2018 will be a transformational year for the Canadian cannabis business. Many companies expect to rake in excess capitallocally as legalization for the recreational industry sets in, but what about a bigger picture beyond our borders? Competition is getting stiffer and everyone must work that much harder to distinguish themselves.
As European countries liberalize their marijuana laws, Canadian companies are taking first-mover advantage, inking deals and exporting their products. Germany is one of the largest markets, with estimates that it could be worth up to 10.2 billion euros annually in a few year’s time. A similar figure in Canadian dollars is also projected for our market in the coming years.
The latest Canadian company to tap that market is Delta 9 Cannabis Inc. (TSX: V.NINE, OTCQB: VRNDF, Forum), a Manitoba-based Licensed Producer operating in the biotechnology and medical research spaces. NINE is a licensed producer of medical marijuana and operates a production facility in Winnipeg. Currently producing around 2,000 kilos annually and planning to ramp-up production to roll-out 17,500 kilos by the end of 2019, looking to multiply 10-fold over the next two years. Delta 9 also has an innovative strategy to retrofit shipping containers to better harness control over cultivation and produce more cannabis in a smaller space. On the retail side, the Company is working to expand its existing storefront clinic in Winnipeg into a chain branching out across Manitoba, Saskatchewan and Alberta.
How will the Company accomplish this growth at home and across the pond? Much of this is thanks to its partnership with industry behemoth Canopy Growth Corp. (TSX: WEED, OTCQB: TWMJF, Forum).
In conjunction with the Company’s retail and production expansion, it will also expand its brand. Delta 9 doesn’t plan to blur the lines between its medical and recreational products once the market is legalized in Canada this summer but create two distinct lines for consumers.
Growing Awareness
Delta 9 was founded in 2012 by CEO John Arbuthnot and his father Bill, now the Company’s President. The two had been looking for ways to enter the cannabis space for several years prior, to help patients register with Health Canada’s medical marijuana program. In the early days of Delta 9, the Company worked with Health Canada to commercialize its program and this relationship helped put the company in a solid position to become an early licensee of its Marijuana for Medical Purposes Regulations (MMPR) Program in 2013.
A year later, Delta 9 was licensed to sell. In 2017, NINE took a “bigger picture” approach. The Company raised roughly $35 million, took the steps toward an RTO and was listed on the TSX Venture by November.
Stacking the Deck
An innovative element to the Company’s operation is its grow pods; essentially shipping containers retrofitted into state-of-the-art growing facilities. These pods expand the facility without taking up a lot of space, simply by stacking one on top of the other. NINE can capitalize on a high level of control over the grow area versus its big greenhouse competitors. This includes everything from light intensity, temperature, humidity, air flow, and anything that affects product quality. It is much easier to control a smaller environment than a larger one.
The Company is also able to compartmentalize its uncertainty where a greenhouse could open itself up to a series of serious risks. Anything from contamination, plant disease, infestation, mites or predators can affect product quality and output, costing a major operation upwards of tens of millions of dollars. However, Delta 9 could sustain such problems by containing, destroying, and sterilizing a compromised pod and then start over. That loss would be closer to between $5,000 to $10,000.
Each pod also comes with a reasonable price tag. As CEO Arbuthnot explains, the full cost of deploying a pod is $28,000, including a full retrofit. Plug it in, turn it on and each one of those units will produce 32 kilos of product, worth roughly $320,000 a year.
Expanding the Home Base
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Delta 9 operates out of an 80,000 square foot production facility in Winnipeg, up from a small 10,000 square foot space in its early days and now has the option to purchase that facility, as well as a 65-acre parcel of land across the street.
The Company has begun the process of executing its option to buy the buildings pictured above, as well as 65 acres of land for future expansion. It plans to expand beyond these buildings over the next five to 10 years.
While NINE is well positioned to expand its production facility, it is continuing to focus on retail across the prairies, exploring its options in Manitoba, Saskatchewan, and Alberta. In addition to being Manitoba’s only licensed producer to sell cannabis, Delta 9 operates under Health Canada’s Access to Cannabis for Medical Purposes Regulations (ACMPR) program. Everything the Company sells is by mail-order, but it also operates a brick-and-mortar storefront in Winnipeg where doctors sign for patients and refer them to the ACMPR program. Retail bids are already underway to expand its business to Saskatchewan and Alberta for more stores, which is a major part of its business strategy: Integration into retail, ultimately capturing the retail margin, having more control over the marketing and branding element of the product.
When industry giant Canopy Growth took notice of Delta 9 the two joined together to distribute cannabis products to retail stores throughout Manitoba through their Craft Grow program in November 2017. This partnership has a lot to offer both companies. For Delta 9, it means joining Canopy’s nationwide distribution network, while Canopy Growth benefits from Delta 9’s established access to the Manitoba market.
Keeping an Eye on the European Market
Germany established its widespread marijuana access program in 2017 but the one thing the country lacks is its own industry, so for now it imports from Canada.
To compare the two nations, John Arbuthnot sees the German market as where Canada was at around the end of 2014, at least from a medical perspective, just getting into the regulation and distribution of the product. He’s watched the country grow its program from a dozen or so patients to thousands and sees a clear opportunity to expand into the EU from here. In March 2018; Delta 9 signed a letter of intent to export a minimum of 40 kilograms of cannabis a month (480 kilos per year) and an additional amount of cannabis extracts to CanPharma GMBH and global group Kalapa S.L. for sale to medical cannabis patients in Germany. For Delta 9, this is considered a first step into the global market.
Making Medical Cannabis More Medical
As Canadian producers anticipate a drastic change in business once cannabis is planned to become legal by July 2018, Delta 9 won’t blur the lines between its medical and recreational business. John Arbuthnot explains how the Company will divide its business.
“This will be born out of things like packaging, labelling and branding strategy to how we’re distributing the product. On the medical side, you’ll see a lean toward more medical-sounding product names, toward more of the extracts and ingestible type products, non-smokable products. I think ultimately, we’ll see distribution arrangements through brick and mortar pharmacies. For lack of a better word, I think over the next five years, you’ll see medical cannabis become more medical. On the recreational side, that’s where we not only produce these products, come up with the smokable cannabis flower products, but the extracts, the derivatives on those drug delivery formats in extracts, we also vertically integrate them into retail, giving ourselves more control over the branding and distribution elements.”
Changing Landscape
The last six years have been incredibly transformative for the marijuana industry in Canada and in-turn for Delta 9. Health Canada introduced the MMPR and then the ACMPR program to offer medicinal cannabis as an alternative treatment for patients. During this time, Delta 9 and CEO Arbuthnot have worked with patients through these programs and still see many of the same people coming through their doors today.
“Month one of the MMPR program, we had three signing doctors in our home province of Manitoba that we were working with, that is all that we could get province-wide who would possibly sit down and meet with patients and sign medical documents. I believe as of this month, we have over 480 signing doctors in Manitoba.”
He calls it an explosion, not just in the number of participating patients, or doctors signing, but the overall acceptance of cannabis as medicine, as not just a medicine of last-resort, but as something that patients and doctors can collectively consider a treatment option.
“As I look further into my crystal ball, I see that becoming even more pronounced on the medical side of the market, as these products become more adopted by doctors and pharmacists.”
Investors will want to keep an eye on Delta 9 Cannabis Inc. as Canada moves into a brave new world of marijuana regulation. The Company is putting its vertical integration strategy into retail across the prairies and the rest of the country into action, allowing for maximized margins for investment.
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FULL DISCLOSURE: Delta 9 Cannabis Inc. is a paid client of Stockhouse Publishing.