Pushing forward with major expansion plans, WeedMD aims to fill Canada’s need for high-quality, legal cannabis
Although product shortages have stymied the legal, recreational marijuana market in Canada, the country’s leading licensed producers are ramping up their efforts to supply an entire population of consumers yearning for high-quality cannabis.
For cannabis companies that got their start in Canada’s relatively limited medical sector, like Ontario-based WeedMD, this is the moment they’ve waited years for.
WeedMD was founded in 2013 and finally licensed in April 2016 for its 26,000-square-foot indoor facility in Aylmer, Ontario, about two hours south of Toronto — a production facility that would serve as a proof-of-concept for a much larger expansion plan.
“We took the approach of getting things done as quickly and efficiently as possible,” WeedMD CEO Keith Merker says. “Let’s not try and reinvent the wheel; let’s go with the tried-and-true practices and techniques that work.”
The company took that formula to its expansion site in nearby Strathroy, Ontario, and unveiled its state-of-the-art hybrid greenhouse in the summer of 2018. The company is on track to have 550,000 square feet of cultivation space available by mid-2019, while continuing to build out its distribution channels for both recreational and medical cannabis.
SunGrower: Can you describe your greenhouse?
Keith Merker: It’s a full hybrid greenhouse. We’ve got 20 grow rooms that are 10,000 square feet and have full HVAC, dehumidification, light deprivation curtains and supplemental lighting. These are as hybrid as hybrid gets, and they produce a very high-quality product. We currently have 110,000 square feet of cultivation, and we’ve been blowing our own internal estimates out of the water with respect to the production capabilities in these rooms.
We’ve also got another seven acres we’re almost done retrofitting that’s going to be more of a traditional greenhouse grow. It won’t have the full HVAC and supplemental lighting that we’ve put into the hybrid space. We like to think of it as the “juice factory.” That’s the space we’ll be growing primarily extract-grade cannabis.
We’ll have the full spectrum between the indoor, the hybrid and then the traditional greenhouse, and beyond that we’ve got 50 acres of property where we’ll be able to produce outdoors. Of course, this being Canada, we’ll get one crop a year, but it will be a great crop. We’ve got the growers who’ve done it before at this kind of scale. We’ve got the right genetics with which to do it and we’re very excited about the opportunity to grow outdoors and then bring down a massive, single harvest in September.
By midyear we’ll really have one of the largest production platforms in the country and our M.O., as I mentioned earlier, is to keep it simple and efficient. By virtue of that, we’ve never had a crop failure. We’ve been very successful with our cultivation and we provide a high return on investment to our shareholders as a result.
SG: What do you envision for the future of the indoor facility as you build out the various greenhouse facilities and outdoor farm to full capacity?
KM: It’s a really interesting question and it’s one we bat around amongst the team as we evolve. In the short term there’s no plans to make any changes to the original site. There are all kinds of different opportunities. It’s a different product (than what’s produced at the hybrid facility). It’s a quadruple-A product — or “quads” as they say — and it can be marketed as such. We all know it costs a bit more to grow in that environment, but if we can capture a greater margin because we brand it as a craft, indoor product, which it is, then so be it. I think there’s a market for that in the long term.
A lot of people like to talk about the commoditization of cannabis. When you talk about the high-end flower, I’m not sure that commoditization is necessarily the case. And we can prove that in environments like this.
SG: How do you define high-end flower? What does that phrase mean to you?
KM: Yeah, it’s really the $6 million question. A lot of people just think cannabis is going to become a commodity product, as I mentioned earlier, but even for that commodity product no one’s come up with a consistent way of grading it. What is Grade A, Grade B and Grade C? I think we’ll get to a place where the market will understand that better, so if I’m trying to sell somebody bulk product, we’re both talking about apples, and not apples versus oranges.
But there’s also another aspect to it: When you walk into the liquor store, there’s all the rows of wine, the regular $5 to $10 bottles, but there’s also the special section in the back where you’ve got all the really high-end stuff that people chase after and are willing to spend more on. That’s what I’m talking about when I think about high-end flower. There are all kinds of interesting analogies and metaphors and parallels you can use when you talk about cannabis, and I tend to lean on the fine wines with the different terroirs and the different flavor profiles and all that kind of good stuff that cannabis connoisseurs want to see and experience.
SG: What was the process for deciding to build out this hybrid greenhouse for your large-scale production facility?
KM: Like any true Canadian endeavor, it all started at a hockey game.
We’d been kicking tires, looking at a lot of different prospective facilities and looking at greenhouses across Ontario and Canada at-large, running numbers and models on various different production platforms. It all came down to this funny introduction that happened at a hockey game and speaking to a group that ticked every box for a group we wanted to work with.
They had a wonderful facility located quite close to our existing shop which has a ton of logistical advantages associated with it. And they were willing to cut a deal that made sense to us and obviously to them to get to get us in the game. At that point, on the financial side, we’d run a lot of numbers. We were trying to figure out how WeedMD was going to take that next step to become a player of note, of size, with capacities to compete, but efficient capacity to compete over the long term.
And this was the methodology by which we chose to go the hybrid greenhouse route. We had the human capital on our team that knew not only how to operate, but also to retrofit, a greenhouse, which enabled us to get this thing ramped up in a hurry. We rolled out into the greenhouse last summer (2018), which in southwestern Ontario was one of the hottest summers in recent memory. It stress-tested our systems and we passed with flying colors, with respect to the product that we were able to create in just our first harvest.
