Experimenting with hemp: Ecofibre

Eric Wang is the Managing Director of Ecofibre (ASX: EOF). Now, this is a business that was taken over by or at least backed by Barry Lambert. It was started by a bloke called Phil Warner about 10 years ago. It floated just this year, just about a month ago at $1.00. It's now $2.00, so it's been a fantastic ride for those who came in, I suppose the vendors would be reflecting that they might have under-priced it. But anyway, it floated at $1.00 at the end of March and now, it's $2.00. It has a market cap of $230 million. 

Now, it's got three businesses. The main one is in the US. It's a hemp business. Not exactly medicinal cannabis. The products, I suppose, are medicinal in the sense that they sell through pharmacies. They're about anxiety and pain. There are tablets or capsules, things you put under your tongue, and also creams that rub on all sorts of parts of the body. That's generating reasonable cash at the moment. It's profitable, that business in the US.

They've also got a lab in the US where they're experimenting and developing hemp as a fibre that actually conducts electricity and is anti-microbial. Basically, it’s t-shirts and underpants that don't get smelly and are anti-bacterial, so that's interesting. They reckon there's a big future in that. Eric Wang says that's his favourite part of the business. 

In Australia, they're not allowed to sell pain and anxiety medications in pharmacies, but they are allowed to sell hemp as food and so that's what they're doing and it's basically low-gluten, high-fibre, pasta and foods like that which is just starting in Australia. 

Three parts of the business, pharmacies, what they call nutraceuticals which are non-prescription medicines in the US which is the first advance of the businesses. Food in Australia, hemp food in Australia, and hemp research in the US. They called themselves, "vertically integrated" in that they're growing the hemp and processing it and then selling it under their own brands. 

Eric is a former Bain and Company management consultant. He also worked for Perpetual and now is the Managing Director and he owns about two and bit per cent of this, and I think Barry Lambert's got about 25 per cent. They're all making a fair bit of money so far. Look, it's an interesting business. Obviously, this is a booming industry around the world, hemp and cannabis. It also has the disadvantage of being a gold rush as well, so potentially an oversupply which is what Graham Witcomb at Intelligent Investor has been talking about. But there is still some money being made. 

Here’s Eric Wang, the Managing Director of Ecofibre.

Well, Eric, I was just thinking that perhaps the best way to start would be to focus on your revenue in the latest quarter and the year to date, and if you could just tell us where that money has come from?  I think it's nine and a bit million for the quarter and I can't remember the amount for the year to date.  But so is that all from American, what you call, nutraceuticals? 

Yeah.  The quarterly revenue was unaudited about $10 million and for the year to date, nine months year to date, we're sitting probably call it, just over $23 million for revenue and the vast majority of that's from the United States.  I'd probably say well over 95 per cent of that revenue is from our, Ananda business, which is CBD.  Then, a small amount of the revenue's coming from the new business we started in Australia that deals with hemp food as opposed to CBD. 

What exactly are the products that you're selling in the US?

We have a range of, I call it probably 25 different skews that we have.  But they're based all off...

You mean stock…?

...the base product.  Yes, units.  Yeah, different product types.  Correct.  The products we have are really focused on the pain, sleep and anxiety markets.  And they come in a format of a sublingual tincture, they come in a gel cap, they come in topical format, and they're for humans and for pets.  We focus really heavily on more the market which is, well only the market that does not want to get high.  We don't deal with anything marijuana based, focus on people who want quality control and we like to use practitioners, for example, doctors and pharmacists as our main channel because there's a lot of education required still on this product.  It's still an advice product in my view. 

Just to be clear, you're selling some capsules plus things to put under your tongue and by "topical" do you mean creams that you rub on?

Yeah, creams, lotions, salves, and we also launched something called Bliss which is a sexual health product which is topical as well. 

What do you rub that on?

Yeah.  The Ananda Bliss product is actually something, it's meant for intimacy for both men and women and the basis of it started with dealing with women's health.  Especially a lot of pain and dryness that comes from thinning of the walls.  You know, which comes from the pre and post-menopausal and what happens is CBD actually helps with the pain and inflammation.  We've turned it into something a bit more of a lubricant as well.  The other benefit comes, is there's a lot of stimulation in the erogenous zones of the male and female.  What you end up having is, our product not only helps with dealing with pain and dryness, but it actually causes a fair bit of stimulation for women, and for men in certain cases, it helps address erectile dysfunction.  We're quite…

Okay, just overall, you say that you're selling the products through doctors and pharmacies.  Do you mean that it's on prescription?  Or the doctors are just recommending it? 

