Internationalization of Canopy Growth Corp

Co-founded by Bruce Linton and Chuck Rifici in 2013 headquartered in Smith Falls, Canada based Canopy growth Corp (CANOPY) formerly known as Tweed Marijuana Inc. has 21 subsidiaries and many affiliates (See Exhibit A). It operates in 15 countries across 5 continents. ¹ CANOPY trades on the Toronto Stock exchange as WEED and became first cannabis company to get listed on the New York Stock Exchange as CGC. In 2016 CEO Bruce Linton said during Mayor’s Breakfast Series “We want to be really not very Canadian. We want to dominate the world, “². It has subsidiaries, partnerships in Germany, Chile, Columbia, Denmark, Jamaica, Lesotho, Australia, Brazil, Czech Republic and Spain as per Exhibit B. It is a multi-brand Cannabis and hemp company and has worlds recognized brands- Tweed, Spectrum Cannabis, DNA Genetics. Canopy has ten licensed production sites with over 4.3 million square feet of capacity, including over 500,000 square feet of GMP certified production space ^{3, 3a.} It operates many Tweed retail stores and has secured supply agreements with each Canadian province ⁴. They are stepping first step into US market now. Recent Farm Act in Dec 2018 gave them an entry in the US. Canopy supplied first medical cannabis legally to US for research purpose to their Colorado based Hemp research company, ebbu Inc. As per RTTNews CANOPY is the world’s biggest Marijuana company ⁵.

What is Cannabis?

Cannabis or marijuana is a plant based psychoactive drug. It is used for medical and recreational purposes because of its mental and physical effects, but its intoxicating and addictive properties make it illegal in most countries in the world.

International Cannabis market overview

The global cannabis market is forecasted to reach $140 billion/year by 2027 ⁶. Canada is the 2^nd G20 country after Uruguay to legalize marijuana for adult recreational use. Medical Cannabis was legalized in Canada back in 2001 and recreational Cannabis was legalized in Oct 2018. Several countries have legalized Medical Cannabis recently and more countries are expected to legalize it for medical purpose. Uruguay and Canada are the only countries that fully legalized the consumption and sale of recreational cannabis nationwide ⁷. Canada has developed regulatory framework and companies working within that framework have expertise, knowledge and product share with global community¹⁸. The number of registered users and supply is growing proportionately (See Exhibit D).

Canopy Growth Corp: A global Cannabis leader in the making

Under Opium and Narcotic drug Act, Canada had banned Cannabis until 1998. Rapid increase in Cannabis popularization and users led Canada legalize medical Cannabis in 2001 but poor enforcement laws, chain of custody issues, diversion to the black market and loss of tax revenue worried authorities ⁸. This makes for risk-premiums that create a monopolized market with high barriers to entry, which in turn, leads to increases in violence, organized crime and the diversion of limited government resources to prosecuting drug users ⁹. Linton’s previous telecom experience had helped him to find a solution. “If you understand how not to lose data packets from a data network, not losing weed is way easier,” he said ¹⁰.

