Licensed producers negotiate learning curve to deliver consistent medical marijuana product

ABcann’s growing reputation for quality is opening doors abroad

 
By Scott Neufeld
 
In Canada’s blossoming medical marijuana market, the field is rapidly becoming crowded.
 
New applicants are sprouting across the country, while more established producers are lining up to go public. With so many racing to join the green rush, the ability to differentiate and leave the pack behind has never been more important.
 
So what’s the best way to rise above the rest? Consistently growing high-quality cannabis is a good place to start, but it’s easier said than done.
 
A recent surge of cannabis product recalls over the use of banned pesticides suggests mastering marijuana cultivation is no easy feat. Health Canada was spurred into action as a result, and companies are now subject to mandatory product safety testing.
 
“You’ve got guys that have no clue what they’re doing, and it’s taking a long time for them to figure it out,” said Jason Zandberg, an equity analyst at PI Financial who studies the marijuana industry. “They’ve really had a lot of problems.”
 
A tightly controlled growing environment is critical, because cannabis is vulnerable to mildew. Although fungicides like myclobutanil are approved for use on food products like grapes, it’s banned for use on tobacco and cannabis because it can turn poisonous when ignited.
 
“We’ve seen the pesticide issue and that’s just really them trying to cover up the fact that they haven’t been able to grow very well,” said Zandberg. “Yields have been poor. Lots of crop losses.”
 
As competitors struggle, one company is burnishing its global reputation for producing high-quality cannabis. From its high-tech facility in Napanee, Ont. ABcann Global Corporation (TSX.V: ABCN) is producing a product that is becoming the envy of the industry.
 
“The yields are the best yields that I’ve seen in terms of the actual production of it, and just the consistency of it,” Zandberg said. “I found that they have the healthiest plant that I’ve ever seen.”
 
ABcann has invested heavily in its facility to create a growing environment that has the feel of a medical research lab. Each growing room is computer-controlled, allowing staff to monitor a host of factors that determine the health of the plant — everything from the mix of lighting to the use of fertilizers.
 
This high-tech cultivation process gives consumers peace of mind, knowing ABcann has never faced a product recall.
 
“We don’t use pesticides because of the unique environment we grow in,” said ABcann CEO Aaron Keay. “There’s a medical approach to how we grow.”
 
Another struggle for licensed producers is growing marijuana plants with a consistent profile. For many producers cannabinoid and THC levels can vary widely from batch to batch.
 
“Having that huge difference from crop to crop goes against everything we know about developing a product for consumers,” said Zandberg. “You want to have that high consistency every time they use the product.”
 
This is another challenge that ABcann’s high-tech process has solved.
 
“They get a very consistent product with only a one to three per cent deviation,” said Zandberg. “That, we felt, was going to be a differentiator.”
 
Consistency is critical in the pharmaceutical industry and a major advantage for ABcann in the medical marijuana space.
 
ABcann worked with the University of Guelph to develop its cultivation process, and the high-tech growing facility is an expensive investment. However, that investment is paying off not only because of the health and consistency of the plants, but also with high yields.
 
According to a report by PI Financial, while the average indoor licensed producer yields $138 per gram per square foot each year, ABcann nearly doubles that at $250/g/sq. ft.
 
“It’s a higher cost process for sure,” said Keay. “The CapEx is a little bit higher, but our yields are higher.”
 
A high-quality management team backs up ABcann’s high-quality product. The company was founded by industry veteran Ken Clement and is now headed by CEO Aaron Keay, an executive with more than 10 years experience in corporate finance, senior management, and board member roles.
 
Advisors and board members include former president and CEO of GlaxoSmithKline Canada Paul Lucas, entrepreneur W. Brett Wilson, and Raphael Mechoulam, an Israeli organic chemist who is often called the father of medical marijuana research.
 
“We’ve got through some learning curves and now we’re ready to scale,” said Keay. “With cash in the bank, it takes out the business risk.”
 
ABcann’s future also looks bright, having secured funding for a facility expansion through a deal with marijuana streaming company Cannabis Wheaton. Keay sees it as a great deal as it doesn’t dilute ABcann’s shares immediately, while it also delivers capital to expand infrastructure.
 
“It’s definitely accretive for us,” Keay said. “I actually don’t need any capital for the foreseeable future — we will likely end up having excess capital to do other things because of this deal.”
 
Canada’s medical market is seeing explosive growth with licensed users up 73% between September to December last year to nearly 130,000 patients, according to Health Canada’s most current statistics. But ABcann is already looking internationally to conquer even larger markets.
 
“Canada right now is the global leader in the sector — that’s full stop,” said Keay. “If you can get your facility up, and you’re growing high quality while working out all your kinks, and you’ve good production capacity, then you set yourself up for international distribution.”
 
One of the brightest prospects is in Germany, where parliament has approved a progressive law that will open up state-regulated marijuana production. Health insurers will also be required to cover the costs of cannabis treatment.
 
“If you’ve got your distribution licence in Canada and you’re doing a good job, you’re probably going to be front of the queue to get a deal done,” Keay said. “Now it’s about scaling our facilities domestically so we have enough capacity to distribute.”
 
“I don’t think patients are a problem in this business. I think they’re everywhere.”
 
With all the uncertainty around the recreational marijuana market, ABcann is carving out a niche in the medical market both at home and abroad that could deliver steady growth for years to come. Although the sales volume will be lower, PI Financial’s Zandberg believes the medical market will see a higher price point and larger margins than the recreational market, representing a great opportunity for companies who can deliver the consistency and quality the medical industry needs.
 
At ABcann, the company believes that it’s delivering a product that meets medical standards and that governments are taking notice.
 
“Globally, our reputation is definitely helping us out, and that’s opening doors for us,” Keay said.

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