Ecofibre (ASX:EOF): Interview with CEO Eric Wang

February 28, 2022

Ecofibre, EOF, video

Summary

Ecofibre (ASX:EOF)

We spoke Eric Wang, CEO of to Ecofibre (ASX: EOF) about the company’s opportunity in hemp products, the reasons for the difficult sales environment of 2020, sales improvements in the December 2021 half, and the coming clinical data across a range of indications.

Full transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to Stocks Down Under. My name is Stuart Roberts, and I’m one of the co-founders of our publication. And joining me today from Brisbane on Friday the 25th of February is Mr. Eric Wang who’s the CEO of Ecofibre, EOF. Eric, good afternoon.

Eric: Good afternoon, Stuart. Nice to meet you. And thank you for having me on.

Stuart: It’s a pleasure. So, Eric, you are one of about 20 or 30 companies involved in cannabis and hemp on the ASX. As I’ve talked to a lot of investors, they find it difficult to distinguish one cannabis and hemp story from another one. You have a very interesting proposition. One is that you’ve got a diverse range of products which are well regarded, but you’ve got to grow that market in the U.S., and the other is a sustainability angle you don’t hear much about when it comes to cannabis and hemp. Talk to us, first of all, about the state of the U.S. market for CBD-based cannabis products, how that’s not been working so well for you and what initiative you’re taking to fix that.

Eric: Sure. Thanks, Stuart. So, I think to give people context in Australia about the cannabis market, so we participate in what we call the hemp market, which is the non-intoxicating version of medicinal cannabis. And I think the best thing to do is explain to Australians, it’s like, you know, the U.S. is Northern Hemisphere, Australia’s Southern Hemisphere, so, you know, your winters are our summer and you couldn’t be more different in terms of how the cannabis industry works in the U.S.

Stuart: As I like to explain to Americans, our center-right party is called the Liberal Party. Go figure.

Eri: Yeah. Exactly. And so, in Australia, okay, everyone here looks at medicinal cannabis as intoxicating with the molecule THC. And the only way to get it in Australia is to get a doctor’s prescription, and then it’s a very controlled substance, and you can’t buy it over-the-counter in stores. Completely opposite in the U.S. In the U.S., doctors are not allowed to prescribe cannabis, okay? But you can buy it anywhere, online, in stores, in pharmacies. Okay? So, you have a very large market, but highly unregulated. And in Australia, you have a smaller market, but very highly regulated. So in the U.S., you know, we are still the leading pharmacy brand. So, we were, pre-COVID at about $50 million of revenue a year. And, unfortunately, COVID took a pretty big chunk out of our business because of…you know, there were a few factors. One is obviously over-competition and supply. Number two is bricks and mortar stores took a big hit in terms of being open or not. And then number three, you know, our core channel pharmacies were very focused on doing vaccines and handling COVID-related issues. So, that’s been a real challenge, of a few things happening all at the same time. But like I said, our focus on that is the professional segment. We focus on pharmacies, and physicians, and patients who are actually genuinely seeking real advice and a high-quality product. So, you know, I wish you could say it’s an overnight proposition that sort of kicks back in. It’s not. These are things you have to rebuild in a new world happening in the U.S. right now.

Stuart: Right. Now, if I know the U.S., eventually the FDA will figure out how to properly regulate this sector because of, you know, the great interest on the part of consumers. And I think as well of the long history in medicine of natural products, this is just an evolution of the same trend that gave us aspirin back in the day, for example. So, what regulatory changes do you see happening which unlocks the prescription side of things, which then push you in the box seat for prescriptions?

Eric: Yeah, exactly. And it’s pushing sort of very much more the regulated and formal side as a dietary supplement as well. So, as you mentioned, Stuart, right now, because it’s legal but the FDA hasn’t ruled on, is it a dietary supplement or a drug or a food, we’re in a gray area. And as you operate in a gray area, that means that no one’s actually checking quality control and no one’s making…you know, there’s no discipline on what’s happening. So, you have a market that’s very messy, there’s no barriers to entry, and a lot of quality control issues, which the consumers are at risk. So, there’s been legislation put forward. And so, in the U.S., we have the House and the Senate, and we have two bills of which I’m, you know, heavily involved in because we’re in an industry group, and both bills have tremendous bipartisan support. And as you know, there aren’t a lot of things in the U.S. that anyone agrees on anymore based upon bipartisan agreement.

Stuart: I’m scratching my head thinking, how can that happen, the Republicans and Democrats agreeing on something?

Eric: So, the funniest thing is, you know, on the bill, we actually have, you know, the hemp bill, original one, Chuck Schumer and Mitch McConnell co-sponsored the bill. Okay? So, you know, if that never happens again, I’ll fall off my chair.

Stuart: It’s interesting, you’re based in the state of Kentucky, so you would have got to know Senator McConnell reasonably well, I imagine.