Let us apply the framework (see Exhibit F) to understand how CANOPY has expanded successfully around the globe (see Exhibit G). CANOPY became the first Canadian company to get a license to cultivate marijuana and grew faster. Culture plays an important role in expanding. CANOPY created a fund called Canopy Rivers, which invests in cannabis startups to work with them instead of crushing them, maintain a supplier relationship and eliminate competition. A clear mindset of being first movers and doing business in most regulated ways so they only targeted legally approved countries. Operating and investing in federally illegal markets put the company at risk of prosecution and potentially could jeopardize its listed on NYSE and in the future, limiting access to capital from investors¹⁸. It exhibits social responsibility of educating customers about Cannabis and run several marketing campaigns to educate customers about the benefits and dangers of cannabis like danger of driving after consuming it. Canopy provides financial support to research institutes. Next, Admin cost consideration for globalization. As Cannabis comes under the strict Compliance radar so each subsidiary, affiliate needs to follow compliance SOP guidelines. Production sites need regular maintenance and insurance to save them from unknown mishaps, security breaches, downtimes because that could incur them heavy losses. Management of supply agreements, its related formalities, documentation, approvals, government, lawmaker and investors lobbing, Canopy Rivers finance management, Regulatory compliance management etc. Geography costs. Factors like Federally legalized G20 countries for Cannabis, low-cost high-quality labor, Germany as a global hub and gives easy entry to other G20 countries, targeted US as it is the biggest Cannabis market and draws maximum investors. Another consideration is economic conditions of the host country. Canada is a stable economy, wealthiest nation in the world with low inflation and interest rate. Canadian Government supports CANOPY in terms of tax relaxation and 52 tax treaties with many countries. People in Canada would prefer to buy low cost marijuana medicines. Internationally, also it is expected that marijuana medicines will be available to cheaper rates as compared to medicines. The motivation is market seeking with high-quality, low-waged labor, increase productivity and Cost reduction, resource seeking in terms of cannabis and diversified portfolio as most of the world has banned Cannabis, improve Enterprise IT and improve supply chain management. Canopy knows that they must diversify their portfolio, develop innovative products to disrupt markets like Alcohol, Tobacco and medicines. They are seeking knowledge to develop GMP Cannabis from DNA Genetics, With Spektrum Cannabis Germany, formerly MeddCann, acquisition they are successful distributing Cannabis in more than 400 pharmacies across Germany, with Bedrocan, they wanted to import proprietary standardized Cannabis strains and know-how to the Brazilian market and improve yield efficiency. Constellation Brands (Wine, Beer, liquor company) and Canopy have collaborated for manufacturing of non-alcoholic drinks, Canopy would leverage bottling and distribution model of Constellation Brands.

Canopy has complex ownership advantages. Cannabis is valuable, somewhat rare and addictive product and that is Canopy’s biggest advantage. It is tough to imitate as most of the countries have banned it legally. Because of many mental and health benefits it has grown loyal users. Bruce Linton is the next factor. He is smart, intelligent, market seeker, has good relations with government, good captivator of the press, along with lawmakers, regulators and investors. He said “Success in future global medical markets and the recreational cannabis market in Canada will depend not only on capacity, but on strong execution and securing supply agreements with the provinces today ¹⁶. In August 2018, his biggest deal with Constellation Brands ²²(Wine, Beer and spirits producer) to invest C$5B US Dollar in CANOPY is the biggest in Cannabis market history and this additional cash flow would allow CANOPY to expand in more 30 countries where medical marijuana is expected to be legalized. Expansion is necessary for them as dried Cannabis is a low margin commodity and the future will depend on product innovation. CANOPY plans to develop non-alcoholic drink in collaboration with Constellation Brands. It can leverage the bottling and distribution capacity-and regulatory know-how-of beverage industry partners to offer prospective customers a smoke-free consumption method in a familiar format ¹⁰. Linton was named 2018 CEO of the Year by the Ottawa Board of Trade and Ottawa Business Journal. He made CANOPY the first cannabis public trading company on TSX and NYSE.

Next, company big brands. CANOPY has world renowned brands like Tweed, Spectrum Cannabis, Doja, DNA Genetics, Foria etc. These are highly popular and earn huge customer loyalty. Cannabis icon Snoop Dogg that grants Tweed exclusive rights to use certain content and brands owned by the rapper’s company, LBC Holdings and in return Snoop Dogg gets cash and stock from Tweed ¹⁵.

