Welcome to "Rising High," The Fly's recurring series focused on the stories impacting cannabis stocks. In this edition, The Fly conducted an exclusive interview with Khurram Malik, chief executive officer of Biome Grow (ORTFD), a Canadian-based company aiming to become the next cannabis conglomerate through its diversified holdings. In the interview, Malik discussed the company, competition, legalization, and much more. Here are some of the highlights:
LOWER RISK: Malik said the founding team of Biome has been investment backers and consultants in the cannabis industry going back to its beginning. “We’re a small company with a very done-it-before team, very different than your typical sub-$500M cannabis companies in Canada,” he said. The CEO added that the team has been involved in building some of the largest cannabis companies in Canada and has taken what they’ve learned in best practices in order to build a more efficient cannabis company. He said from an investor standpoint, the company is “building what we believe is probably a dramatically lower-risk cannabis company than most other cannabis companies out there,” adding, “This is a highly volatile sector and it’s going to be pretty choppy for the next two or three years. We’re just trying to work against that grain to provide an alternative way to get exposure to the sector.”
BRANDS: Biome has set up facilities in several provinces in Canada as the company believes distribution to the entire country through one massive facility does not work, Malik said. “If you look at how many licensed producers there are in Canada right now, 75% of them are either British Columbia or Ontario and the rest of the country is uncovered to some degree or the other,” he said. “So for a variety of reasons, we’re building what we believe is the largest production footprint in Atlantic Canada in every single one of those provinces. Being local, branding local, supplying local, having locals run your business and being looked at as a local company is really important to us.” He said while other companies are building company brands and product brands, Biome is focused on province-specific brands.
COMPETITION: Following the legalization of cannabis in Canada, the CEO said he does see competition ramping up. “The way to look at competition in Canada is that there are about 120 licenses right now, and I think we’re going to peak at probably 200 at some point in 2020,” he said, noting the industry is not going to have enough supply until 2020 to meet demand as it takes time to build up operations. “We anticipate going from a supply shortage to a supply balance in 2020 and then the next move into 2021, you’ll probably have a supply surplus,” he said. “At the end of the day Canada only has about 34M people, it’s a very large land mass, but not a large customer base.” When the supply surplus happens, Malik said Biome expects the 200 or so licenses in 2020 to drop down very quickly to “about 12 big guys and a handful of small crafty, niche guys.” He said, “Everybody else in that 200 are going to go bankrupt and just disappear”, adding Biome was built with “the day of judgement” in mind. “How do you survive when there’s a supply surplus in Canada?,” he said. “We do it two ways, one is entrenching ourselves in a lot of Canada and being well-liked as a local company...Number two is that most of our sales by 2020 hopefully will be coming from overseas markets, not Canada. And at that point if Canada gets a little wonky or a little volatile, it’s a smaller part of our overall international customer mix.”
LEGALIZATION: Looking at legalization on a federal level, Malik said he would hope the United States would follow Canada’s lead but it will most likely be another country. “It will probably be a country like Australia or South Africa,” he said, adding, “It’s not going to happen tomorrow, but in terms of the next couple of months, it will probably be Western European countries. Whether it’s Germany or France or Italy, those are the ones to keep an eye on.” The CEO called the U.S. a “wild card” and said legalization depends on who is in the White House in 2020. “I think what you’re going to see in the U.S. is medical being legalized across the country at the state level before 2020 but promises for recreational being legalized federally post-2020,” he said. Due to the unpredictable political dynamic of the U.S. and the difficulties from a regulatory and compliance standpoint, Malik said the company doesn’t touch the U.S. in regards to the marijuana plant, but may do some things in terms of technology and services.
EXPANSION: Malik said Biome has roughly 400,000 sq. ft. of growing space under construction in Canada currently and the company is primarily focused on Atlantic Canada. “Our plan for Canada has always been to be a small- or medium-sized player in terms of the entire country, but very big in the Atlantic Canadian provinces,” he said. ”We may add one or two more provinces, but that’s really it. The problem with Canada is too many suppliers coming on line in the coming years, not enough mouths to feed in terms of the customer base. Our plan has always been to be a small- mid-sized firm in Canada but to be a very large player overseas.” The CEO added that Biome is getting involved in countries where rules may be under development as “being the first in the door gives you certain privileges and competitive advantages.” He said, “It’s really the international scene driving the bus on a go-forward basis after 2019.”
CHALLENGES: Malik said the biggest challenge in the industry currently is getting out enough supply to meet demand. “The black market has higher quality product right now, but it’s a dirtier product,” he said. “We’ve got cleaner product, but we don’t have as many product SKUs because we’re only allowed to do a certain amount. Plus, for example, THC percentages aren’t as high as maybe the black market, but that’s changing shortly because we’re forced to grow at a higher pharma grade.” Malik said the challenge facing Biome is not getting lost in the mix of smaller companies. “We don’t anticipate being smaller much longer but while we are, how do we let people know that we’re doing things dramatically different than your typical sub-$500M company and the reasons they should pay attention?,” he said. “We’re now doing things that only the three or five largest companies in Canada can announce, but we’re announcing it as a small company.” He noted the company recently announced one of the largest deals in Canadian cannabis history, a supply and production agreement with the province of Newfoundland and Labrador. Biome expects that the agreement will represent close to $100M in revenue per year beginning in 2020.
OPPORTUNITIES: Going forward, Malik said he sees opportunities in two places. “One is you got to produce quality product. That’s lacking in the industry right now because the companies here in Canada are learning the process,” he said. “We believe we have a way by deploying technology and automation to have consistent, high-quality product all the time…Two is when other derivative formulations are allowed in the industry starting next year like drinks, edibles and things of that nature. There’s a lot of opportunity to brand unique products there and add innovation to the process.” Malik said there is opportunity in unique delivery systems to the body beyond smoking and vaping, particularly from a medical standpoint. “We’re going to be doing some very interesting things on the medical side in terms of innovation…That’s where the margins are,” he said. “Not selling recreational cannabis, selling medical cannabis which has a drug identification number, has patents, has insurance coverage. And then, you can sell medicine for like $200 a gram versus selling a $7 a gram recreational product.”
OTHER CANNABIS STOCKS: Other publicly traded companies in the space include Aurora Cannabis (ACB), CV Sciences (CVSI), CannTrust Holdings (CNTTF), Canopy Growth (CGC), Cronos Group (CRON), General Cannabis (CANN), India Globalization Capital (IGC), Tilray (TLRY) and MediPharm Labs (MLCPF).
Keywords: weed, cannabis, stocks, legalization, risk, volatility, provinces, distribution, supply, demand, shortage, surplus, marijuana, pharmaceutical,THC, drinks, edibles