Eric: Yes, we have. So, he’s been very, very supportive of Ecofibre. And, you know, we always host him for press conferences and different thought…think tank events. So, like I said, very pleased to be in Kentucky and have his support and insight on what’s going on. And I think, Stuart, to your point, is there are 2 bills, okay, 1691 and 841, which have been written, have bipartisan support, and all we’re waiting on is trying to find this time slot to have it be presented. Okay. And that’s the challenge in the U.S. right now, is… And it’s not a high enough card because it’s not found controversial. And so, you know, if you think about the last year, they were doing the infrastructure bill, trying to keep the government open, you know, the January 6th insurrection, so you have so many distractions that keep, you know, our bills from actually making it to the floor for discussion.

And so, we’re hoping possibly in August it makes it in that session, if not, it’ll be the session after that, but it’s really not a matter of, you know, Congress not wanting to support it. It’s just finding the time to make it to it. If it finds its way and makes it to it, then CBD will be regulated as a dietary supplement, which immediately puts a whole host of rules on quality control manufacturing which will help clean up the U.S. market because at that point in time, there is regulation, and a lot of different types of stores who haven’t carried CBD in a certain way will be more comfortable doing that. So, like you mentioned, the box seat are those who manufacture the right way, don’t make claims illegally, and have done some background research with it. And so, like I said, I welcome the regulation as quickly as possible, but like I said, it’s one of those things that it’s a matter of when, not if it happens

Stuart: And potentially before we come to these midterms in November, the Congress might get around to looking at these bills.

Eric: I would hope so, but, you know, I tell you what, nowadays, the way things go, Stuart, you never know what comes up in it. It’s a pretty funny world right now politically, but like I said, we keep pushing. And it’s not a long bill to get through because the support is fantastic. So, ideally, if it doesn’t make it into session this time, it’ll be tucked into another bill that has to pass. And background is, you know, Senator McConnell put the hemp laws all into the Farm Bill, and the Farm Bill has to get passed every four years because it includes things like food stamps.

Stuart: Of course. And we’re coming up to the next Farm Bill this year.

Eric: Correct. So that will get tagged onto another bill, is how that will work.

Stuart: Right. Now, one thing that impressed me about Ecofibre is ahead of this streamlining of regulation in the U.S., you’ve been investing heavily in some clinical data. There’s at least seven individual studies going on at phase two-level and some very interesting indications. Give us a sense of what you hope you can achieve in those studies.

Eric: Yeah, sure. So, we have a few different purposes for them. So, in every investment, we have to know why we’re doing it and what we’re trying to achieve. So, in the U.S., we invest in the studies to actually give clinical data to support efficacy and safety for physicians and pharmacies because like I said, in the U.S. right now, doctors can’t prescribe or recommend CBD. Well, they don’t recommend it because they’re worried about the risk. No one’s given them data to support safety, or efficacy, or dosing. And so, that’s how we’re spending money there to hopefully open up that market as people get more comfortable and more mainstream on CBD. In Australia, so, like I said, a very different market, okay. You have to go to a doctor to get it. And most people who try to get it realize it’s easier to buy it on the black market than it is to go through the proper channels to buy it.

But as you hear, everyone is on the black market, you don’t know what quality control, what safety, who made it, or if it’s even real. So, we have another study, which is the largest sleep study in the world right now being done. It’s enrolling patients, and the sole purpose of that sleep study is to support our registration to have CBD become an over-the-counter product. And so, what would it mean for Australian consumers, so one’s in a smaller market but a much, much more regulated market, is instead of the average patient having to go to a doctor to get the diagnosis, and then going to a prescriber to get a medicinal cannabis prescription, and then going to the pharmacist to order it, the pharmacist ordering it and you picking it up, you can go to one of 6,000 pharmacies, talk to the pharmacist and he or she can prescribe the product on the spot with 30-day supply.

And so, you have a much more streamlined process, a much more cost-efficient process, but the only difference is, is the product is a non-intoxicating product that will need to be safe and, like I said, for us, it’s working on helping improve sleep indications. So, our research, like I said, the U.S., it’s to have open up the physician market, and in Australia, it’s to open up the over-the-counter market. And the beauty, Stuart, is in the U.S., we have a huge over-the-counter presence, so everything we do in the U.S. is just gonna translate into Australia.

Stuart: Now, we’ve talked about cannabis as…or hemp, sorry, I should say, as medicine or dietary supplement here. Hemp is also for you potentially a fashion item. There’s plenty of high-end textiles, and that’s another angle to the story. Share with us what you’ve achieved with your Hemp Black venture over the last little while.