They have supply agreements with all provinces across Canada (See Exhibit E). Canopy Rivers funds cannabis startups and in return gets the supply of dried cannabis/end goods in return see example ¹¹. Canopy has developed Craftgrow, a partnership program that gives Cannabis patients access to multiple cannabis brands under 1 roof, new Cannabis Licensed Producers (LP) access to Canopy QA program, online marketplace, customer care and call center capabilities as well as Tweed customer base help LPs to market much faster and help customers ¹⁹. Tweed Main Street Community Engagement Centers help customers to learn more about medical cannabis in a helpful, supportive and consumer-friendly environment. Canopy (Tweed) also runs campaigns to build community awareness about the effect of Cannabis while driving.

CANOPY also strives for product and process innovation, distribution capabilities and diversified portfolio. CEO Linton has shared that Cannabis can potentially disrupt $500 billion global market. A 2014 study done in Washington State, for example, showed a 12% drop in alcohol demand after pot was legalized ^{12 ,13}. Canopy potentially disrupts alcohol, cigarettes, in terms of smoking cessation and really disrupts pharmaceutical, because whether or not you’re geriatric care, you’re dealing with arthritic conditions, you’re someone who can’t sleep, you’re going through an oncology treatment, you’re going to find cannabinoid therapies really hit there.”- Said Bruce Linton ¹⁴. Economic conditions are also supporting Cannabis industry growth. Five years ago, banks and investors won’t touch this industry, but now they are openly supporting it to the tune of $8 Billion last year.

Structurally, CANOPY is an umbrella entity for more than a dozen subsidiaries and affiliate ventures, including consumer-facing brands – 2 brick-and-mortar chains, Tweed and Tokyo Smoke. CANOPY is a decentralized enterprise and each subsidiary and affiliates has local management but controlled by the Board of directors (See Exhibit H). CANOPY has an Omnibus Incentive Plan (OIP) to attract, retain and reward those employees, directors and other individuals with up to 15% of the aggregate number of common shares, who are expected to contribute significantly to the success of the Corporation and its Affiliates ¹⁷. There are incentives to grow Cannabis as humanely as possible by creating community-focused retail environment. Tweed strains now evoke the brand’s “tweed” theme (Donegal, Argyle, Houndstooth, Herringbone) plus whimsical pop-culture memes such as Boaty McBoatface. Tokyo Smoke’s house cannabis line has adopted a yoga-class-friendly nomenclature-Go, Rise, Equalize, Pause, and Ease. Tokyo Smoke CEO Gertner envisions it to become next “Starbucks of Cannabis” ¹⁰. I think their corporate culture of caring for the community, employees, partners, relationships with government, lawmakers and investors will further help them excel in this industry.

Conclusion

Canopy Growth Corp is taking every single step cautiously to grow in global markets. Bruce Linton’s charisma has helped CANOPY maintain good relationship with lawmakers, regulators and hence government are supporting them with suitable laws and tax reliefs. With increased interest shown by banks and investors, CANOPY is ready to make further acquisitions in many other countries. However, there are some risks and threats to CANOPY. These are¹⁸:

1) The protection of Intellectual property (IP) – the rely on trademarks, patents and general counsel to review unregistered IP and continuously improving IP portfolio, but still it’s a risk

2) Early stage enterprise- Expansion in US resulted high interests of banks and investors but still, it’s relatively new and has fewer financial resources

3) Dependency on licenses- License producer’s failure to comply with regulations can have high impact on Canopy.

4) Reliance on manufacturing sites- Proper maintenance and full insurance of sites to avoid security breaches, failures and overall business.

5)  The importance of key inputs- like raw material, supplier, labor, electricity, water and utilities

6) Others like Competition, climate conditions and international regulations ambiguity. CANOPY may face intense competition from companies with more financial resources and marketing experience.

It has spent most of the capital in acquisitions (See Exhibit G) and has volatile stocks ^{20 & 20a,} but Canopy’s future looks extremely good. I think Canopy needs to keep monitoring regulations, investments in product development, distribution, IT, resourcing, retail store activity, renewal or addition of more supply agreements, increase in production, meet quality standards and satisfy shareholders.

