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Hydropothecary CEO Sebastien St. Louis on Competing with the Marijuana Black Market and Adapting to the LCBO-Style Model

by Michelle-Andrea Girouard

 

The Hydropothecary Corporation (CVE:THCX) (OTCMKTS:HYYDF) (FRA:74H) is a cannabis distribution company currently focused on medical patients. CEO Sebastien St. Louis talks to James about expanding to the Canadian recreational market once marijuana has been legalized in 2018.

 

TRANSCRIPT:

James West:     Sebastien, thank you for joining us once again.

Sebastien St. Louis:     Thank you for having me.

James West:     Sebastien, you guys have been putting out a lot of news lately, which indicates that Hydropothecary is making great strides in its business execution. Why don’t you update us on the latest in your development?

Sebastien St. Louis:     We’re extremely pleased with all the hard work we’ve been putting through and our ability to serve more and more patients. We’ve most recently announced a 250,000 square foot expansion, which ties in very nicely with the announcement today we’ve heard by the Ontario government for adult use recreational distribution through an LCBO-type model.

James West:     Right.

Sebastien St. Louis:     We’re very excited about that in that we’re right on track for 2018 to have that facility fully operational. Now James, that’s more than just greenhouse; that’s a manufacturing facility, laboratories, that will enable us to continue developing new, innovative products, such as our elixir sublingual spray, still unique in the marketplace, so that we can continue to really do that full breadth product offering moving into adult use.

James West:     Right. So you mentioned the Ontario model that was rolled out today. What do you think about that, the LCBO style? Is that a benefit, is that a good approach in your view? Or is that going to restrict the ability of cannabis consumers to access it?

Sebastien St. Louis:     We need to learn more about the Ontario model, but in a very first step, it’s positive news, because we’re talking about 40 locations in the near term, 150 locations by 2020. So we’re really talking about a huge volume. It’s a single point of distribution, which makes it logistically very easy, and, from those points of view, I have to commend the Ontario government for taking a leadership position and being first to market with a clear plan.

I think we will continue to investigate with the other provinces as one model may not fit all sizes. For example, in Quebec, the culture can be very different, so we will make sure to work with the Quebec government to put something that’s very much Québécois focused, so we’re looking forward to that.

But on Day One, what’s really got me excited about the Ontario model is that we now have a clear path to retail distribution on July 1st, and Hydropothecary will be ready with close to $180 million in capacity for production of dried marijuana, cannacap dried cannabis pills, and also our elixir oil products.

James West:     Yeah, okay. So what percentage of your strategy would you say you’re gearing for the recreational market, and what percentage for the medical market?

Sebastien St. Louis:     So medical market remains a key focus for Hydropothecary. We are not abandoning our medical patients, and our medical patients have nothing to worry about. We are continuing to allocate production and product development for them, we will continue our national mail order strategy to our medical patients.

With that in mind, the adult use opportunity is immense, and our estimates put it anywhere from 8 to 12 times larger than the medical market. That’s why we’re doing such a push to increase our capacity for 2018, so that we’re ready in moving forward to taking 10 percent of that adult use market over time, which we think could represent upwards of a $20 billion opportunity altogether.

James West:     Yeah, interesting. So are you finding that your customers, as you grow your customer base, are you finding that there’s a real attraction to Hydropothecary for Quebecers because they’re in Quebec?

Sebastien St. Louis:     I think Québécois certainly like to purchase from Quebec companies, and for the moment, Hydropothecary is still the only licensed producer in Quebec. So we have made some strides on that. We continue to push a ‘French-first’ customer service centre 24/7, and that’s resonated very well in our home province.

James West:     So is that a bilingual service centre?

Sebastien St. Louis:     Absolutely. All our service agents are fully bilingual, many of them French-first language.

James West:     Sure. I was kind of joking with you there. So do you think that the July 1st deadline now, the closer it gets, there’s been a lot of skepticism expressed on the part of media, on the part of politicians. Do you think that it’s becoming more and more clear and certain now that these plans are rolling out? Or do you think there’s still some uncertainty, some questionability as to whether we are going to be able to hit that deadline with a national strategy?