Eric: So, Hemp Black, we started with the concept of going to high performance and high sustainability. So, a very strong hypothesis and the assertion we have is that sustainability is going to be a core non-negotiable in manufacturing across the globe. And we’re seeing that come through right now. But a lot of it is, I would say, it’s greenwashed or it’s in name only, not genuine. And so, what we’ve done over the past several years and throughout the patents in infrastructure is to create the only sustainable carbon black around. So, the dirty little story we have is everything that’s black in the world that’s around you, whether it’s your chair, your clothes, your iPhone cover, your mascara, the tires in your car, it has carbon black, and carbon black comes from burning petroleum, okay? The technical definition is the incomplete combustion of petroleum. Okay. It emits carbon, it’s a Group 2 carcinogen, and it comes from pulling petroleum out of the ground. So, it’s not sustainable in nature. What we have is we use the hemp stock, we go through a process called [inaudible 00:11:35] it, which basically turns it into carbon. It’s been rated as a platinum-rated carbon, which means its health rating is platinum-rated by MBDC, and it’s a carbon black. So, one carbon, same carbons, one emits CO2 and is not great for, especially mascara, as an example. And then our carbon is carbon-negative, it permanently sequesters carbon. So, our focus is to work with printing, and so any packaging that’s printed, any textiles that are black, any coatings, paints, palettes, tires that have black in there, we want to replace that carbon with our carbon, and at the same time, you know, you don’t get the performance…no changes in performance, but you have something that’s carbon-negative versus carbon-positive. And that should become something that, you know, all manufacturing, all products will require over time. So, that’s what we’re really excited about. And how that works is it goes into textiles, like it goes into injection molding. You know, basically everything you look around in your, you know, in your house or around you day-to-day that’s black, over time, we need to find a more sustainable source of carbon black. And that…

Stuart: And you are probably one of the first people in the world talking about sustainable sources of carbon black, which is a multibillion dollar market globally.

Eric: Correct. Yeah. So, carbon black’s about $17.5 billion a year. And, you know, we actually have done the work for that… And the biggest thing is you start off with a sustainable source. So, it comes off with we’re replacing petroleum as an input with hemp. And for those who are familiar with hemp, hemp improves soil regeneration, it digs roots deep, doesn’t use a lot of water, and it puts a lot of nutrient and carbon back into the soil, which is just soil improving. And then when we turn it into carbon black, it actually permanently sequesters carbon forever. So, you’re actually not releasing carbon back into the atmosphere. So, it’s a true carbon-negative product that we have.

Stuart: Now, it’s fair to say that Ecofibre hasn’t had a good couple of years share price-wise. Your stock peaked at above $3 a share in late 2019. We’re now about 40 cents a share as we speak. Talk to us about the sort of things that could potentially re-excite the market again over the next year or so.

Eric: And like I said, I think, you know, what I always work on is I have to focus on the business, and share price obviously takes care of itself. And there are a lot of factors in how the share price moves, depending on sectors, liquidity, and things like that. But performance is what I have to drive. So, when I look at things, I look at improving the performance of Ecofibre. And this is always not about sort of making excuses on what happened, but at the top level, you know, what I like at Ecofibre, our revenues are growing, our costs are managed very tightly, margins are more challenged with inflation and competitive pressure, so we have a lot of input prices going up that we have to move costs on…you know, into the next stage of the pricing. But what we’ve done is this, we have high conviction in all of the businesses that we’re in and so, we’re still investing in them. We haven’t stopped investing and we’re looking at the long term. And so, like I said, the things that excite me is, you know, opening up the CBD market in the U.S. to the doctors and physicians, which is not something that exists in the U.S. today. But [Inaudible 00:14:55] Australia is to actually provide, you know, estimates are 2.2 million Australians, with an over-the-counter CBD product that we know is safe and we use in the U.S. to address sleep issues.

Stuart: Which affects probably 100% of the adult population, right?

Eric: Yeah. And then I’m very excited at, you know, we’re well placed and we’ve invested in sustainability as a product and a space that’s actually quite relevant. We’d always been working on carbon and now carbon seems to be the new, you know, this cryptocurrency and now there’s eco currency, but we’re not doing it as a fad. You know, this is a long-term business that has patents and IP to that. So, we’re excited. And like I said, the carbon story is very, very broad in terms of how we support it and supply it. Okay. And that’s an important thing. And I just ask people, look at everything around you that’s black.

Stuart: So, it’s fair to say that you are not alone in terms of having your stock out of water. I looked at Canopy Growth today in Canada, and it’s had a pretty torrid time since about the peak for Ecofibre as well. So, you’ve been caught up in sectoral issues. And, you know, let’s face it, it’s a relatively new industry for which there’ll be multiple booms and busts. So, we’re at the bust, at least share price-wise right now, but thanks to the investments you are making, it could potentially be a good year ahead.

Eric: Yeah. And we’re looking forward. And like I said, well, I don’t worry about the…I have to just worry about the business and not chase the share price. You know, we do, when people do ask about it… You know, I was, you know, doing a lot of trading back in 1999 and there was a huge run-up on the dotcom boom, lots of things dropped, and then good companies grew over the last 20 years, you’ve seen some wonderful technology companies, you know, come out of the movement of the share price, that they believed in what they were doing and had the assets to do it. So, I think, like I said, the share price will go up and down, but, you know, if you believe in natural healthcare, believe in plant-based diets, and believe in sustainability, you know, then we have a very privileged position with industrial hemp and all three of those. And like I said, it’s one of those things that, you know, the price will move, but if you’re there for the long term, that’s what we plan on being there for.

Stuart: Eric Wang, thanks for joining us in Stocks Down Under.

Eric: Thank you.