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“TWO OR THREE MULTINATIONALS WILL DOMINATE THE MARKET”

Canadian company Hydropothecary is at the forefront of developing new products and the CEO sees a radiant future for the industry.

TECHNOLOGICAL ENTREPRENEUR

Until the summer of 2013, there was no reason for Sébastien St-Louis to take an interest in cannabis. The CEO of Hydropothecary, who has an MBA in finance, was running a real estate company at the time. Prior to that, he was CFO of an auto parts company after spending a few years working at a bank. St-Louis was only 17 when he founded his first start-up, a consulting firm specialising in 3D simulations, and 20 when he bought his first rental property. The turning point for this entrepreneur was when Canada legalised medicinal marijuana. Now aged 34, Sébastien St-Louis recalls his early days as a CEO: “I was too young at the time. To combat my lack of experience, the first thing I did when I started Hydropothecary was to build a very strong team. I surrounded myself with experts in marketing, law and finance. We even hired a former health minister.”

Vaporizers, dried flowers, cannabis powders and oils… Hydropothecary, based in Quebec, has become a market leader with its premium marijuana-based products. CEO Sébastien St-Louis, enthusiastically answered our questions.

Starting 1 July of this year, recreational cannabis will be legal in Canada. Do you think this will spread to the rest of the world?

The cannabis phenomenon is effectively just getting started. Canada paved the way, but we’ll soon see other countries like Denmark, Germany and Australia follow suit. I expect a timing similar to that seen in Canada, namely four or five years of medicinal legalisation before total legalisation. And I would say eight to 10 years before we’ll see legalisation at the federal level in the United States.

Are you worried that the United States might take a step backwards, with Washington imposing a strict marijuana ban at the state level?

No, I don’t think the current movement will be stopped. There could be up and down periods, similar to market fluctuations, but legalisation seems inevitable at this point. Canada will be a good example to consider, especially after increased revenue comes in from taxes.

Are Canadian companies at an advantage?

It’s really simple: even if there’s a legislative change in the United States in the next year, Canadian companies already have a decisive advantage. They have experience in the market and a bigger cashflow. Newcomers will find themselves in a start-up situation competing with established companies. The most promising future companies will probably be acquired by Canadian companies. My prediction is that two or three multinationals will ultimately dominate the cannabis market. And we intend to be one of them. Canopy Growth has a good chance of being the other.

But, excluding financial obstacles, what’s stopping a newcomer from copying the way you do things?

It all depends on the business you’re talking about. Obviously, growing cannabis isn’t that complicated. But our business model isn’t just for growing. We don’t just grow the plant; we transform it to be used in our various products. Today, we are without a doubt a technological manufacturing company. Innovation and R&D aren’t easy to implement in this industry, and neither is the approval and authorisation you need to put new products on the market.

Due to legislative restrictions, Hydropothecary currently specialises in medicinal products only. What will be the impact of recreational legalisation on your business and your commercial strategy?

All market studies have said that legalisation will have a huge impact on the industry. Sales of medicinal products will be replaced 90% by recreational products. Once this market is legalised, we can reach a larger customer base by adapting our product lines.

I can imagine that many industrial sectors will be impacted by legalisation...

That’s correct. We often talk about the tobacco, alcohol and pharma industries. In the purely recreational sector, the cannabis-infused beverage market will explode. One of the advantages of these drinks is that there are no hangovers the morning after... But other industries will also be affected, such as cosmetics and natural products, and on a larger scale, the food industry.

 

“The cannabis-infused beverage market will explode”

 

At Hydropothecary, we’re currently developing cannabis drinks with the intent of stimulating appetite (ed. note: using the CBD molecule found in cannabis) as well as ointments for sport-related use.

How do you develop new products?

We have a team of about 30 in-house engineers and chemists who focus partly on R&D. We also collaborate with external scientific consultants.

What will be the next big innovative products expected on the market?

One of the biggest technical challenges is to make THC water- soluble. Once that is solved, the door is wide open to a whole range of new products. The idea is to use the active molecules of THC but without the cannabis taste. One example is to create drinks with a low dose of THC that are subsequently less psychoactive.

Do you expect to sell your expertise to food and drink industry giants? In October, US company Constellation Brands, owner of Corona, took a 10% share in your competitor Canopy Growth...

These types of alliances are clearly likely to multiply. Big drink brands will not only become our clients, but also our partners.

Many investors believe that cannabis is still an uncertain market. What arguments would you give to reassure them?

In the short term, let’s say in the next 18 months, cashflow levels at the biggest companies are set to increase significantly, which is a guarantee of survival. Hydropothecary alone has already pre-sold 20,000 kilos of cannabis to the Quebec government, which is the largest order ever recorded. And that’s just the beginning in only one province… We’re expecting volume to increase substantially.

Enough to generate a large profit?

Yes. We can do a quick calculation: the vast majority of our products will be sold for around $7 per gram, we know there will be about a $1 tax. We also know that our government partners won’t take a margin of more than 50%. That ensures we make about $3 per gram. Since our current costs are less than $1 per gram, we make $2 as profit. A cautious investor could say that our long-term profits will be close to $1 per gram, but objectively the $2 range seems more realistic to me, especially when you take into account forthcoming economies of scale. Our goal is to produce 100 million grams per year. If we take a conservative average, that would mean $150 million in profits per year. If you look at it that way, Hydropothecary is still a bargain, with its capitalisation at $700 million.

However, black market actors will probably reduce their margins to try and compete by bringing prices down...

We are well aware that the black market will not vanish overnight. But we are optimistic: the officially supported rate of 7 dollars per gram is below the current black market price. This is a brand new industry, which implies that there are some unknowns. What is important is to remain adaptable.

Do you personally test Hydropothecary’s products?

Yes, I am a consumer. I have a medical prescription. On Friday nights, I would rather have a dose of our menthol Elixir spray than an alcoholic beverage.

What is your opinion of the CBD market in Switzerland?

It’s a very interesting type of legalisation. It’s a start. We could quite easily imagine working with existing Swiss SMEs in the future, knowing that they already have a distribution network once cannabis is legalised in Switzerland. We’ll have a complete portfolio of products to offer.

 
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