As the companies come up to the starting gate for the great Canadian recreational cannabis sweepstakes we are seeing huge interest in the sector. The investment of 5 billion dollars in Canopy Growth by Constellation Beverages re-ignited the marijuana stock market in Canada. All of a sudden, Canada’s world-wide lead in the creation and financing of cannabis businesses looked to have an international scope.
There are over 60 cannabis companies being traded on Canadian stock exchanges and each one of them represents a different, and potentially profitable, approach to the marketplace. It is a question which Anthony Durkacz, a Director of FSD Pharma (C.HUGE) has spent a good deal of time thinking about.
“If you look at the US the price of greenhouse and outdoor grown marijuana in states where marijuana has been legalized it has been steadily dropping,” said Durkacz. “However, indoor, hydroponic cannabis has been able to much better hold its price.”
Good news for HUGE which owns outright an over 620,000 square foot, food grade, former Kraft Food plant in Colburg Ontario. “We have a seventy-acre site including forty acres of expansion land on the site with the potential to build on twenty acres,” said Durkacz. “We are on track to become the largest indoor hydroponic cannabis grower in Canada.”
The key thing about indoor, hydroponic, cannabis growing is that there is a lot more control over the final product. In the black and grey markets which have emerged in Canada over the last decade, it is universally acknowledged that the hydroponic product is simply better and more consistent than the greenhouse or outdoor product.
Of course, the problem with hydroponics is that the growing rooms cost more to build and to operate. If, as Durkacz predicts, the recreational market for greenhouse and outdoor pot follows the same trajectory as it has in the US where will that leave FSD Pharma?
“In the next couple of years,” said Durkacz, “The recreational market is going to be the low hanging fruit. The estimates I am seeing say the Canadian recreational market alone could be worth 7 billion dollars a year. We can’t turn away.”
However, HUGE sees a potentially larger and more lucrative opportunity in the medicinal market.
“Over 90% of Canadian doctors won’t prescribe cannabis-based medicines,” said Durkacz. “At the moment it is next to impossible to control dosage and it is also very difficult to precisely control which active cannabis compounds are in a particular medicine. How much CBD with THC are you getting exactly?”
“There are new technologies coming to market,” said Durkacz. “They will allow dosage to be controlled and the exact compounds to be specified. Which will go a long way to legitimize the medical side.”
For FSD Pharma the medical market is more interesting in the longer term than recreational pot. “The pharmaceutical market is much bigger than the recreational marijuana market. A single medicine can have a value over 7 billion dollars but there are many different medicines for many different health ailments so compared to the recreational market it is huge,” said Durkacz.
Here Durkacz is talking about medicines derived what is referred to as “flower” which is the top part of a marijuana plant. And he is talking about using the flower as a crushed powder rather than as an oil or a concentrate. As he points out, for drink purposes, oil and water don’t mix.
By aiming at the high quality, controlled dosage, pharma, market HUGE is positioning itself to add much more value to its product. “There are over 200 compounds in cannabis. Literally billions of possible combinations,” said Durkacz. “Creating entourage combinations is what creates medicine and we are at the forefront of that medicine research. Looking ahead we see the greenhouse, outdoor recreational market as a race to zero. Pharma is going to be bigger than recreational, a lot bigger.”
Recreational marijuana in the US has become, more or less, a commodity. Branding (which is largely prohibited in Canada) and the tremendous growth of the edibles market (which will not be legal in Canada for at least a year) has masked the fact that the wholesale price of outdoor and greenhouse marijuana has been in steep decline almost entirely because of oversupply of the product. FSD Pharma wants to avoid its products from falling into the commodity trap.
“You have to have very well controlled, high-grade cannabis for medical purposes,” said Durkacz. “Which means indoor hydroponic.”
With hydroponically grown, indoor, marijuana growing conditions, nutrients, light, seed stock and pest and fungus control are all carefully calibrated, known, quantities. Essentially, FSD Pharma will be producing pharmaceutical grade cannabis from the beginning. Which will mean it will command top dollar for its products but also, as the result of research agreements, the company will be accumulating intellectual property in the form of patents for particular medicines.
FSD Pharma has a number of other advantages. As Durkacz points out, its Cobourg, Ontario facility is an hour away from Toronto, Canada which reduces transportation costs and puts it closer to its customers and its workforce.
HUGE has also got the advantage that it has worked out an agreement with Auxly, a publicly traded marijuana streaming company, to build out the actual facility. “Auxly was founded by the people who founded the Canopy Growth Hersey plant indoor grow operation. “Right now they are at our site building. We already have a 25,000 square foot grow facility which HUGE owns outright and they are building an additional approx. 220,000 square feet,” said Durkacz. “Auxly is paying for the build. We will operate the facility. The way the deal works is that we recover all the costs of growing the crop plus a 10% “kiss” and then we split the actual crop 50.1% for FSD and 49.9% for Auxly. Frankly, Auxly knows a lot more about building this sort of facility than we do.”
HUGE has taken a bit of flack for the sheer size of its initial public offering: 1.3 billion shares. Why so many? “That many shares means we have a lot of shareholders and we trade a lot of shares. We broke a record of over a billion shares traded on consecutive days of trading on the Canadian Securities Exchange,” said Durkacz. “We go down less in bad markets and up more in good markets. Which is very good for the retail perception of the stock.”
The company has also been criticized for having an A share, B share structure where only the A shares have control. “Ultimately the A shares are controlled by three people, our President Thomas Faithful, our co-founding Executive Vice President, Zeeshan Saeed and myself. We also hold a lot of the B shares. Our interests are very much aligned with the B shareholders. With this sort of control, we can make decisions very quickly. We know that there is going to be a flurry of M&A activity in the industry. We want to be ready and we are.”
One of the great advantages of the focus on pharma strategy is that FSD Pharma will rapidly differentiate itself from the 60 something publicly listed, Canadian cannabis companies. Not only will it become the largest indoor hydroponic grower, big enough to supply any of the 38 other big alcohol companies looking to enter the market, but agile enough to supply recreational marijuana while building a research-based, pharmaceutical grade, medicine pipeline.
From the investors perspective, HUGE is very likely to have a steady stream of news as it researches medicine, creates joint ventures, supplies recreational marijuana and makes investments in early-stage cannabis companies. News means market attention and FSD Pharma has a solid story to tell.