Real Money's Kevin Curran talked this week with CEO Bruce Linton of Canopy Growth Corp. (CGC) , one of the hot legal-cannabis stocks that are taking financial markets by storm. Click here to read Part I of our interview, or check out Part II below, where Linton talks about why beer giant Constellation Brands (STZ) recently agreed to invest $4 billion in his company:
Kevin Curran: Something I wanted to touch on with you as well, because obviously you garnered a lot of attention with Constellation Brands investing a couple billion in Canopy --
Bruce Linton: More than a couple billion! (laughs)
KC: Of course, of course, didn't mean to understate that! But I was curious about that because this week Coca-Cola (KO) was rumored to be interested in Aurora Cannabis (ACBFF) , which speaks to the consolidation that you've talked about. Do you see [cannabis] companies growing independently from here, or do you see the consolidation moving towards these larger companies moving in from other spaces?
BL: I think the larger companies from other spaces are either going to have to joint venture or acquire, because the final option is to fearfully wait. I don't think that there's any material alcohol-producing company or sports-drink company or pharma company that isn't either in country or in committee looking at how to [get into cannabis]. Cannabis right now is moving way faster than [beverage companies] ever wanted or expected, becoming a real option -- and that, through a combination of forces, can become unbelievably disruptive to some of their underlying businesses.
So, intellectual-property moats will be built by companies like Canopy, because we actually have the capacity and consider the future a little bit to say 'these are all indications we're going to go against, and all the ways we're going to create party beverages and other things.' And we can actually file all kinds of process and outcome patents.
For the science, many will say there hasn't been clinical work [on cannabis]. But principally, this has been a criminal business. Do you think criminals are going to do clinical trials? No! So, those will be the things that cause the next wave of 'Holy crap! How do we deal with that?'
KC: OK great, and on criminality and regulation, what's your feeling on [potential U.S. federal marijuana legalization]? That seems to be the big honeypot that a lot of investors are waiting for when they're valuing a lot of these companies.
BL: Well I think it is a big additional market. All of Europe is trying to regulate [cannabis], and that is about the same number of people [as in America]. But the United States is the golden crown.
I think it's going to be very complicated, because if you ask and look around, all the jurisdictions that have enabled production -- whether for medical or medical and recreational [use] -- they quite like the jobs and the economic outcome. And I'm not sure they're actually at all interested in having a national program [of legal U.S. cannabis]. I bet you would find there wouldn't be much production where they currently produce it.
If you and I were to go grow cannabis, I don't think we'd necessarily take California real estate prices or Nevada water circumstances or Colorado [three states that have legalized cannabis at the state level]. We'd probably pick up and set it down in the Midwest. So I think it's kind of complicated, because everybody wants to win and nobody wants to give up anything.
KC: Do you see a move for companies like Canopy supplying, hypothetically, marijuana to the United States from Canada?
BL: No. It will have to be domiciled in every state and every country, because part of the solution is creating localized employment and using intellectual property across the global platform, because the whole point of IP is to do the research, protect it and use it globally.
So, we would drop down all of the expertise we have from our scale. Our platform for production is approved or almost approved for 6 million square feet just in Canada. Each time you add a zero to the scale, things change. What you did at 100,000 square feet, everything changes at 1 million. As we approach 10 million, everything changes again. And so, what you learn are those lessons and you apply those intellectual-property outcomes to new markets. You're not exporting products so much as you're exporting expertise.
KC: Fantastic, well explained. So the last thing I wanted to ask about was how you're preparing for full legalization in Canada just next month?
BL: So, the provinces have all chosen one supplier. They didn't have to choose us, but they all chose us. We have a 36% market share of what's going to be in the warehouses to get sold in the stores.
Across the country, it will be handled differently for retail. One of the provinces, Ontario, the province was going to run a handful of stores -- 35, compared to the liquor outlets they run, which is more than 800. That was not going to work very well.
A new government came in and said: 'We're going to [just] do the warehousing. ... We'll buy it from Canopy, put in our warehouse and we have the private sector try to build about 250 retail stores over the next nine months.' ... So, that will go from an OK plan before [to] a really good one, and it will happen when those stores open up. We have new products to introduce like vapes and beverage and things like that.
In other provinces, particularly the East, they all have stores. Some of them are owned by us in Newfoundland and some of them are public sector. As you go to the West, we have stores approved in three of four Western provinces. And so we have quite a lot of retail footprint, which is really a bit about margin and a lot about onboarding. So, it really should be a loyal and good client experience. That looks like it should be a go for almost all of the provinces on [Oct. 17, when Canada legalizes recreational pot]. And ... Ontario, which isn't going to have [Canopy] stores, is going to have an online store. So, basically you can use the government courier to deliver cannabis to your house. And we do the same thing here with alcohol. So long as you're home, you have your I.D. and you're not impaired, here is your cannabis.
KC: We've touched on beverages a couple of times, and that's obviously been a point of focus for a lot of the industry lately. Is that what you see specifically as the next step, or is it cannabidiol [or 'CBD,' marijuana component some claim has medicinal properties]? I'm just curious on what your what your outlook is on specific segments.
BL: I think there will be a mix on a bunch of different things. Beverages, it's just what's socially normal and what people are comfortable with and how the technology catches up with the 'new normal.' I think we're in good shape on that.
I think for things like CBD, we are going to need a lot of science. There's no obligation that these things stay isolated from all of their current medical ingredients. So what else could be prepared with be more effective? What dosage? What duration? What scenario?
So there's quite a lot I would suggest. It needs to run as a race for science before we can actually make claims. But it's interesting because there really aren't current and great competitors out there. Everybody has to run the race, and the question is: 'Can we now, with the support of Constellation, run faster than everybody else?' We feel pretty good about that.
KC: Alright, fantastic. I know Jim Cramer has felt pretty good about Canopy since the Constellation deal, as I'm sure you're aware.
BL: You know, I just agreed to do [TheStreet's Oct. 13 Boot Camp for Investors]. The more I think about it, I must be the stupidest guy on the planet! I had two good interviews with him, I should have said 'no'! What am I going to do? Keep going until I have a bad one? But I'm dumb, so I said 'yes.'
BL: I know, I know. I saw it [Wednesday morning with Tilray's rise]. I thought it was a technical glitch!
KC: No, well Tilray did fluctuate from 8% to near 100% on the day and was halted five times. It wasn't a stock that you could walk away from.
BL: Yeah, you're not going to buy and put in the bank and see how it's going on five years.
Read Part I of our interview with Bruce Linton here.