Delta 9's CEO talks vertical integration, challenges, opportunities, and more
In this edition of "Rising High," The Fly conducted an exclusive interview with John Arbuthnot, chief executive officer of Delta 9 Cannabis (VRNDF), a vertically integrated cannabis company focused on bringing high-quality products to market. Here are some of the highlights:
VERTICAL INTEGRATION: Delta 9 is a vertically integrated cannabis company and was one of the first licensed producers under Health Canada’s MMPR program, licensed in 2013. Arbuthnot said the company started off modestly as a medical producer and distributor but really grew in 2017 as it raised about $10M throughout the year and publicly listed its shares on the Toronto Venture Exchange. “Since then we’ve raised about $80M through a mix of debt and equity,” he said. “We’re now one of Canada’s few vertically integrated cannabis companies. We bill ourselves as licensed for cultivation, processing, extraction, wholesale distribution of both medical and recreational sides of the industry and we’re also a licensed retailer.”
DIFFERENTIATION AND MARKET SHARE: The CEO said he believes the Delta 9’s key differentiator is its vertical integration strategy. ”Beyond ourselves and Canopy (CGC) and Aurora (ACB), I don’t know that there are any truly vertically integrated companies that touch up and down the value chain,” he said. Arbuthnot added there is so much uncertainty in the market as it unfolds and companies need to ask where does the business plan make sense from a market perspective. “We really see the best plan of attack there as being vertically integrated across all of those channels.” When looking at capturing market share, the CEO said the company took a very focused approach on its home market on Manitoba. “We targeted our home market and over Q4 last year, we were able to achieve about 25% market share in the wholesale market," he said. As a retailer in our market we were able to achieve about 56% market share of retail sales volume.” He added the company has now built its supply capacity and expanded overall supply agreements across the Canadian Prairie provinces. “As we continue to build that supply capacity, we’ll continue to expand across the potential markets and acquire market share across the country,” Arbuthnot said.
GROW PODS: The CEO said the company experimented early on with different styles of cultivation and wanted a production unit that was modular, scalable and stackable. The result became Delta 9’s retrofitted shipping containers called Grow Pods, which have customized wall panels, electrical lighting and HVAC systems. “The real benefits here in how this helps to differentiate us, is it gives a very high level of control over the production environment,” he said. “We put all of that attention to detail into the factors that contribute to product quality…All of that’s dialed in very precisely in these pods and the real positioning here is that we want to have the highest quality product that we possibly can in the market.”
LEGALIZATION: When asked about which country might be next to legalize cannabis on a federal level, Arbuthnot said he would probably expect a country in Europe. “We’re seeing so much activity across the European Union in terms of countries that are either decriminalizing, legalizing or deregulating from a medical standpoint,” he said. “If I had to venture a guess, I would think we may see Spain or Portugal or Italy, one of the European countries be the next chip to fall.” When asked about a timeline on legalization for the U.S., the CEO called it ‘’tricky,” saying the U.S. has reached a tipping point as cannabis is legalized in enough states that it covers a little over 50% of the population.
EXPANSION: The CEO said when looking at expansion, his preference from a strategic perspective is to have centralized production and manufacturing facilities and a global distribution capacity. “I think it’s a little bit different to what we see from some of the other producers that are trying to acquire these assets or invest in these assets all over the world,” he said. “We see a lot more value in having a more centralized production system and then more regionalized distribution globally. But obviously Canada was the first chip to fall in legalization and it stands to reason that we will see a number of countries and markets start to open up over the following years. We need to be positioned to be ready for that.” He noted Delta 9 has already made some initial shipments to Australia and Tazmania on the cannabis genetics side and is working on EU GMP certification for its Winnipeg facilities with a target to make shipments to the EU on the medical side in 2020.
CHALLENGES: When asked about the challenges facing the industry and the company, Arbuthnot said on the onset of legalization the biggest issues were supply chain-related, which resulted in significant supply shortages that trended into early this year. “Since then, we’ve seen a lot of producers, and I would put ourselves in this category as well, really streamline and refine those internal supply chain,” he said. However, the CEO said as time has progressed there has been a paradigm shift and the real issue now across the Canadian market is demand. “Beyond those initial supply concerns, we’re now at a point where the country needs more demand and that demand really gets driven through additional retail outlets to bring product to market."
OPPORTUNITIES: The CEO said the obvious opportunity on the horizon from an industry standpoint is value-add and extract products. “I would point to our introduction of pre-roll products in Q2 this year,” he said. “We brought in our Delta 9-branded pre-roll products into the retail setting and in the last sixty days we’ve sold more than 50,000 pre-rolls. We are really seeing the uptake from the consumer.” Arbuthnot said as the industry progresses with extracts and derivative products, the company can bring on a whole host of new product SKUs and drug delivery formats. When asked about which drug delivery formats he sees as becoming prominent in the future, the CEO said Delta 9 is “very bullish” on vaporizable oils and vape pens. “We really see that as hitting all the main factors that the consumer has been looking for and our market research really points to vape pens and vape cartridges being that leading product category in the derivatives segment.” Arbuthnot said he believes the missing piece for edibles and drinkables is the drug uptake and while the company does have partnerships on that side of the business, the technology is still very young. “Further down the road, some of those other more technology plays in terms of the extract and edibles products become more interesting,” he said.
OTHER CANNABIS STOCKS: Publicly-traded companies in the space include Aurora Cannabis, Aphria (APHA), CV Sciences (CVSI), CannTrust Holdings (CTST), Cronos Group (CRON), General Cannabis (CANN), Canopy Growth, Tilray (TLRY), Innovative Industrial Properties (IIPR), India Globalization Capital (IGC), ICC International Cannabis (KNHBF), Biome Grow (ORTFD), MediPharm Labs (MLCPF), Indiva (NDVAF), OrganiGram (OGRMF), KushCo (KSHB), MedMen Enterprises (MMNFF), Elixinol Global (ELLXF), Planet 13 Holdings (PLNHF), Wayland Group (MRRCF), Khiron Life Sciences (KHRNF), Liberty Health Sciences (LHSIF), Origin House (ORHOF), Sunniva (SNNVF), Sproutly (SRUTF), DionyMed Brands (HMDEF), GrowGeneration (GRWG), Harvest Health & Recreation (HRVSF), Trulieve (TCNNF), Zynerba (ZYNE) and Greenlane (GNLN).