Hydropothecary Corp ( CVE:THCX ) CEO Sebastien St. Louis joins us to discuss Canada’s newest addition to the publicly traded roster of ACMPR medical cannabis growers, and why his company’s approach to growing the best quality product will appeal to the Canadian medical marijuana audience.

Transcript:

James West: Sebastien, thanks for joining us today.

Sebastien St-Louis: thanks for having me, Jim.

James West: Sebastien, let’s start with an overview. What’s the value proposition for investors in Hydropothecary?

Sebastien St-Louis: Hydropothecary is the only licensed producer in Quebec. It’s one of the lowest cost producers in the country, with costs per gram under $1.50 and lowering every day. And we are the most premium marijuana producer in the country, with the highest revenue per gram currently, and currently growing at a rapid pace. We’ve just recently completed a 35,000 square foot expansion, which brings up our total square fo0tage right now to 42,000 square feet, and we have plans to put up another 250,000 square feet very shortly – expansion plans which are currently fully funded.

James West: Wow, that’s impressive. I remember Hydropothecary, you started off offering a real premium service relative to what else was available out there, and I see that your prices have come down significantly. Are you find that the traction isn’t there for the medical side of marijuana on the ultra-premium brands, or is it just that the market’s too competitive and you have to be a little bit more price-sensitive?

Sebastien St-Louis: Yeah, I think it’s more a story of us really penetrating deeper into the market, James. In fact, our Time of Day line, the super-premium $15 a gram, is actually selling more today than it’s ever sold before. What we’ve done since is, we’ve launched our H2 line, which is a mid-market line of dried marijuana, still excellent product, still supported by our great customer service, but it starts at $7.25 a gram. So right now we’re giving a broader selection to the clients.

We’ve enabled that ability through our recent large expansions, but we certainly continue to sell Time of Day and, as I mentioned, in fact, sales are higher than ever before.

James West: Sure, okay. So how many registered patients do you have at this point?

Sebastien St-Louis: We’re not reporting registered patients at the moment, but as we move forward, and especially since launching our H2 line in December, we’ve more than doubled in a few short months. So, accelerating our patient growth, for sure.

James West: Mm-hmm. Okay, now being in Quebec, and being the only supplier in Quebec, does that give you some kind of competitive advantage outside of Quebec, or just within Quebec with more of the Francophone community?

Sebastien St-Louis: I think being in Quebec will definitely show its advantage in the future, especially as we start to move into legalized recreational market. For the moment, it’s really a fundamental advantage in terms of input costs. Relative to our Ontario competitors, we’re paying about a quarter of the price of Hydro that they’re paying in Ontario, and that is really paving the way to our industry-leading cost of production. We have a fully bilingual customer service team which operates 24/7, and on that side we’re geared up to serve Quebec customers, and Quebec customers represent about 10 percent of our patient base at the moment.

James West: Sure, okay. So did you say your most popular product at this point was the higher-end one?

Sebastien St-Louis: So the most popular products at the moment are actually split between our H2 line, which is our mid-market line, and then now also our Decarb offering, cannacaps. So we’re the only licensed producer at the moment to have a dried marijuana capsule on the market. This allows people to avoid smoking, and relative to oils, it gets away from the stomach pains that some consumers have been experiencing with oil products, and it’s also calorie-free and long-lasting. So, a good alternative, and the only one on the market right now for people looking to ingest something other than oils.

James West: Yeah, that’s interesting. So I have to ask: the recent pesticide problem that emerged in a couple of ACMPR growers, do you see that ever becoming a problem for the Hydropothecary?

Sebastien St-Louis: Hydropothecary has never used a synthetic pesticide, and we will certainly strive to make sure we never use them. You know, we can never say never; quality is always top of mind. We take every step possible. We run all our locks now through full screen pesticide tests at third party laboratories, we check all the inputs and everything that arrives on site, we actually verify it and ensure there are no synthetic pesticides or nothing, certainly no illegal pesticides. So definitely quality top of mind there.

James West: Okay. So you guys came to trade earlier this week. You started, well, the first price I saw quoted was $0.75. You closed the first day of roughly a handy double and you’re trading over $2.00 now. Do you think that there is a lot more room for a lot more publicly traded ACMPR producers in Canada? Or do you think we’re kind of reaching a limit?

Sebastien St-Louis: I think from, when you look at the size of the industry, James, there’s just so much room for this industry to grow, and if you look at the math, you could buy every single publicly licensed company right now for a total of about $4 billion, you would pick up everything. And then assuming, we’ve seen different analysts rate the size of market, assuming legalization of the recreational market, we’ve seen different analysts go from $2 billion to $26 billion for the size of the market in Canada – that’s let alone the worldwide market, which is $350 billion.

