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Mar 13, 2018

How Quebec's Hydropothecary is plotting global growth

Marijuana plant.

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As Canadian marijuana growers rush to boost production before pot gets legalized, Quebec’s biggest cannabis company is looking at the province’s global convenience-store giant Alimentation Couche-Tard Inc. (ATDb.TO) for a road map.

Gatineau-based The Hydropothecary Corp. (THCX.V) says it wants to follow the footsteps of Quebec leaders such as Couche-Tard, the owner of the Circle K chain, which started with one store outside Montreal and gobbled up rivals from Ontario to Norway. Hydropothecary secured about a third of its home market last month, when it signed a letter of intent with the province’s alcohol distributor to supply 20,000 kilograms (44,092 pounds) of cannabis products in the first year of recreational sales.

“I plan to be one of the two to three multinational companies still standing in five years,” founder and Chief Executive Officer Sebastien St. Louis, 34, said in a phone interview last week. “Our strategy is to go to Quebec first, then expand to Ontario, then to Western Canada, and then internationally.”

Canada’s pot producers are jockeying to grab a slice of a medical and recreational marijuana market that’s forecast to reach $8 billion in sales by 2021. Companies such as Aurora Cannabis Inc. (ACB.TO) have launched takeovers while others such as Cronos Group Inc. (CRON.V, CRON.OQ) are listing on the Nasdaq Stock Market to boost international exposure. Share prices in the industry have tumbled since the beginning of the year, however, amid overvaluation concerns.

Hydropothecary has dropped 22 per cent to $3.89 from its Jan. 23 peak. That’s not stopping St. Louis from “very seriously” considering a Nasdaq listing after a planned move from the junior to the main Toronto stock exchange in the next few months, he said. The company, which shares board member Nathalie Bourque with Couche-Tard, has $130 million in cash to help fund its ambitions to expand, according to St. Louis.

The company, which won a license to sell medical marijuana in 2015, has a market capitalization of about $696 million compared with about $6.4 billion for Canopy Growth Corp., Canada’s largest pot company by market value, which has operations in seven countries.

Yet the preliminary supply agreement with Quebec, which could grow over time, gives Hydropothecary greater visibility and may be worth as much as $120 million, analysts at GMP Securities wrote in a note last month.

“This provides a major endorsement of Hydropothecary’s execution capabilities to deliver quality products at large scale,” they wrote.

The company is expanding its production capacity to 25,000 kilos of dry cannabis by July, and 108,000 kilos by the end of the year. It’s also planning to invest in machines that will directly extract the molecule from plants to make products such as sublingual sprays, massage oils or drinks.

Such higher-margin products will eventually account for 70 per cent of the business and help the company weather a looming oversupply that’s going to spur competition, St. Louis predicts. In Quebec, the grower also benefits from cheap power helping keep production costs lower.

“It’s going to be critical to be hyper-competitive on growing costs but also to develop a manufacturing expertise,” he said. “Cannabis is talked about for its flower but it’s only a very small part of the story. That’s why we’re putting our efforts on transformation and new products.”

--With assistance from Jen Skerritt and Aoyon Ashraf