Cannabis company Hexo Corp. is moving to undercut prices in the illicit market with a new 28-gram product that costs consumers as much as one dollar less per gram than at the average illegal dispensary.

The product, under the brand Original Stash, which will be on sale in Quebec cannabis stores starting Thursday for $125.70, or $4.49 per gram, including taxes, the company said.

That’s cheaper than the average cost of a gram of cannabis at $7.37 per gram during the third quarter, with the price of legal and illegal weed at $10.23 and $5.59 per gram, respectively, according to the latest Statistics Canada analysis of crowdsourced data.

Hexo is targeting the roughly half of Canadians who — one year after the legalization of recreational pot — are still buying weed from the illicit market, its chief executive Sebastien St-Louis said.

“That 51 per cent of Canadians that buys illegally, when they walk into their dealer, they don’t pay tax… Hexo is absorbing that cost for them. We’ve listened, we’re removing their reason for not shopping legal,” he said in an interview.

He said Hexo is able to offer a one ounce, or 28 gram, product at this relatively low price point for various reasons, such as less packaging needed for the bulk size rather than individual packaging for each gram or 3.5 gram product. St. Louis added that the licensed producer increased its production scale and lower hydroelectric costs in Quebec also allow the company to reduce its price.

Hexo worked with Quebec’s provincial cannabis corporation on this pricing strategy and it will be on sale exclusively at its shops starting tomorrow.

The company is currently working with entities in other provinces, such as Ontario and Alberta, to do a similar low-cost product.

Canada legalized recreational cannabis on Oct. 17 last year, making it the first G7 country and the second country in the world to take that landmark step.

Once the initial product shortages and supply chain bottlenecks eased, legal cannabis sales in Canada have grown but a large proportion of buyers continue to turn to illegal sources for pot.

In the second quarter, household expenditures on cannabis at licensed retailers was $443 million, up from $172 million in fourth quarter of 2018, according to Statistics Canada. But pot expenditures at unlicensed retailers amounted to $918 million, down from $1.17 billion in the fourth quarter of last year.

When deciding where to buy cannabis, 76 per cent of Canadians who consumed pot in the first half of the year cited quality and safety as an important consideration while 42 per cent mainly considered price, according to Statistics Canada survey results released in August.

St. Louis said that the cannabis used in its Original Stash products are only low price, but not low quality.

“This is high-quality cannabis flower, it has more THC than what’s available on the black market,” he said, noting that it has between 12 and 18 per cent tetrahydrocannabinol, the compound that produces a high.

He added that it is not a loss leader, but would not talk about specific margins until Hexo reports its earnings on Oct. 24.

When asked about a potential price war among other large-scale producers, as signs of pricing pressure emerge, St. Louis said he was not concerned.

“It’s not much of a war, if the other side has no chance,” he said. “Most of the other licensed producers don’t have the cost structure that Hexo does.”

He also noted that with capital drying up in the broader market, most of the production facilities underway “will never get finished,” he said.

The product launch comes after Hexo lowered its net revenues forecast for its upcoming fourth-quarter ended July 31, and it withdrew its $400 million net revenue guidance for its 2020 financial year.

St. Louis said more details on its guidance would be provided during its upcoming earnings, but said the decision to pull back stemmed from the uncertainty facing the cannabis industry. He expects that this low-cost product will be a key part of its strategy to reach 20-plus per cent market share in the coming years and ramp up its revenues.

“We’re very bullish on Original Stash, how its going to perform. But we’ll monitor it,” he said. “We didn’t want to be in a situation to commit to specifics in this unsure industry.”

This report by The Canadian Press was first published Oct. 16, 2019.

Companies in this story: (TSX:HEXO)

Armina Ligaya, The Canadian Press

TORONTO — Weed-infused brownies, CBD-based hand creams and cannabis vaping products are now legal in Canada, but eager consumers will have to wait until at least mid-December — and the province with the most licensed pot shops is signalling that early 2020 is more realistic.

Regulations governing next-generation cannabis products such as edibles, beverages, vapes and topical forms of cannabis came into effect as of Oct. 17 — exactly one year after Canada legalized recreational pot.

Due to the mandatory 60-day notice period companies must provide to Health Canada before selling these products, the earliest these so-called Cannabis 2.0 goods can legally go on sale in Canada is mid-December.