Yes. 

And is it for sale only in pharmacies or what? 

Yes, Alan, so right now, we're probably in about 3,000 physical locations in the US and we sell it as an over-the-counter nutraceutical, so there's no prescription required.  Pharmacists sell it in the front of the store and recommend it to patients.  And a lot of physicians and doctors recommend their patients use CBD and they'll send their patients to a local pharmacy to purchase it.  Now, about 80 per cent of our sales come through the pharmacies and then the remainder of sales come through health food stores and online.

Right.  Why did it happen that you're selling the stuff in the US mainly because you're an Australian company?

Sure.  We started off, Barry Lambert and I wanted this to happen in Australia, but to put not too fine of a point, the government and the TGA created quite a mess in their structure, so it's commercially not viable to run a business over here.  We literally, in 2016, moved anything that dealt with the medicinal side of it to the United States where the laws are far more, I would say commercial and consumer and patient-friendly, and so our products you can buy over-the-counter in any pharmacy. 

My son's ten years old, and he could literally walk into a pharmacy in America and buy our product over-the-counter.  Whereas here in Australia you'd have to go through the access scheme, get doctor prescription.  It was would have to be almost last resort as a medication.  It's just the wrong place to do it, so we've moved completely out of Australia, and I have no interest in sort of dealing with this in Australia. 

What's the difference between the laws exactly?

What we have is two different frameworks, Alan.  In Australia, we treat cannabis as cannabis.  So industrial hemp or marijuana, we treat it as the same type of plant basically, okay?  And in the United States, they treat it as two very different plants, okay?  Because one, you can get high off of, which is marijuana and industrial hemp has such a low level of a psychoactive molecule called, "THC," that you can't get high off it. 

What they've done in the United States is, Senator McConnell has championed industrial hemp as a crop and basically said anything that comes from the industrial hemp plant, is a legal product.  In essence, our CBD from the United States is no longer a schedule one substance and we can freely transport it across state borders and export it. 

Now if you shift it to the Australian side, they look at it as, everything that deals with cannabis, whether it be marijuana or industrial hemp is a scheduled substance, treated like heroin or cocaine, as an example.  Two very different frameworks being used, which means one is over-the-counter, sold as a nutraceutical like the US, and in Australia, it's treated like a drug which is highly controlled. 

I presume there's a percentage THC limit in the US that you're allowed to have.  What is it?

Yeah, there's global standard that's gone in place which is 0.3 per cent THC as a percentage of the weight or volume of a product.  As an example, if you were to go to try to buy marijuana to get high, typically you need to be kind of 12 per cent or higher and so 0.3 per cent or lower, you can just see the gap between what's real marijuana as opposed to what's considered industrial hemp.  There’s a huge difference between the two.  You just can't get high off of industrial hemp and there's no issue with frontal lobe development in children.  It's quite safe as a product. 

Right, okay.  Tell us about the margins in this product.  Because there's lots of these kind of things that you can buy nutraceuticals, you can buy for anxiety or for lubrication or whatever you're doing.  Are you able with the CBD products to get a higher price and therefore a higher margin? 

I think the margin is an interesting question.  Margins really probably depend on your company's business model.  The margins are there because the product works and we've seen, I know everyone tries to do trials and studies, we know it works.  I've seen it work in thousands of people.  The research is just to validate, in my view. As opposed to try to prove it works.  But I think margins exist in any business, but it depends on whether you control the whole supply chain or you outsource large portions of it to different people. 

Yes. 

And your cost of distribution.  It's really how you set up your model of who you distribute to, who your partners are, and how much you control. 

You describe yourself as fully vertically integrated.  Does that mean you're growing the hemp yourself in your own farms?  Or have you contracted private growers?

Our business model is we depend on agricultural crops that we contract grow with farmers or farming organisations and then once the crop is delivered to us, and in some cases, we give them our genetics and in some cases, we just buy the finished crop from them.  It depends on what we need for our input materials.  But once that's done, we do the extraction.  We do something called partitioning, we do fractionation, formulating, bottling, packaging and we fulfil it all end to end.  We control most of the value chain, basically, in-house in Kentucky. 

Right, okay, and you've got a factory that then processes it.  Correct?

Yes, exactly.  We basically take the plants in its raw form and then out of the back end of our factory, we're actually shipping pallets of finished goods and all of that happens inside our factory. 

