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Weed phase II now kicking in: Value-adds taking off

05/10/2016

Last December, Canadian Liberal Party mover/shaker, founding partner in Canopy Growth Corporation (CGC.V) and private equity player Chuck Rifici bought Wikileafs, the best named dispensary price comparison app out there, for an undisclosed sum, through his Nesta Holding Company,

Wikileafs was originally a sort of Priceline for weed, where the user got to name their price, but recently shifted to a straight price comparison model and is getting nice lift with that change.

Rifici plays in private equity, but he knows the business well on the public side, having helped raised untold millions for Tweed (now CGC), and making it an instant leader in the Canadian space. And he understands the value of torquing a new entity like Wikileafs for a few months, then releasing it onto a ticker where enthusiastic weedheads can go buy stock.

Rifici has always been a few steps ahead of the field, and this is no exception. While the focus of many is still on growing weed, Rifici is looking towards associated services, value-adds, and ways to profit from what will no doubt soon be a low-priced agricultural product.

Wikileafs is playing in a crowded space. Weedmaps has been out for a long time, ditto Leafly, Lift has a strong focus on Canada, while the infamous Wolf of Weed Street recently released BudHubz, a company that calls itself a ‘social weedia’ leader.

In other places, significant industry players are making their own move for a weed foothold. Canada’s pharmacy chains have been demanding that government regulators look to them to dispense cannabis, while government run liquor stores have also made their pitch. I know of at least one MMPR that is making investments outside of the traditional growing space, looking to earn royalties from associated industries, while US-based value-adders like Golden Leaf Holdings (GLH.C) and Nutritional High (EAT.C) are either making moves to expand their product lines into new places (Golden Leaf has a deal to play in Washington State as soon as regulators clarify rules there, and recently announced they’re adding a line of bubble hash) or working with Canadian licensees to bring expertise in associated products north (Nutritional High has been working with CGC on edibles).

I’ve been calling for this shift for a long time, at conferences and in my articles. Growing weed is nice, and if you do it on a large scale you can make money doing so, but there are now over 30 companies with grow licenses in Canada, and there’s likely to be many more soon. At one point there was a general price tag of $30m attached to an MMPR approval, but the perceived value of a license has lately been dropping, as many who have one have yet to put it to good use, and more still have yet to figure out how to make them profitable.

What baffles me is the lack of MMPR-driven movement to get regulators to allow them to run dispensaries. I know there’s a capital investment involved in opening storefronts, but some dispensaries have more clients than large MMPR growers do, and there’s definitely a profit to be made on that side of the game.

So much of a profit that, even though Vancouver has finally decided to start ticketing illegal dispensaries in that city, most of the dispensary owners are staying open, paying their fine, and eating a taco.

When CGC bought MedCannAccess last year, many thought (myself included) that the purchase was the first step in having a retail presence that would eventually shift to dispensaries. But that hasn’t happened, and the MMPR executives have been very quiet on the need to clamp down on the illegal end of town. Nobody wants to be seen as an enemy of the smoker, but the reality is there’s nobody better suited to run dispensaries than companies that have already gone through the regulatory checks, background checks, and actually got to the starting line in one of the most stringently overseen new industries ever.

Government wants the dispensaries closed so the MMPR growers can establish their legitimate industry. What better way to make that happen than to let the growers buy out the illegals and take over their business, run it the right way, and make sure the supply chain doesn’t involve people selling their medicine or gangs selling to retail?

The recent Allard case, in which the courts found the current Health Canada system to not be providing people with accessible, inexpensive medicine, gives the Canadian government a deadline to sort this out, and by all accounts they’re trying to do so. And I know of several players who are waiting in the wings to pounce once the new rules are clarified and we know what’s going to happen going forward with recreational weed, retail weed, licensing changes, import/export.

The boom is such that Kwantlen Polytechnic University in BC has filled all the spots in their nascent 16-week online Introduction to Professional Management of Marijuana for Medical Purposes course, and is in talks to take that course into other provinces, and even other countries such as Jamaica, the US and Australia.

So while Phase I of Canada’s weed journey was figuring out how to grow, and Phase II was figuring out what’s next, Phase III is yet to come. That will involve the legitimization of cannabis as an ingredient, a medicine, and an additive to foods, drinks, pills, and a load of other things we haven’t thought of yet.

One of our sponsors, Veritas Pharmaceuticals (VRT.C), is diving headlong into that space and expects to be sitting in the sweet spot when the crowd moves from  revolution to activation and finally acceptance. Their team of researchers is taking cannabis to clinical trials and is set on proving out exactly what is the strain of cannabis that will be the doctor’s choice going forward to treat pain, nausea and vomiting – or the ‘Charlotte’s Web’ of pain, if you will. Their timeline is to have that done in the next year and a bit.

States like Kentucky are quickly moving to okay weed, and Kentucky isn’t exactly the most progressive state in the union, yet the new weed regs passed completely unopposed by either side of the state legislature. Once the federal election in the US is out of the way, you can guarantee the current patchwork of regulations will switch to a uniform national oversight, and that’s when the game is truly afoot.

Big pharma, big tobacco, big drug store, big government, big liquor, big agriculture, big chemical – they’ll all be into it. Canada’s challenge is to get there first so that our mature, industry leading growers are allowed to become industry leading value adders, and retailers, and researchers.

Lithium may be distracting you right now, but keep your cash fluid so that you can get in on what will be the weed wave that leaves all others in the shade. The first big industry shift into weed from mainstream corporate Canada will be the ringing bell that it’s game on.

–Chris Parry

http://www.twitter.com/chrisparry

FULL DISCLOSURE: Golden Leaf and Veritas Pharma are Equity.Guru clients. The author is a marketing consultant for both companies.

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