CanniMed Therapeutics Inc (TSE:CMED)(OTCMKTS:CMMDF)(FRA:0GB) CEO Brent Zettl describes how his company, formerly known as Prairie Plant Systems, evolved from being the first supplier of medical marijuana to the Canadian Government under the MMAR system, to the current diversified plant technology company whose cannabis business is just one line in a pharmaceutical platform rooted in plant science.

Listen to the podcast interview with Brent Zettl:

Transcript:

James West: Brent, thanks for joining us today.

Brent Zettl: Good afternoon, James.

James West: Brent, why don’t we start with an overview of the history of CanniMed, since Prairie Plant Systems. How did you get into this whole business?

Brent Zettl: Well actually, when we first were looking at getting into the business of medical cannabis, it was a little bit serendipitous. We were, in the mid-90s, we’d been involved in what was called then Plant Made Pharmaceuticals, where we were designing plants to make certain potential therapeutics which would be protein-based. And in the late 90s, we were looking for a marquis project that would evidence both the science that we had, the plant bio-tech sciences, as well as the contained production facility that we had at the time, which were in the chamber in Flin Flon, Manitoba.

Health Canada actually put up their hand and said they were looking for, they put out a request for proposal looking for clinical grade cannabis for clinical trials, and looking for a supplier. There was 195 bidders, and we were the successful one at that time. And I think the truth is why we were selected, when looking back, it was because of both the pedigree in the plant sciences combined with a strong security potential with using the underground environment.

James West: I see. So you were not necessarily marijuana motivated from the outset, you were plant biology motivated and plant sciences motivated?

Brent Zettl: Yeah. Plants motivated, with a focus on pharmaceuticals where we saw the convergence of plant biotech and pharmacy. So we could see that there was going to be potentials for all kinds of things, especially falling out from the human genome that was getting sequenced, that was on deck to be sequenced. So we knew that there was going to be lots of opportunity there. So that wasn’t our focus; in fact, to be honest, I never even knew what a marijuana plant looked like in real life until I actually grew it the first time.

James West: That’s interesting. Ha! So it was, that’s interesting, I thought it was the other way around, that you got into the plant business through marijuana, but that was obviously an incorrect assumption. So then, how did you come to decide to be a publicly traded ACMPR company?

Brent Zettl: Well, what happened is that during the process, you know, we were under Health Canada contract for 14 years, until March of ’14, but the MMPR, which then eventually became the ACMPR, we were licensed in October of ’13. At the time, in the transition, our patient population basically went to next to zero. The Health Canada, even though we served about 15 percent of the old MMAR market, which was about 5,500 patients, Health Canada considered them their patients and they came in and scrubbed their servers clean, and then we had zero patients. So the patients had to find their way back to us.

And then secondly, under the Allard case, the Allard case basically allowed the injunction for the other 38,000, or whatever number it was, to continue to grow. So the market went to zero. Now, layer on top of that the direction from a lot of the Colleges of Physicians and Surgeons to their respective physicians was, do not start writing scripts willy-nilly because it’s going to be, we don’t know this, this isn’t tried and true, etcetera, etcetera.

So the doctors all took sort of a pause and a wait-and-see approach. And so consequently, we had lots of capacity in 2014, but we, the market in terms of patients wasn’t showing up very strong. So we had to, we decided intentionally to wait until we saw the market really progressing, and the true market, the pharmaceutical market, coming to the fore, that we decided okay, now when we’re getting bumping the limit of our capacity and we can see that we’re going to be having to go beyond that, then that’s when we decided to go public. And it just so happened that it was this year. So we always had it in mind to be able to do that.

But the idea here is to, you know, we want to make sure that when we go out to raise money, that we can turn it into making money. So we’ve always had a culture of generating revenues and profits and EBITDA so that the investors are happy and getting happier. So it’s more about let’s be responsible, let’s not enter into that part of it until the market really shows up, which it really did start showing up with great fervour in 2016.

James West: Okay. So what are some of the features of CanniMed’s business model that does differentiate it from the existing ACMPR growers?

Brent Zettl: Well, the biggest thing that we’ve always maintained is that we were disciplined under the old program to be a pharmaceutical manufacturer, and we were registered since 2006 as a GMP rated facility. So we had to produce and manufacture – we evolved the program over a 10-year period before we could get to a precise deliverable to patients where the products were reliable and consistent over a long period of time.

So within that, we became a 281-points-of-quality-control, GMP rated. We also have a strong patient following that basically looked at the physician education as part of that process. So we took that on, and have a series of detailers as they’re referred to, or drug reps, as formerly, drug reps in the field, and helping with that.

We also realized that collecting data was important, so we do what’s called both upstream research, so we continue with the plant sciences research, but what we’re also doing now, we entered into the downstream clinical research. So we have, for example, a two-way clinical trial for osteoarthritis of the knee. So we’re making those investments in those areas, both upstream and downstream recycle, downstream clinicals [sic], in order to really shine a light or help propel the sales in the next generation, but also because we’re trying to educate the physicians and get to the real data.

