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PRINT EDITION
The shelf-space race: Pot producers seal supply agreements with Quebec
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By CHRISTINA PELLEGRINI
  
  

Email this article Print this article
Thursday, February 15, 2018 – Page B1

The race for Canadian cannabis growers to secure shelf space in retail stores ahead of the legalization of recreational marijuana is picking up speed.

Six companies said Wednesday that they had signed agreements with Quebec's liquor board to supply a total of 62,000 kilograms of the drug into the province to be sold in the first year. Pricing wasn't disclosed, although Matt Bottomley, an analyst at Canaccord Genuity Inc., is estimating an average wholesale price per gram of dried marijuana of $4.

Quebec joins three Maritime provinces in striking multiyear deals with growers to stock the stores that these governments intend to open and run later this year.

For years, producers have sold their cannabis to medical patients by operating online stores and shipping orders to clients' homes across Canada. But changing laws around the leisurely use of the drug will upend how and where companies will sell their product and for what price.

So much is still uncertain as the rules and terms are being worked out. Investors, whose cash has fuelled the growth of this nascent sector, have been left mostly in the dark.

Canopy Growth Corp. is the only grower to have disclosed that it is going to supply its cannabis to each of the four eastern provinces that have announced deals.

The Smiths Falls, Ont.-based company has inked agreements to sell up to 25,000 kg of marijuana across four provinces after the drug is legalized for recreational use. Canopy said Wednesday that it will earmark 12,000 kg for the Quebec market annually, with the rest of this supply serving three provinces in the Maritimes.

That's a lot of cannabis - and it doesn't yet include an allocation to Ontario, the most-populous province. In its past four quarters, Canopy sold less than 7,000 kg of product to patients.

Bruce Linton, Canopy's chief executive officer, said he could have probably signed up to supply Quebec with an additional 6,000 kg of cannabis, but he wants to commit to a quantity he says he can deliver.

Gatineau, Que.-based Hydropothecary Corp. will supply the province with 20,000 kg, the largest of the six orders. Aphria Inc.

of Leamington, Ont., will sell 12,000 kg, while the other orders are going to be filled by MedReleaf Corp., Aurora Cannabis Inc. and privately owned Tilray Inc.

These companies have a track record of being able to grow and sell marijuana to thousands of medical patients. Mr. Linton says this is what differentiates his company from others.

"We are four for four and maybe we got lucky four times," he added. "But I think what we've done is demonstrated a competence in production and distribution capabilities of scale."

Mr. Linton won't say how much Quebec - or any other province - is going to pay for his cannabis.

"I can't tell you what we're getting paid.

But we're not all getting paid the same, I suspect," he said.

"I suspect what you'll find is the people who can supply [the provinces] with a really high degree of certainty, that they will have a better negotiating position than people who haven't produced a gram of cannabis." Canopy has focused its efforts on provinces where the government has said it will operate the marijuana stores and the number of retail shops will be controlled. But without clarity on pricing, it's hard for investors to see how these deals stack up.

"When we report a year from now, I bet you'll find our margins are pretty amazing," Mr. Linton said.

He said that's because he will be producing more volume of cannabis, which should drive his costs down. Plus, he expects Canopy will ship up to 10 per cent of his total sales to patients, while the rest will be delivered in bulk either to a warehouse or directly to a retail store.

Mr. Linton believes it will take at least two years for the full network of regulated cannabis stores that will satisfy demand to be up and running. That is why he thinks a large portion of early recreational cannabis sales will be conducted online, not in a brick-and-mortar store.

Associated Graphic

Bruce Linton, CEO of Canopy Growth, seen in his company's Smith Falls, Ont., facility in December, says that when his firm reports results a year from now, 'I bet you'll find our margins are pretty amazing.'

CHRIS ROUSSAKIS/BLOOMBERG

Workers produce medical marijuana at Canopy Growth Corp.'s facility in Smiths Falls, Ont., on Monday.

SEAN KILPATRICK/THE CANADIAN PRESS


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