Companies have already begun unveiling details of their products ahead of time — ranging from spring water to mints that contain CBD and THC, respectively, two active ingredients found in cannabis.

These cannabis-derivative products will be subject to strict regulations, including a cap on the level of active ingredients and packaging. They also cannot contain nicotine, caffeine or alcohol, and companies will not be able to call these beverages beer or wine.

For edible cannabis, whether food or beverage, the amount of THC will be capped at 10 milligrams per container, according to Health Canada regulations. For example, in a package of grape-flavoured gummies, the total amount of THC in all the pieces must amount to no more than 10 milligrams.

Weed extracts are limited to 1,000 milligrams of THC per container. A bottle could contain 100 THC capsules of an extract that each contain 10 milligrams of THC, for instance.

Topicals, such as lotions, must have no more than 1,000 milligrams of THC in a container.

These goods must not be reasonably considered to be appealing to kids, which would take into account factors such as shape, flavour and scent, and must be contained in plain, child-proof packaging.

Health Canada has said to expect a “limited selection” in legal stores in mid-December, at the earliest.

Albertans will likely see these products available for sale in stores and online by early next year, according to the provincial body responsible for regulating cannabis.

“While nothing is definite and time will tell, that January 2020 timeline reflects when consumers can expect to see products on shelves,” said Heather Holmen, communications manager for Alberta Gaming, Liquor and Cannabis Commission, in an emailed statement.

“As such, AGLC, as the distributor, expects to receive product sooner but retailers (online store included) will need to order and receive these new products before they are available to consumers, which will require additional time.”

The Nova Scotia Liquor Corporation, whose outlets sell both alcohol and recreational cannabis products, expects a “slow introduction” of products starting in late December based on discussions with potential suppliers, said spokeswoman Beverley Ware.

“Modifications have been completed at most of our stores so we are ready to offer this next phase of cannabis products when they come on to the market,” she said in an emailed statement.

PEI Cannabis is preparing to train its staff on the new cannabis formats, and anticipates having products ready for store shelves in mid-December as well, said spokesman Colin MacDonald.

The B.C. Liquor Distribution Branch is now working with licensed cannabis producers who had signalled their interest and ability to be suppliers. B.C.’s solicitor general is expected to announce the province’s plans for the products on Friday afternoon.

“It will take time before suppliers will be able to stock and ship a full suite of products to retailers. Availability of product will be dependent on a number of factors, such as supply, and the demand suppliers are meeting in other markets across Canada,” said Viviana Zanocco, a BCLDB spokeswoman, in an email.

The Quebec cannabis corporation, known as the SQDC, also expects the second wave of legalization to be gradual starting in mid-December with products that “should be mainly beverages,” according to spokesman Fabrice Giguere.

The SQDC’s president Jean-Francois Bergeron said the initial offerings would be limited and include drinks such as teas, various types of carbonated water and non-alcoholic beers.

Government entities in Yukon, Newfoundland and Labrador, Northwest Territories and New Brunswick also say they are gearing up for a mid-December rollout at the earliest.

“Some suppliers will be ready in December pending Health Canada approval, but many will be adding to their product offering over the next year,” said Cannabis NB spokeswoman Marie-Andree Bolduc in an email. “Our goal is to try to offer some options at launch across all the new product categories (chocolates, candies, concentrates, beverages etc.).”

The Ontario Cannabis Store believes it will be late 2019 or early 2020 when new products will be available.

“OCS is working with federally licensed producers to better understand timelines and availability for each individual product,” said spokesman Daffyd Roderick in an emailed statement.

Vaping, however, has come under scrutiny after more than 1,400 related lung-illnesses in the U.S. have been reported — many of which involved THC-containing products — and recently diagnosed cases in Quebec and B.C.

Health Canada said in an emailed statement that it is not delaying the legalization of pot vapes but is actively monitoring the situation on both sides of the border, and “will take additional action, if warranted and as appropriate, to protect the health and safety of Canadians.”

The OCS said it “continues to monitor news on reported health concerns related to the illegal cannabis vape products.”

This report by The Canadian Press was first published Oct. 18, 2019.

— With files from Julien Arsenault

The Canadian Press