Exhibits

Exhibit A Canopy Subsidiaries and affiliates, Page 6, Nov 13, 2018

Source-https://www.Canopygrowth.com/wp-content/uploads/2018/11/Canopy-Growth-Corp-Q2-2019-MDA-FINAL.pdf

Exhibit B Canopy International subsidiaries, partnerships or business activities, Page 13, Nov 13, 2018

https://www.Canopygrowth.com/wp-content/uploads/2018/11/Canopy-Growth-Corp-Q2-2019-MDA-FINAL.pdf

Exhibit C Legalities of Cannabis

C1. https://en.wikipedia.org/wiki/Legality_of_cannabis Recreational Cannabis status, Page visited Jan 28^th, 2019

C2. https://en.wikipedia.org/wiki/File:Map-of-world-medical-cannabis-laws.svg Medical Cannabis status, Page visited Jan 28^th, 2019

English: Map showing legal status of medical cannabis across the world.

 Legal as authorized by a physician

 Legal for any use (no prescription required) Jamesy0627144

Exhibit D Cannabis fiscal year reporting (FY 2019-19)

D1. Cannabis for medical purposes (FY 2018-19) – licensed producers: monthly data by Health Canada, Page visited Jan 28^th, 2019 https://www.canada.ca/en/health-canada/services/drugs-medication/cannabis/licensed-producers/market-data.html#tb5fn12

D2. Cannabis for medical purposes (FY 2018-19) – licensed producers: monthly data by Health Canada, Page visited Jan 28^th, 2019 https://www.canada.ca/en/health-canada/services/drugs-medication/cannabis/licensed-producers/market-data.html#tb5fn12

Exhibit E

Brian Paradzahttps://www.fool.ca/2018/08/17/aurora-cannabis-inc-tsxacb-vs-Canopy-growth-corp-tsxweed-provincial-supply-agreements/ Page visited Jan 28^th, 2019

Exhibit F

Canopy Growth Corp globalization framework (Self-created)

Exhibit G

Heasie Invests YouTube video “Canopy Growth Corp timeline of major events” April 13^th,12018 https://www.youtube.com/watch?v=aAF8c121epc

Exhibit H

New Cannabis Ventures Annual information form report on Canopy growth Corp. Canopy organization structure (Modified to fit in this document) Page No. 8, June 28^th, 2017

https://www.newcannabisventures.com/wp-content/uploads/WEED-Annual-Information-Statement-2017.pdf

Exhibit H

Endnotes:

