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Joint venture opens path for CannTrust entry into U.S. CBD market

CannTrust Holdings said it plans to enter the U.S. market for CBD, starting with a hemp production joint-venture in California.

The Vaughan, Ont.-based licensed producer has signed a non-binding letter of intent with Elk Grove Farming Company to secure hemp with high cannabidiol (CBD), the non-intoxicating compound found in cannabis and hemp.

Under the deal, the joint-venture will secure a long-term lease for more than 3,000 acres of farmland designated for hemp production in Southern California. It adds that it will process, formulate and sell hemp-derived CBD products.

This is the “first step” in CannTrust’s development of “full-scale” U.S. operations, the company said.

“Our U.S. operation is expected to deliver a significant increase in low-cost production capacity… And will give the Company a foothold in the largest international CBD market in the world with an experienced and knowledgeable partner,” said CannTrust’s chief executive Peter Aceto in a statement.

Once a binding agreement is executed, commercial operations are expected to begin in 2020, subject to regulatory approval, the company added.

CannTrust is the latest Canadian licensed producer to plot its entry to the massive U.S. market.

Cannabis has been legalized for medical or recreational use in several U.S. states, but remains an illegal Schedule 1 drug at the federal level. However, the passage of a U.S. law late last year, known as the farm bill, has allowed for the growing of hemp for the purposes of extracting CBD.

Some regulatory uncertainty remains as the Food and Drug Administration recently held its first public hearing on the CBD as officials try to determine how to regulate these products.

Shares of CannTrust were up as much as seven per cent on the Toronto Stock Exchange to $7.16 in midday trading after the announcement.

The move gives CannTrust a foothold in the world’s largest market, which is critical for long-term growth and valuation of all large licensed producers, said Jefferies analyst Ryan Tomkins.

“At the same time, we do urge some caution,” he said in a note to clients. “It is not operational until 2020, the hemp will be sourced from a farm that has no hemp experience, and CannTrust still lacks a branded partner, something we think will be hugely important in the hemp CBD space.”

RBC Capital Markets analyst Douglas Miehm said establishing hemp operations in Southern California was “positive” but additional moves are required. Canadian licensed producers face a tough task in building U.S. distribution on their own, he said in a note to clients.

“We believe the company will now look to add partners that would give it access to a distribution network,” Miehm said.

CannTrust said it will invest up to $20 million in its U.S. operations through to the end of 2020. This capital includes the company’s portion of cultivation, harvest and post-harvest processing for the 50-50 joint venture, as well as extraction and processing investments to be funded by CannTrust, it said.