We outsource little pieces sometimes but by and large, we control that; 95 per cent of the value chain is ours and that does give us good flexibility to handle pricing, handle distribution, help serve certain causes.  We do a fair bit of research with some foundations funded by the Lamberts, so we do provide a lot of medicine to those research projects.  Like I said, because our costs are quite low, we're able to provide a lot of medicine for research and for patients who need it. 

And just staying with the US for a moment, you've got another business there you're calling Hemp Black.  Sorry, just back on the main business that you've got in the US, you're using the brand name Ananda, right? 

Correct. 

Is that the brand on all of the products that you're selling?

Yes.  Right now, Ananda probably sits on 80 to 90 per cent of the products we sell.  We do white label very, very selectively with some strategic partners and they're partners who are in segments that I won't necessarily distribute to.  For example, chiropractors, there are about 70,000 chiropractors in America, and I'm not really set up to distribute and manage that many relationships, so I white label for folks who have a practitioner brand. 

Right. 

We're set up to deal with them.  We handle that strategically, and those are good partnerships that are important to us longer term. 

Just how competitive is it in the US?  If I walked into a pharmacy there, how many choices would I have for CBD nutraceutical products? 

Sure.  That's a really good question, Alan.  It's hyper-competitive in the United States right now and not knowing how many there are, I would probably say there are over 500 brands running around the country right now.  I would say probably 480 of those brands are just someone buying from someone else and sticking a label on it, so there are a lot of poor brands there. 

And the question will come in a few points.  If you go to a health food store, you might find six or eight different brands in a health food store.  If you go to an independent pharmacy which are very small, you know what we're used to here in Australia, they're kind of small independent pharmacies, they might carry one or two brands at the most.  And then in early days for the CVSs and Walgreens, these are what we call sort of big box retail, so they’re only early days starting to carry sort of eight to ten brands just to test the market.  But those will shrink down once they get more mature.  But like I said, the segment that I focus on, independent pharmacies, there high advice model in terms of pharmacist knows all their patients and their family, and they might carry just one brand or maybe two at most. 

What's the basis for the choice?  How are pharmacists and customers making their decisions as to which brand?  Is it based on price or is there a difference in quality or what?

Yeah, it's important, we won't compete on price.  We're obviously price sensitive to what is affordable for people.  But the pharmacist who basically advise their patients make their choice based on a few things.  One is a legal status of the product.  Just because industrial hemp is legal in America doesn't mean all industrial hemp products are legal.  It's a bit of a complicated thing but it's no exaggeration to say that 25 ways to be illegal from a hemp product and only one way to be federally legal. 

The independent pharmacies are regulated by the Drug Enforcement Administration and so if they break the law by any chance of moving a schedule one substance, they lose their licence to practise and they lose their licence to run a business.  So number one, the pharmacist is very careful what they put into their store, and that's where our product sort of stands out more than anyone else's. 

Then number two, they also make their selection on quality control and because we control the whole supply chain end to end, we actually invite them to our facility in Kentucky, it all sits behind a glass wall so everyone can see what we do inside.  Those two elements are really important for a pharmacy to say, we know we're not going to break the law and number two we know what you say is in the product is in the product. 

Then last reason why they really like us is our education, so leveraging our work from the Lambert Centre and Thomas Jefferson University and our own Chief Science Officer, we do a lot of educating our pharmacists and physicians on why the endocannabinoid system, which is the basis for CBD working, how it works and what the method of action is.  So that's an important part of our value proposition.  It may not be exciting but it's quite effective for the group that we like. 

It's important to note, Alan, too that there's a part of the market that likes to get high and I'll never be able to serve that market.  But there's an equally large part of the market that doesn't want to get high but looks for relief on pain, anxiety and sleep and those are the markets that we actually do very well in. 

It is the case, is it, that if you've got less than 0.3 per cent THC, it still relieves anxiety and pain, does it?

Absolutely.  I think it's a big misnomer now.  THC which is the molecule that creates the psychoactive high has a place and has its value in it.  But as the research and more people are studying this thing, only a very small amount of THC is required for its full entourage effect.  But in and of itself, THC is not what creates anti-inflammation and things like that.  It's actually the CBD that does that.  There's sort of a big shift in terms of understanding of how much THC is actually required or useful for real pain, sleep and anxiety. 

Your other business in the US is called Hemp Black.  Can you tell us what that's about?

Sure, Alan.  This is my favourite business, and once again, this one will sort of change how things are done and enable a lot of different things.  I guess at the core of it, there are a few different things that the hemp plant will do and properties it does.  From an antimicrobial perspective, the product we create, for example, kills golden staph or MRSA to 99.9 per cent efficiency.  It has great wicking factor and it can conduct electrical current.  Alan, that in and of itself isn't special because copper will conduct current, silver oxide is antimicrobial. 