1. PR Newswire news on Canopy Growth receives New York State hemp license and will establish U.S.-based commercial operations https://www.prnewswire.com/news-releases/Canopy-growth-receives-new-york-state-hemp-licence-and-will-establish-us-based-commercial-operations-300777845.html on Jan 14, 2019
2. David Sali, Ottawa Business Journal on Sept 15, 2016 https://obj.ca/article/Canopy-growth-corp-aiming-dominate-world-marijuana-market-ceo-says
3. PR Newswire news on Canopy Growth receives New York State hemp license and will establish U.S.-based commercial operations https://www.prnewswire.com/news-releases/Canopy-growth-receives-new-york-state-hemp-licence-and-will-establish-us-based-commercial-operations-300777845.html on Jan 14, 2019
4. 3a. New Cannabis Ventures, NCV media https://www.newcannabisventures.com/stock-Canopy-twmjf-Canopy-growth-corp/
5. PR Newswire news on Canopy Growth receives New York State hemp license and will establish U.S.-based commercial operations https://www.prnewswire.com/news-releases/Canopy-growth-receives-new-york-state-hemp-licence-and-will-establish-us-based-commercial-operations-300777845.html on Jan 14, 2019
6. RTTNews on Growin’ Like A Weed: These Are The World’s 10 Biggest Marijuana Companies http://www.rttnews.com/slideshow/3774/ten-largest-marijuana-companies-cannabis-marijuana-canada-medical-cannabis-recreational-market-Canopy-growth.aspx?Slide=11
7. Marijuana Business Daily’s Global cannabis market poised for 1,000%-plus growth to $140B, report predicts on Jan 23^rd, 2018 https://mjbizdaily.com/global-cannabis-market-poised-1000-plus-growth-140b-report-predicts/
8. https://en.wikipedia.org/wiki/Legality_of_cannabis
9. Adam Bluestein, FastCompany magazine article “How Canopy growth became the jolly green giant of Cannabis on Jan 24th, 2019 https://www.fastcompany.com/90285740/how-Canopy-growth-became-the-jolly-green-giant-of-cannabis
10. “The Economic Case for Marijuana Legalization in Canada”. Journal of Alternative Perspectives in the Social Sciences. 5 (1): 96–100. Dec 1, 2012.
11. Adam Bluestein, FastCompany magazine article “How Canopy growth became the jolly green giant of Cannabis on Jan 24th, 2019 https://www.fastcompany.com/90285740/how-Canopy-growth-became-the-jolly-green-giant-of-cannabis
12. Canopy Growth Corp Manitoba Liquor and Lotteries corporation supply agreement news release on June 29, 2018 https://www.Canopygrowth.com/wp-content/uploads/2018/06/20180625-Manitoba-Supply-Agreement-News-Release-Final-EN.pdf
13. Christopher Ingraham, Washington Post Analysis Medical marijuana took a bite out of alcohol sales. Recreational pot could take an even bigger one on Dec 1, 2017 https://www.washingtonpost.com/news/wonk/wp/2017/12/01/medical-marijuana-took-a-bite-out-of-alcohol-sales-recreational-pot-could-take-an-even-bigger-one/?noredirect=on&utm_term=.084d79a93657
14. Thomas Pellechia, Forbes article “Alcohol Sales Dropped 15% in States With Medical Marijuana Laws” on Jan 22, 2018 https://www.forbes.com/sites/thomaspellechia/2018/01/22/alcohol-sales-dropped-15-percent-in-states-with-medical-marijuana-laws/#41e809375f22
15. Elizabeth Gurdus, CNBC news “Cannabis could disrupt a $500 billion market, says CEO of top marijuana maker after deal with DEA on Oct 12, 2018” https://www.cnbc.com/2018/10/12/Canopy-growth-ceo-cannabis-could-disrupt-a-500-billion-market.html

16. Alexandra Posadzki, Star Business Journal-The Star “Snoop Dogg and Ontario marijuana producer Tweed strike business deal” on Feb 11, 2016 https://www.thestar.com/business/2016/02/11/snoop-dogg-and-ontario-marijuana-producer-tweed-strike-business-deal.html

17. PR Newswire’s Canopy Growth Corporation Reports Third Quarter Fiscal 2018 Financial Results: Focussed on Execution” news on Feb 14, 2018 https://finance.yahoo.com/news/Canopy-growth-corporation-reports-third-120000640.html

18. Canopy Growth Management Information Circular- June 13, 2018 https://www.Canopygrowth.com/wp-content/uploads/2018/06/DOCS-17974697-v9-CANOPY_Management_Information_Circular_June_2018-Final.pdf

19. New Cannabis Ventures released Annual information form on June 28, 2017 https://www.newcannabisventures.com/wp-content/uploads/WEED-Annual-Information-Statement-2017.pdf

20. Canopy Growth Corporation website https://www.Canopygrowth.com/brands/

21. NYSE stock page of Canopy Growth Corporation https://www.nyse.com/quote/XNYS:CGC

22. TSX Canopy Growth Corporation https://web.tmxmoney.com/charting.php?qm_symbol=WEED

23. Proactive Investors, UK reports “Canopy Growth shares jump after Cowen analyst raises price target” on Sept 4,2018file:///C:/Users/preetsha/Downloads/Proactiveinvestors_UK_-_Canopy_Growth_shares_jump_after_Cowen_analyst_raises_price_target.pdf