Those are the main focuses that we have, that really help to differentiate us. We focused on the pharmacy delivery and we focused on those abilities to provide a sequence of products, including now which includes the oils and eventually moving to other delivery forms, that’ll be into, I would say, the mainstream pharmaceutical access for patients.

James West: Okay. So what does your 2017 revenue growth outlook look like in those various business segments?

Brent Zettl: Well technically, we’re still in distribution, James, so I can’t give out exact numbers. But generally speaking, the growth we’re experiencing, and we’ve represented this in the prospectus that we’ve been experiencing month-over-month growth in that 4 to 10 percent range, month-over-month, and it’s maintained that. We don’t see that changing at all domestically, we see that still maintaining itself domestically.

But the nuances, of course, are the announcements that we’ve heard from Germany. But we have eight countries that we’re speaking with at various levels, and those discussions are all ongoing, and we expect to see something happening in early sales provided that the licensing amendments come through as we need, and then we’ll start to see how that propels. So we think it’s going to, we’re going to have a very strong 2017, but it’s because of the drivers that we’ve identified that are coming to the market now.

James West: Yeah, sure. So in terms of that announcement with Germany’s basically allowing insurers to reimburse their patients for marijuana, you’re positioned through a partnership with Creso to distribute CanniMed products into all of the European Union. Is Creso obliged to supply exclusively CanniMed cannabis products, or are they open to supplying from a range of growers?

Brent Zettl: Well I think they, we have a preferred arrangement with them, preferred status with them. But when they look at it, though, they look at all the track record of the companies that are involved. So we have a preferred status with them for a year to see how it opens up, but they have their appetite is to work together closely in developing the partnership as we looked at distribution.

You know, we have, in the 16-year tenure, we have zero incidents of diversion; we have zero incidents of product recall, and we have zero incidents of running out of product. And so when they look at those three things, that pedigree and that discipline allows for them to have confidence when they’re looking at opening up distribution in these particular jurisdictions. And so that’s why we have that preferred status that we’re doing with them, with Creso Pharma. And I think we’re pretty excited about the opportunity, because the conversations for us all start with the oils and eventually the gel caps, and that’s where we’re heading towards.

James West: Okay. So it sounds like to me that CanniMed is very much focused on the medical applications for cannabis exclusively. And are you positioning or anticipating participating in the recreational side of the cannabis market when it becomes legal in Canada?

Brent Zettl: Yeah. We said look, when the legalization component comes into reality, we’ll take a look at it, and as a Board, and to the benefit of shareholders, we’ll take a really serious look to see if that’s where we should put our resources towards, and if that makes some sense for us. And I think we’re very open-minded about it.

Now what we’re doing is, we’re trying to sort of manage the immediate market that’s here today, which is a domestic market for pharmaceutical access, but as well as the international markets that are opening up. So we’re not restricted to a domestic market; we’re looking at the globe as a possible. And using Canada as a first mover advantage is a big thing, because we’ve had that benefit of being in the business 16 years, so the production systems are all like cookie cutter and they’re all like sequenced, so we can do this very clearly.

And so these other countries are going to have to catch up, but they want to move to distribution immediately. So as these other countries start to open up the legal medical market, they’re looking for an immediate supply, and that’s where we think our big growth potential is going to come from. And the world’s a much bigger place. Like, when we look at the Baby Boomer demographic, for example, that’s what we’re focused on, there’s 9 million Baby Boomers in Canada; in Europe there’s 156 million Baby Boomers in Europe.

So you think about the opportunities for us, especially as just post-signing the free trade agreement with the EU, we think that that’s a spectacular opportunity for us.

James West: Wow, that’s incredible. Do you think that the ascent of Jeff Sessions to the role of Attorney General in the United States is going to have a sufficient damping effect on the growth of the marijuana industry in the US that it will be representative of opportunity for Canadian companies like CanniMed?

Brent Zettl: Well, the signalling of having Senator Sessions become the Attorney General is definitely would be concerning to the rec market, especially with the attitude that comes with it. But you know, to be fair, I’ve heard the very wide range of outright legalization to outright constriction back to prohibition, and the varying points of view on this are to that extent. I mean, they’re 180 degrees.

It’s really hard to sort of say where they’re going to land on this thing. one thing that we’re quite certain about, though, that we feel confident about, rather, is that the medical side is going to continue, for a number of reasons that we think are…so the mindset is that the medical has arrived, and now that 28 states have it medically available, the Feds are obligated to sort of manage this in some form or shape. And I think that once the new regime gets into power and starts moving around, and Attorney General Sessions takes power, we’ll see some pretty clear indications of what’s going to happen on the medical front. But we think, we’re pretty optimistic about what’s going to happen on the medical front.

I have, really it’s hard to say, like I said, the range is 180 degrees; where they land, it’s anyone’s guess at this point.