Hemp conducts electricity?  I never knew that. 

Yeah, when you process it the right way.  We carbonise it and we've filed patents on how to do this, okay?  Because we've got such a high carbon content in the plant, so you can't use it in its old scratchy smoke your t-shirt type of way, it's actually through a process that we put it through.  But if you can imagine this, is we're able to take this product and put it into any textile, onto any surface or into any composite right now.  Just say your t-shirt, with a small amount of Hemp Black in it, is conductive of current and antimicrobial.  One is you can wear it more days and it won't smell and things like that.  But number two, most importantly from let's say a medical example, with a transmitter, you can actually transmit your data, so a wearable in terms of heart rate, body temperature, and over time even measuring things like stress and anxiety.  That passive monitoring then is data that can be used by your medical professional to monitor you without you going to a doctor's office, as an example. 

At the other end of the spectrum, you can put the Hemp Black into the fibres that are in office chairs or aeroplanes or cruise ships and all of a sudden you’re constantly having antibacterial properties without having to spray chemicals but it's constantly killing everything on there.  So it prevents on a cruise ship especially, you'll have a lot of issues with gastro and things like that.  But the most important thing Alan, is what it does is, we can deliver at a fraction of the cost of silver or copper, which is what it replaces and it's got a very large sustainability footprint to it.  We've done about a year and a half worth of data on it, so it's actually carbon negative what we do.  From a technical standpoint, it's equal to or better than and replaces what we use heavy metals for.  It's much cheaper, so it can be much more widely used, and it's a sustainable source. 

That's the core value proposition and if you can imagine putting antimicrobial on a whole different range of surfaces or textiles or making 3-D printing filament conductive, so you can actual 3-D print something that can conduct current, you just opened up a whole new world of things that can be done that couldn't be done before. 

How long does it kill microbe for?

Well, so what we're doing is on a textile, we've sort of been through 40 washes and it still is effective, so what we're doing is, we're in the testing where we wash it multiple times, test it again, wash it and test it.  We haven't found where it washes out yet.

You obviously reckon you can make a lot of money out of this stuff.

I think anytime you make something better, and it can be used in so many applications, Alan, and the ability to deliver at a cost much lower than what you do today, yeah, I think there's a lot of upside in this one here.  Trying not to get too ahead of ourselves on it because there's a lot of work to be done, but I think we're innovating not inventing. 

Inventing takes years to come to fruition and you got to convince people there's a market for it.  Innovating, the market's there.  It's just letting people get it more readily at a better price and at a more efficient delivery of the specification, so yeah, I'm very bullish on this one, Alan. 

Just finally, your Australian business is called Ananda Food, how are you able to sell food in Australia that's based on hemp if it's all controlled in Australia? 

Yeah, so this is the funny one here, Alan, is because it's food and it doesn't include the flower of the plant, it was legalised.  We have different regulator for food than we do for medicinal purposes.  Medicinal, the TGA is your regulator for food and fibre it's Department of Primary Industries and Food Standards Australia New Zealand.

The food itself comes from the seed which actually has no THC or CBD in it.  It's a high-quality protein.  It's vegan, it's a plant-based protein.  A very good balance between Omega-3s and 6s.  As an example, it's a water-soluble fibre, so it's quite a super food is what you would call it. 

It only got legalised at the end of 2017 as a food in Australia and I think Australia was probably the last first or second world country to legalise hemp as a food.  I think everywhere else had it for many, many years, if not decades.  It's only early days in Australia, but I think people are looking for, especially in today's environment for health conscious, a bit of better balance between sort of animal and plant-based proteins.

Like I said, Australia is a very good region to grow it.  It's quite safe.  For the first few years, I'm focused on the Australian market to develop it is a sort of core ingredient that Australians use and if things work out, ideally, we're looking at sort of moving to Asia over time, but that's something that's much further out on the plan because I think you sort of have to create scale and validate the markets where they are.  It's quite a new food in general. 

What exactly are the foods that you're going to be selling here?

Yeah, so right now we actually sell it as a seed so people can use it as a nut that goes as a sprinkling on top of things.  We create a protein powder and so people look at protein powders as going to the gym and having 50 per cent protein.  We look at the protein powder more as a whole food, so it's about 40 per cent protein, so you use it as an ingredient in what you're making.  It comes out as a flour and it comes out as an oil that you use more like a dressing. 