I for one am very bullish on the sector and growth towards the top line of $26 billion, but let’s say, assuming, for fun, that it’s an $8 billion market. And the licensed producers have all kind of targeted a 20 to 25 percent bottom line EBITDA margin, so that means you’re outputting about a $2 billion in EBITDA overall for the industry.

So then you throw on again, if you were to look at a multiplier from, like, pharmaceuticals for example, you’d have to put a 14x multiplier on that. So at that point, you’re already dealing with an industry that should be worth $28 billion. And as I’ve said previously, you can buy the whole thing for four right now.

So I think the industry as a whole is undervalued by about 8x right now, and of course, within the industry, there are specific companies like Hydropothecary that I think are dramatically undervalued relative our position, or ability as a low cost producer, our ability to generate premium revenue with a premium product that consumers respond to, and of course, our innovation platform, with products such as cannacap.

James West: Interesting. So do you have plans to take advantage of the export opportunities in the global cannabis space, with all of the new medical marijuana regimes emerging in the G20?

Sebastien St-Louis: Certainly opportunities abound in the medical marijuana space, but perhaps the distinguishing feature from Hydropothecary, although we’ve had those opportunities in front of us, we’ve been visited by the German Secretary of State, we’ve had the government of Victoria in Australia approach us for R&D projects – our story for the moment is very much a Canadian medical story. We are focused here, there’s – it takes an incredible amount of resources to launch a new channel, especially an overseas channel in a market that’s not fully developed. And so what we want to do is fully develop Canada. Get our cash flow up to a point that it’s very healthy, and then look at international opportunities. So I think that’ll come down the road, perhaps beyond the next 36 months.

James West: Do you think there’s going to be much of a challenge ahead for you to accumulate market share at the expense of the larger, pre-existing ACMPR growers? Or do you think that there’s a willing and ready marketplace that is Quebec-centric, that’ll give you the leg up you really need to establish the cash flow you’re targeting?

Sebastien St-Louis: I think that we are gaining market share, I mean we’ve demonstrated, we are gaining market share every week, and I think that’s for a variety of reasons. That’s in Quebec, and of course being the only Quebec producer; that’s also part of having a premium offering, and it’s also part, quite frankly, of availability. Some of our competitors are no longer taking patients, and Hydropothecary has its doors wide open. We have ample capacity to take on more patients, and that’s why we’re working on our next 250,000 square foot expansion now, because we want to make sure to be able to continue to take more patients. We are one of the major producers by size right now in Canada, and we plan on being one of the top few remaining ones, not only in Canada but in the world, in the next five to ten years.

James West: How do you acquire patients if you can’t advertise?

Sebastien St-Louis: Acquiring patients in the ACMPR is definitely through word of mouth through patient groups, through doctors and through our partnerships with medical marijuana clinics. So Hydropothecary is currently represented in about 60 medical marijuana clinics across the country, and so there are doctors and front line staff there that are very knowledgeable about medical marijuana products, they’re knowledgeable about our offering, including our cannacap Decarb offering, and they talk to patients that way. But it’s certainly a pull rather than a push strategy.

James West: Okay. And finally, Sebastien, the dispensary situation where in Ontario, at least in Toronto where I am, they shut down the Emerys and their Cannabis Culture chain across Canada, but there are still literally hundreds of storefront dispensaries that I’ve got to assume are taking some serious market share from ACMPR growers. How does that situation look in Quebec, and how do you think that’s going to affect your ability to create market share?

Sebastien St-Louis: Quebec has a very well established black market for marijuana, and I think whether it be Quebec or nationally, because Hydropothecary is a national story, even though we are predominantly here focused in Quebec – we feel the pinch of dispensaries everywhere throughout the country.

However, I do think that given the fact that we produce, as licensed producers and Hydropothecary in particular, we can produce for a lower cost than what the black market is able to produce at. We also do produce at a much higher quality than what black market is able to produce at. So I think once you remove the barrier of the prescription and once we move into a legalized recreational framework, with distribution either into a wholesale and then full retail channels, I think that just putting us head to head against the black market, we’ll eliminate them. Because what we will give is to consumers is the opportunity to have a higher quality product at a lower price, in a regulated framework.

James West: Mm-hmm. Sebastien, that’s a great initial overview. I’ like to thank you for your time today and we’ll come back to you in due course and see how you’re making out. Thanks again for your time.

Sebastien St-Louis: Thanks for yours, James. Thanks for the questions.

Disclosure:The author and/or its affiliated companies and individuals are shareholders in The Hydropothecary and as such this article should be considered biased. See our important disclosure for more details.