SG: There’s been quite a bit of news about the current cannabis drought in the legal Canadian market. With companies like WeedMD ramping up toward full production, it seems like only a matter of time before supply and demand even out and possibly even shift the other direction. How do you see the market playing out?
KM: You’re certainly correct; right now the market is pretty severely undersupplied. There are a lot of reasons behind that, but that would be a whole different conversation to get into those details. But I view that scenario as persisting for longer than some because no one knows for sure how this plays out. In my crystal ball I see the supply/demand imbalance persisting for 24 months at minimum, and I think that the reasons behind that fall both on the supply side and the demand side.
On the supply side, I know what it takes to develop, license, ramp up and operate these facilities and the timelines associated with pulling down crops, getting them tested, dried and ready for sale. As a result, I discount all the claims that are made around production that’s coming online over the next 12 months and beyond.
On the demand side, I truly believe that the demand for cannabis is much greater than most people are anticipating at this point in time. And that’s because most of the analysts who try and figure out the size of the recreational market are simply extrapolating from our current black-market numbers. I don’t think they’re capturing the full picture because the full picture includes people like my mom who might want to take CBD, or some other consumer that wouldn’t otherwise have even thought about going through the black market, but now that we’re in a legal environment would have no second thoughts about trying it. Those are just small examples as to why I believe the demand side is much larger than most people think.
SG: It sounds like edibles won’t be available anytime soon in Canada, but how do you see the market for infused foods and beverages eventually affecting demand?
KM: That’s where I think a ton of that increase in demand beyond the current market exists. The time frame is all going to be pushed out, I think, from the initial anticipation of rolling out a full-fledged suite of new SKUs next October in Canada.
But I’m thinking about this from the long-term standpoint. So if it’s a few months later, that might disappoint a few short-term investors, but that’s not going to bother me. WeedMD is playing a long-term game and making plans for the long term. Over that period of time, there will be all kinds of wonderful products and SKUs that we can develop and bring to market here in Canada and hopefully beyond.
SG: How does the retail side of WeedMD work? How do consumers buy your products?
KM: We’ve got full distribution capabilities across Canada, both for the medical channel as well as on the recreational channel. On the medical side, we’ve got thousands of patients we sell directly to who order from us and that we ship out to on a daily basis.
We’re also one of only a few licensed producers in Canada that has a deal with Shoppers Drug Mart, the largest retail pharmacy chain in the country. That platform is just rolling out now as we speak, and we anticipate it being a very significant distribution channel for us going forward on the medical side.
On the recreational side, we’ve got deals with five Canadian provinces. In Canada, the model is such that typically the provincial liquor agency will stand in the middle as the wholesaler and will purchase directly from licensed producers who then ship product to retailers in every given province. Those retailers would either be privately owned, publicly owned or some combination thereof, depending again on the province. We have deals in place with Ontario, Alberta, British Columbia, Manitoba and Nova Scotia, with further provinces coming online soon.
SG: What do you see the Canadian cannabis market looking like three to five years down the road?
KM: Well, I think we’ll finally have edibles (laughs).
It’s probably going to take that three- to five-year time frame for this market to settle into some semblance of normalcy. I like the approach that the governments and provinces have taken. A lot of people like to complain about the various issues that have cropped up as we’ve rolled out this program, but the reality is if we’d waited to get everything perfect, we would never have rolled it out. I like the approach of getting it done and taking a more conservative stance in the early going, and then let’s sort of build the plane in the air, which is what we’re doing now.
So three to five years from now, we’ll have a full-fledged bricks-and-mortar retail distribution platform that exists across the nation and we’ll have a number of very large licensed producers, of which WeedMD will be one, providing product all across the nation and ultimately internationally. And of course, there will be a number of smaller, craft producers in the mix.
I look forward to getting to that stage of the market. It will be a very exciting time. I think we’ll see all kinds of new products and very exciting product development in Canada, which I truly believe has positioned itself as an epicenter for cannabis going forward for the globe to look at.
SG: Do you believe that independent, craft cannabis producers can survive in the market? Do you see a parallel with the beer industry, in which many successful craft brands are ultimately bought out by the Budweisers of the world?
KM: It’s a great analogy and I think it holds true to what we’re going to see with the recreational side of this market. You’ll see tons of mergers and acquisitions. Even among the bigger players, you’ll see business failures, and then you’ll see craft guys who succeed and are swallowed up and other guys who may maintain their independence.
There’s room for a bunch of different models to flourish. I agree with you that the beer model, where there are some large producers, a bunch of craft producers and then those guys in the sweet spot, or what they call the mass-craft producers, the ones who are able to keep that craft persona but scale it up and really capitalize on it.
SG: How did the name WeedMD come about? And with the MD reference, do you see any need to rebrand to include the broader recreational market?
KM: Well, first and foremost, it’s the best name in the business (laughs).
We will be expanding the brand portfolio more specifically from the strictly medical side, just because “weed” doesn’t play all that well in a lot of institutional pharmaceutical or medical settings. However, we love the name. There was a time we thought Health Canada might not license us because of the name, but obviously that wasn’t the case and those who may have had reservations about the name when they first heard it have embraced it over time. It certainly does grow on people, especially in a world where a lot of folks have more generic names — I mean a lot of the earlier names, especially in Canada, are typically a “Medi-” or a “Canna-.” They didn’t really resonate or stand out, so in that world I think WeedMD is a great name. It’s only six letters and an easy URL, so it’s a winner.
This interview was edited for length and clarity.