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Cannabis Watch: CEO of pot producer Cronos talks about Altria deal, weed drinks and the rise of CBD

Cronos Group Inc. is one of two of Canada’s cannabis producers to ink multi-billion dollar deals with big American companies. Read More...

TORONTO — Cronos Group Inc. is one of two Canadian cannabis producers to have inked a multibillion-dollar deal with a big American company.

The $1.8 billion investment Marlboro maker Altria Group Inc. MO, +2.68% made in Cronos CRON, +3.87% CRON, +3.13% in December legitimized overnight a company that produces far less cannabis than rivals such as Canopy Growth Corp. CGC, +3.55% WEED, +3.20% .

Chief Executive Mike Gorenstein, who has practiced law in the U.S. and was once a partner at Alphabet-owned Google’s GOOGL, +0.80% GOOG, +0.69% venture-capital arm, now has a massive war chest to fund Cronos’s ambitions in cannabis.

Previously: Canopy Growth’s quiet co-CEO on the pot company’s ambitions in the U.S. and more

MarketWatch sat with Gorenstein in the company’s downtown Toronto offices this week to discuss his outlook on the cannabis market, how he’s handling the Altria deal and how the cannabis industry is evolving, especially in terms of its use of related services.

This interview has been edited for clarity and length.

MarketWatch: Several of your rivals have struck beverage-related deals. What’s your outlook for cannabis products in Canada beyond the flower and oil that’s currently available?

Gorenstein: After nonflower categories, vaporizer is clearly the biggest. And then edibles is next, then topicals, and then you start getting into how you classify pharmaceutical formats. Then you get into beverages.

For tetrahydracannabinol, or THC, at least, you have to change the way consumers are consuming the product right now. Retailers today aren’t set up today for mass beverage distribution — the trucks, for example, you need are different. It will take time for beverages to catch on. … If you’re not able to order it in a restaurant or a bar it’ll really hurt the category. Eventually, we should be able to have that, but I don’t see it out of the gate.

MW: The demand for cannabidiol- or CBD-derived products has caught many Canadian licensed producers off guard, given the amount of product available in stores versus the perceived demand. Why was that?

Gorenstein: I think a lot of that comes from forecasting and product mix, and I think that when you looked at what the provinces were originally asking for in orders, you just have to allocate your gross base, and it takes time to turn things over. You have to go through the different stages of cannabis-plant cultivation. Initially the thought was the demand would be in more THC products, but CBD has turned out to be popular.

When you look at CBD as a category, and how it will be in the U.S., and how we thought it would be here, if you’re not able to deschedule it and sell it normally, is it going to compete? It’s so much more expensive for a cannabis retail company given the middle-man distributor and the margins that it almost feels like it was the expectation was that it would only be THC and CBD would be more accessible. THC, for example, is taxed, whereas CBD isn’t.

MW: How should investors think about the Altria deal and some of the health issues the company has faced in the past while you’re trying to build medical brands alongside recreational products?

Gorenstein: If you ask how do you reconcile things, what you would probably ask of that industry is invest in something medical, invest in something helpful, and I think that’s a big part of what you’re seeing. If you look at the investments Altria has made — I can’t speak to 20 or 30 years ago — but the company is very, very focused on reducing risk and expanding choice. And that’s kind of the defining characteristic in the investments they’re making. I think we’re in a position that it doesn’t hurt Altria if we put out more medical products, it doesn’t take away their existing market share. Same thing with recreational products; same thing with CBD products.

I think incentive-wise, we still have access to supply chain, to distribution. I think we have the capital and infrastructure to bring products to market, regardless of what the distribution channel is.

MW: One of the issues frequently brought up by cannabis companies is production choke points that have contributed to the supply shortages across the country in the early days of legalization — the excise-tax stamps being one example of a specific issue. To what extent do production issues remain in the industry?

Gorenstein: The big problem is we also expect packaging is going to continue to change. Like for example, with the bottles for tinctures, you face a decision whether to fully automate that process. It takes time to get the equipment set up to do that. But we know now in October that the packaging rules are changing again. If you were to do design this custom automation that can apply tax stamps, the challenge is that, if you design it for one specific package, will you end up using the package in six months?

I think that’s one of the things when we talk about packaging, tax stamps are a minor detail, but all of these processes for having — most companies that you think of have spent five years designing automation for a single package, that will stay the same. It’s a big innovation project to switch to another piece of packaging. A lot of it for us is looking at what we think the end-state packaging is, and packaging that will flip back and forth, we still think and we hope that packaging rules will evolve from where they are today.

MW: Does Cronos require specialized cannabis-focused software companies like U.S. cannabis businesses do? For example, what’s the Oracle Corp. ORCL, +0.73% of pot?

Gorenstein: When you ask what is the Oracle of pot, my answer is Oracle. But we’re in a fortunate position in Canada. When you ask me who is the Oracle of pot in the U.S., I don’t know. But the question I ask is how long do you believe you can build a business [with] a strong moat that could keep people from switching to Oracle before it becomes federally legal? And do you believe Oracle can plug that hole? Is that going to have value once cannabis is legal in the U.S.?

MW: What restrictions, if any, do you have from working with major software providers, and are there still challenges?

Gorenstein: When it comes to working with software companies, we don’t have, really, restrictions. Sometimes there’s heightened diligence because it’s a new industry, but it’s not really a restriction for us. At least now we don’t have to deal with that issue. When we started off, we didn’t even wire money to the Securities and Exchange Commission for our Nasdaq listing fee; I had to do that personally. They were concerned we were funding a criminal organization. They stop it because they see cannabis. Sometimes there is spillover like that, but you can ultimately get it over the line.

Those software services are also things you’ll see optimize and get better here — enterprise resource planning software, point of sale, card processing, material requirement planning software, all that stuff is being done, but it’s not instant. As those come online, things will move a lot more smoothly. But the stigma, I feel like, is for the most part eroded.

MW: What are areas of software and tech in Canada that still have significant room for improvement?

Gorenstein: I’d say data. Now you’re seeing Nielsen NLSN, +0.20% provide some services, but it’s not comprehensive.

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