James West: Right. You mentioned that you’ve never had an instance of a product recall, and there’s been a few instances of product recalls in the last several months. I’m curious as to whether, in your opinion, is that representative of, perhaps, some risk of purchasing from newer participants? Is it a symptom of an industry that is immature, or is it symptomatic of an industry whose checks and balances are functioning perfectly?

Brent Zettl: I think probably a combination of the latter two. I mean, you know, we took a, to really make a precise product from a plant, this particular – you know, marijuana is like the Formula One of plants. It grows so fast that if you don’t keep up with all of the components, the nutrition and the light, in every step of its life cycle, it’s not going to have a predictable outcome. You’re going to have a wide-ranging outcome. And it took us 10 years to figure out to that precision, to get those 281 points of quality control, to feel with confidence that now when we set out to produce a certain branded product of the seven herbal products and the three oils that we have, we – now it’s a planned thing. We know exactly how long it takes us, we know exactly what we set out to do when we first put the clone in the soil, we know exactly how long it’s going to take and where it’s going to be. So it’s a much more predictable model.

Now, the newer start-ups, they’re still coming to the market. They still haven’t learned all those things, and the production habits are going to have to – they’re going to have to figure that out. We’ve got a strong agronomic background already, but we learned how we have to manage things. Our facilities are shower-in facilities, for example. We know that we have to manage all the things that come through it. And so the cleanliness becomes the thing that guides the process.

So there’s going to be, first of all, there’s a learning curve on the part of the new companies coming in.

Then, the checks and balances for sure have to be brought in, because there’s going to be corners being cut, and the checks and balances have to be enforced; there’s just no question about it, I mean, they have to be. Because why? Because patients demand safety, and they should. That’s because you’re producing a medicine. This is what it’s all about. This isn’t something that’s just going to be like producing tomatoes, or whatever the case is; this is actually we’re producing medicine.

Now when the rec market opens up, that might be a little different set of standards, but at the same time, safety of individuals is really, really important. So we don’t use any pesticides, period. Why? We test for everything else, because we have to test the inputs to make sure they don’t have it either, right? All the inputs that go into it. The fact that there’s some there, that sort of does beg a few questions, but I think the industry as a whole, those individuals are going to get, pardon the pun, but they’re going to get weeded out eventually because there’s going to be those standards that they’re going to have to make sure that they’re keeping the product clean so the patients can get clean product.

Bearing in mind, you know, the big nuance that we learned is that all the active ingredients, all the good parts of marijuana, are on the very outside of the plant. That’s different than, say, you’re growing a seed like wheat where you’re trying to get to the stuff that’s inside, you peel away the layers. In marijuana the good stuff’s on the outside of the plant, so whatever’s there is going to be there, so you’ve got to make sure that it’s clean for patients. That’s the bottom line.

James West: Interesting. So then, in the United States, Bloomberg published an article highlighting the price deterioration that could be expected from growers of both recreational and medical cannabis, due to a proliferation of large-scale automated product facilities. Do you think that there’s any sort of risk to Canadian growers at this juncture of the evolution of the game, in terms of over-supply, considering how the bigger, earlier companies involved have just announced massive build-outs?

Brent Zettl: Well, you know, in the case of the, size is definitely a consideration, but being good is totally different, and good means making sure that it’s done and being licensed to grow and having licensed facilities means it has to be done right, as well. So yeah, there’s going to be, you know, as these, if they get to the point of having all the checks and balances in place, and they get to the consistency side of things, yeah, there’s going to be some downward pressure on price. But at the same time, I think there’s still a lot to be learned about how big the market that’s coming in terms of the pharmaceutical side. I think there’s still going to be lots of room for production because of the market size that’s coming is staggering.

I think I’ve mentioned this before, I think that the medical cannabis, the true medical cannabis, as it gets into the hands of patients, as it starts to offset or reduce the opiate prescriptions such as fentanyl, oxycontin and so forth, as they start to offset those things, we’re going to see that there’s going to be a fairly pivotal change, and I think it’s going to be as disruptive in the pharmaceutical market as the iPhone was to the telecom business. And I think from that perspective, I think in the short term, I think there’s still going to be lots of price adjustments. But it’s not going to be wholesale, like we might think.

James West: Okay. So that’s great. What are the big milestones that investors can look forward to for CanniMed in 2017?

Brent Zettl: I think you’re going to look to see, we’re going to be looking at, we’ve said in our prospectus we’re looking at distribution models, because beyond the – you know, we have basically the online pharmacy model, which is going to maintain itself, but we’ve got to think in terms of scale. So we’re looking at distribution models both domestically as well as internationally, so you can hear something as that progresses well.

We’re going to be doing some announcements of course on increased production capacity, on all fronts, and that’s going to come out. We’re also going to be making, we’ve got four other clinical trials on deck for starting, and we’ll be talking about those clinical trials a little bit and how this is going to start to drive the awareness and the education as we move forward on upside, too.

James West: All right, Brent, that’s a great introductory interview. We’re going to look forward to covering the evolution of CanniMed. Thank you very much for your time today.

Brent Zettl: You’re most welcome. My pleasure.