One of the things that I really like is we're working with Chef Michael Moore who owns O Dining and O Bar and he's very, very health conscious in how he cooks, so at the restaurant they've been using our hemp in creating sort of hemp degustation menus.  The one that I love the most is a pasta that they make with hemp in it.  Imagine a pasta that has...

A what?

A pasta.

A pasta, ah, yeah, yeah.

Yeah, using hemp flour, so that pasta all of sudden...  because hemp is gluten free, high in protein, high in fibre and no carbs, so the pastas are making our lower carb, higher fibre, higher protein.  There's a market for that type of pasta and I think a lot people who would like to eat more pasta don't because it's too high carb or high in gluten.  This is reducing it and making it a healthier pasta.

Right, how far advanced are you on all the food products here?  Apart from the restaurants on degustation.  Are you sort of developing foods that you're going to sell in shops?

Right now, we're selling the four core products I mentioned, okay.  We white label for some folks.  We sell bulk to large retailers and we have our own brand in some special retail.  And Michael right now is working with the team on developing the food, so they're not in market yet.  He uses them in his restaurant, but the next step is to try to take them to the mass market.  When you do mass production it's a little bit different than making them in his kitchen to try and get the same texture, feel and flavours out of them, so that's what we're working on right now with Michael.

Right.  Just give us a sense of where you think this company's heading.  What sort of size?  You're capitalised at over $200 million now.  Double the price, the share price doubled from when you listed, not too long ago, in fact, so it's been obviously a pretty good ride so far for everybody.  Where do you think it's heading?

We're very pleased with the support we've had from the market.  I think from my standpoint I just have to run the business really well.  The market will decide the value and the growth of it.  If I look at it globally, CBD and the medicinal value is quite an important shift in what the global economy has with it, especially with the opioid crisis and a lot of sort of scrutiny on conventional medications and the number of them that they have, so this has a lot of traction and I think a lot of upside going forward.

A lot of people quote market size in the future of $22 billion.  I don't know how they came up with that number, Alan, to be quite frank and I don't know how they validate that.  But I just know here's a lot of people who use it very successfully and it's only in its early stages.  I think we're pretty well positioned to be in a very credible side of that market, the high-quality professional end of it. 

I think Hemp Black, if you imagine textiles, composites and surfaces and having the capability to conduct current in them, having the capability for better antimicrobial properties across the board that kind of gives you a sense of how broad that market can be.  And like I said food is, food is food.  Food is the very sort of conservative industry that has a place and it's how much people take up plant-based proteins. 

I'm not going to try to pick a market cap size that we have, but I think it's fair to say we're very early in our stages of beginning.  I'm very happy with the infrastructure we have.  Very happy with the markets we're in.  We sort of picked very selectively where we play geographically. 

Eric, I suppose the main concern I would have as an investor is the potential for competition.  There seems to be such a gold rush going on.  Everyone's jumping into it.  Is there a potential, do you think, that the market will end up being over-supplied?

Well I think that that's a really, really good question, Alan.  The answer is, I think in terms of oversupply, there could be a little floods of brands in the market and I think the oversupply, maybe people rush into it and then it settles down, and like with anything, I think there will be a few quality players remaining. 

I'll be honest, this industry has moved a lot faster than I thought it would, I think because we're taking the market that was dormant for 80 years because it was artificially held back due to the Marijuana Tax Act in America, so in terms of business maturity and skillsets and value chain and need of people disintermediating things, that's been very fast. 

But I think what has been equally fast, you'll see the shakeout, which will drive all the small players who actually don't have assets, who are just creating brands.  You'll see a shakeout very quickly of them falling out I think faster than people think.  As I said for me, the industry's matured must faster than I would have expected it to and when I speak about that I talk about even growing in America.  I thought that growing in America from the hemp plant would take a few years to mature, but within five years, for example, in Kentucky, we grew 5,000 acres as a state last year.  This year over 50,000 was approved for this upcoming season.  Okay, now that's too much supply and a lot of people will sort of shake out of it.  But like I said, I think quality companies always come through. 

I break it down, Alan.  Is CBD a market in the future?  The answer is yes.  Do I think Hemp Black has a market in the future?  Absolutely.  Do I think hemp as a food has a future?  Yes, it does.  And if you believe those three things, then the better companies will come through in the end, especially the ones who have the patience and can stick through sort of the big swings and cycles that happen with any industry. 

Great to talk to you, Eric.  Thank you very much. 

Perfect.  Thank you, Alan.  Wonderful to talk to you.  Thank you very much for having me.

That was Eric Wang, the Managing Director of Ecofibre.