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Canopy CEO: ‘Political cycle in Canada’ delaying new rules for pot drinks

Bubbles in a sample beverage over a Tweed logo seen during a tour at a Canopy Growth facility that produces cannabis derivatives in Smiths Falls, Ontario, Canada October 29, 2019.  REUTERS/Blair Gable
REUTERS/Blair Gable

Canopy Growth (WEED.TO)(CGC) said it sold more than a million cans of infused beverages since its first drinks hit stores in mid-March. The milestone comes as the company pleads with regulators to rethink rules preventing consumers from buying more than five cans of its least potent pot drink per purchase.

Canopy marked the sale of 1.2 million cans year-to-date on Monday as it reported better-than-expected financial results. Chief executive officer David Klein touted the company’s drinks as a bright spot in the quarter, noting Canopy products accounted for 74 per cent of cannabis beverage sales in Canada year-to-date.

A self-described “recovering beer guy” following his tenure at Canopy’s largest shareholder, booze giant Constellation Brands (STZ)(STZ-B), Klein has been a vocal critic of Health Canada’s limits on how pot drinks are sold.

He and others in the industry have argued for purchase limits based on active cannabis ingredients, not the volume of liquid in each container. The Canopy CEO said provincial cannabis authorities he’s raised the issue with, including the Ontario Cannabis Store, now support the change. With those parties on side, he now sees the political optics of tweaking federal cannabis rules as the main obstacle.

“Every single provincial cannabis lead is on the same page as we are. The question they bring up is, ‘When is the timing right?’ I think it has as much to do with the political cycle in Canada as anything else,” Klein told Yahoo Finance Canada in an interview. “I think most people would feel more comfortable doing it in a politically expedient way, whether it's at the right time before or after an election.”

It’s easy to see why Canopy is pushing for changes. Three out of four products it has on the market come in 355ml cans with about two milligrams of THC per serving. Consumers are limited to five cans per purchase under Health Canada’s current rules. Those same rules allow consumers to buy up to nine cans of Canopy’s strongest 10 milligram of THC per serving drink, because it’s sold in a smaller 222ml can. Rival Aurora Cannabis (ACB.TO)(ACB) recently put 10 milligrams of drinkable THC in an even smaller bottle. Health Canada lets you buy 42 of those at once.

While Ottawa has been quiet on the legal cannabis file for some time now, records show a number of companies in the sector have lobbied the government on pot drinks and edibles. The Cannabis Act, the legislation that ushered in legal recreational cannabis on Oct. 17, 2018, is set to be reviewed in 2021. A report must be tabled in Parliament no later than April 17, 2023.

Asked in June about potential changes to the rules, a Health Canada spokesperson declined to say whether any are being considered.

“Like any government, it’s government inaction. It takes a while to get stuff done,” Klein said. “I don’t know that anybody disagrees with us.”

The Smiths Falls, Ont.-based company has placed a far bigger bet on drinks than any of its rivals, with four ready-to-drink products now on the market. It plans to release several more in the coming months, including a new lemon flavoured THC drink under Seth Rogen’s brand, and a CBD product. The company said on Monday that it doubled its beverage production capacity between June and July, and is set to do so again in August in order to meet demand.

Cowen analyst Vivien Azer said Canopy’s drinks are off to a “better-than-expected start.”

“The offerings hold over a 75 per cent share of the beverage segment (which [Canopy] estimates accounts for three to four per cent of the total legal adult use market, and would be ahead of the one to two per cent share that we generally see for THC beverages in the U.S.,” she wrote in a note to clients.

Klein sees pot drinks like his Houseplant grapefruit eventually rivalling the explosive popularity of hard seltzers like White Claw with American consumers as Canopy its expands its product and intellectual property sharing agreements with New York-based Acreage Holdings (ACRG-U.CN)(ACRGF).

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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