OWC Pharmaceutical Research Corp (OWCP)

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Cannabis COWEN EVENT Take-Aways JEFF FRIEDLAND MENTIONED

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The Cowen Insight

Last week, we hosted our Inaugural Cannabis Colloquium, featuring various speakers covering topics ranging from U.S. policy, consumer trends and investment considerations, to a deep dive into the Canadian cannabis market and the public companies looking to capitalize on the country’s transition to adult use (which we estimate to be a CAD $4 bn in year 1).

Policy: Needs to Play Out

We heard from several policy experts and industry thought leaders, including Ethan Nadelmann (Founder and Executive Director of the Drug Policy Alliance), Allen St. Pierre (former Executive Director of NORML), Jeffrey Friedland (CEO of INTIVA Inc.) and Michael Safir (Business Manager at High Times Magazine). In the U.S., the Trump administration presents uncertainty for the industry, in particular given Trump’s nomination of Jeff Sessions for Attorney General. Broadly, the hope is that cannabis is low on the list of priorities for the administration (in particular given popular support for cannabis legalization, as evidenced by the election outcomes). States that have adopted legal cannabis (either for medical or adult use) will be critical in defending the changes that have already gone into effect (as evidenced by CA’s having hired former AG, Eric Holder). With more states expected to implement an adult use framework in 2018 (and Canada), state legislatures in New England could be motivated to legalize adult use as well, as the benefits of cannabis-related tax revenues in the region become increasingly apparent.

U.S. Market: Fast Growing and Evolving
While the political landscape leaves uncertainty around the evolution of the cannabis market in the U.S., the existing market continues to experience torrid growth, as noted by Cy Scott, the Co-Founder and CEO of Headset, with Washington up 180% in 2016, while CO cannabis sales grew 130%. With an average consumer age of 37, category spend is inline with our estimates, as over 30% of consumers spend in excess of $1,000/year. While flower continues to dominate the market (65% of sales), novel form factors are showing outsized growth. Off of a small base, topicals grew ~400%, which rapid growth was reflected in the insights from Lynn Honderd, Co-Founder of Mary’s Medicinals. Edibles, which account for ~6% of the market, have also experienced rapid growth (over 100%), allowing new market entrant Coda Signature to quickly reach distribution in over 150 dispensaries and become cash flow positive, as articulated by Co-Founder and CEO, Mark Grindeland. In vapor, one of the biggest novel sub-segments (8% of sales), consumers are embracing technology, and are utilizing loose leaf solutions (with tobacco capabilities) for a non-combustion experience. Indeed, Tyler Goldman, CEO of PAX Labs, noted that the company has sold over 1 mm units of their premium priced vaporizer ($280) in just a few years.


The robust growth seen in existing markets, and the notable new market opportunities following the election, continues to fuel interest from new entrants. Both Ben Kaanta, Director of Operations for MJardin, and Brett Roper, COO, Medicine Man Technologies, noted that setting expectations around start-up costs for cultivation operations ($4-$10 mm), market sizing and regulatory complexity filters out a majority of potential clients for their grow consulting services. That said, the nuanced regulatory frameworks adopted by individual states provides a key opportunity for Nick Kovacevich, CEO of Kush Bottles, and the company’s child resistant, compliant packaging. Ultimately, all of these efforts support the dispensary retail model, as noted by President of Medicine Man, Sally Vander Veer, whose chain of dispensaries in CO continue to experience healthy growth (in part fueled by tourism, as the company’s Denver outpost generates 70% of sales from out-of-state visitors).

The Global Cannabis Opportunity, Led by Canada
Brendan Kennedy, Co-Founder and CEO of Privateer Holdings, estimates that the global cannabis market generates sales of ~$200 bn. In addition to Leafly and Marley Natural, the company owns Tilray, a Canadian licensed producer, which has expanded its reach beyond the U.S. via exports to Australia, Latin America and New Zealand. Several other Canadian LP’s have their sights set on the global opportunity as well. Canopy Growth CEO Bruce Linton noted his company is already exporting to Germany and Brazil, while CEO of The Cronus Group, Mike Gorenstein is also exporting to Germany. While both companies are well positioned to capitalize on adult use, which is generally expected in 2018, Dennis Arsenault, CEO of Organigram, noted that his company would remain domestically-focused, given the sizeable opportunity seen for Canada. Consumer research from Deloitte Canada, as presented by Vice Chair and Global Leader for Deloitte Private, Mark Whitmore, supports a focus on Canada as they estimate 22% of adults in the U.S. use cannabis (with another 17% indicating a willingness to try cannabis once legalized).

Vivien Azer
646.562.1351
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Aaron Grey, CFA
646.562.1421
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