Sebastien St. Louis:     So I think the risks, the questions that shareholders, clients, stakeholders may have, are all very real, but I can’t overstate the historic importance of this moment. You have a province and an organization in Canada announcing a 150 cannabis store rollout. This will bring clean, safe, quality product to Ontarians; remember, that’s 2.5 million Ontarians alone that consume illegal cannabis today that will be able to shift over to the legal market. And by doing so, we’re also going to be creating all sorts of jobs in Ontario; we’re going to be creating all sorts of tax revenue which, again, can go to help Ontario and the nation.

So I think that with that in mind, we have more clarity now than we’ve ever had, and I think the next few months, we’ll continue to push that forth. And yes, I do think we’ll make that deadline, at least in a few key provinces, namely Ontario, Quebec coming up soon of course. So I’m very bullish on our ability to do that.

James West:     Great. Now, do you think that the black market operators – I mean, if you punch in weedmaps.com in Toronto here, up pops 66 national mail-order delivery companies that are all black market operators. There’s 88 physical locations in Toronto that are being opened up just as fast as they’re shut down, if not faster. Are you suggesting that they’re going to be just swept under the carpet or swept out of existence by the manifestation of the legal market at the hands of the Ontario government, and more broadly, in Canada?

Sebastien St. Louis:     So I believe that really two things will happen. We heard the Minister and Naqvi speak today about Ontario’s focus on closing those illegal retail locations that exist today, and I think that we have seen historically a challenge for law enforcement because of priority and also just because of the sheer number of these illegal operations, for them to intervene.

The Cannabis Act, so Bill C-45, has given special powers to municipalities and provinces to inspect any area where they suspect illegal cannabis activity. It also gives them unprecedented powers to go in and find them. So that is the first step to starting to curb those dispensaries, is they hit them where it hurts, in their pocketbook, with an ability for the municipalities, for example, of Toronto, to hire a whole bunch of inspectors to go essentially like food inspectors – and maybe it will be the same people – to go and find these illegal operations.

In a second point, the ability of companies like Hydropothecary to scale up, to large scale, to continue to output new products that are simply not available on the black market, like our elixir sublingual spray, I think we will be able to beat the black market competitively, which is really the long-lasting solution to the illegal activity.

James West:     Interesting. So in Quebec, is there so much illegal activity as there is in Ontario?

Sebastien St. Louis:     Interestingly enough, the stats on Quebec put Quebec at the highest consumption rate in Canada for illegal marijuana, right next to British Columbia. So yes, there’s just as much, if not more, demand in Quebec for marijuana. Currently, people do not have enough options to access this product legally, and that’s why I’m very excited about these retail options. If you look to Colorado, the experience there has been overwhelming: consumers prefer a retail option for their first shopping experience, so I think we will see unprecedented movement from that black market over to a legal side, the licensed producer-produced product.

James West:     Okay. Well that’s interesting. Now recently you hired Terry Lake, former BC Health Minister, to join your company and become a Vice President of your luxury brand. I remember Hydropothecary, I think even before your involvement, maybe it was with your involvement, started out as targeting sort of the ultra-premium cannabis market. Is this a return to that strategy? And what is the significance of having Mr. Lake involved with that?

Sebastien St. Louis:     So bringing on Mr. Lake has been a real coup on our side; I think it’s a testament to what we’ve built and what we are building, that someone of his stature – I mean, this is someone who is a very widely respected Health Minister, the most recent Health Minister in British Columbia that’s now moved over to the other side of the country to work for us. So in a very first step, I think this sends a very strong signal to the market that Hydropothecary’s here to stay.

On the strategy side, Hydropothecary has always positioned itself as a premium producer. We’ve always gone the extra mile in producing the best quality available, and really putting forth innovative products in front of our customers. In terms of the return to a strategy, I don’t think the strategy ever left. Rather, what has changed is that, given our new capacity, we are now able to furnish the mid-market as well as the premium end of the market. So customers can enjoy more affordable options that are still excellent quality, and what we are seeing often is that consumers are choosing to buy, for example, our H2 product line during the week, and they will supplement with a little treat over the weekend, often with our Time of Day.

James West:     Mm-hmm. Sebastien, we’re going to leave it there for now, we’re out of time. I’m going to come there – I feel like I’ve got to try to your product once the thing goes live recreationally. Thank you so much for your time today. We’ll come back to you a little later next year, or maybe even a little later this year, and follow up with you. Thank you again for your time today.

Sebastien St. Louis:     James, thanks for yours. It’ll be a pleasure to have you. Thank you.

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