psychoactive properties, but won't taste like cannabis. Instead, the CEO cited Red Bull as an example.
"It's an entirely new category of beverage that's driven by cannabinoids [marijuana's active ingredient]," Linton said. "It's going to be similar to sipping a glass of wine for the effect, and it's more similar to giddiness, euphoria, a positive feeling, whereas alcohol is a depressant."
Ramey, the Pivotal Research Group analyst, thinks the cannabis beverage market could be quite promising in Canada and elsewhere, allowing Constellation and Canopy to secure an early mover advantage in that product category.
"Even without [a beverage product], it's been an excellent portfolio investment that has increased in value several hundred million dollars," for Constellation, he said. "But it is even more logical that they would be in the product development business."
But launching a new product category isn't going to happen overnight.
"The idea of a cannabis beverage is one that will take time to play out," said Brochstein, the New Cannabis Ventures partner. "Canada will lead the way, but it will require substantial product innovation, and this is where Constellation Brands comes in. The beverages must taste good, have rapid onset and limited [cannabinoid] content."
