Once again, I am pleased to bring you this installment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.
Canada – the Next Frontier of Cannabis
On Friday, May 19, along with Mike Gorenstein, CEO of Cronos Group, and Jennifer Hanser, Vice President, Business Development of Tilray, I spoke on a panel at the Marijuana Business Conference & Expo in Washington, DC. The topic of the discussion was Canada as the next frontier for cannabis businesses.
Here is a summary of the questions we fielded from the moderator and the terrific US audience:
Where does the law stand today?
We have an established commercialized medical cannabis industry in Canada. Commercialized medical cannabis is established by federal regulations, the Access to Cannabis for Medical Purposes Regulations. As a result of the federal nature of the ACMPR, the regulated cannabis industry is held to consistent rules and standards across the country by a single regulator – Health Canada.
We also have a draft proposed recreational law, the Cannabis Act, which was presented in April 2017 by the federal Liberal government, which campaigned on a platform of legalizing cannabis for recreational use. The draft Cannabis Act represents a step towards the fulfillment of that promise, although many of the most anticipated details – for example, how edibles will be handled, and what retail distribution and sale will look like – will be contained either in regulations which have yet to be publicized or provincial legislation which has yet to be introduced. In addition, the Cannabis Act is only draft legislation and there is no assurance that it will be enacted into law in its current form or at all.
What are the notable differences between the US markets and the Canadian market?
Less instant gratification. Cannabis must be ordered over the phone or online in Canada, and is delivered by mail 1-3 days later. Storefront dispensaries are not allowed under the ACMPR.
Product variety is also more restricted: Canada currently only allows dried marijuana (or “flower”), fresh marijuana, cannabis oil, plants, and seeds to be sold through licensed producers. Licensed producers cannot sell edibles or cannabis-infused products.
However, the federal nature of the ACMPR means that licensed producers do not face the hurdle of a competing federal law rendering cannabis illegal like many US-based cannabis producers and distributors, and therefore can raise capital and go public on Canadian stock exchanges (after meeting some basic conditions).
What makes the Canadian market such a compelling business proposition?
There are hundreds of cannabis licensees in Denver, Colorado alone. When Cronos Group’s Michael Gorenstein was looking at the cannabis industry for the best investment opportunities, he looked at the few dozen existing ACMPR licences in Canada, combined with the federal legal infrastructure, a population of 35 million of which the federal government estimated over 400,000 would use cannabis as a medicine by the year 2024, and the favourable business climate. All of these factors, combined with the high standards of Health Canada in administering one of the world’s first federal medical cannabis regimes, made Canada the right place for Cronos Group’s New York-based management team to enter the industry.
In the US, as medical markets add on a recreational component, we’ve seen two primary approaches: keeping those markets separate, or absorbing the medical market into the recreational one. Which way is Canada likely to go?
There’s no way to know for sure, but we do know two things: first, people have a constitutional right to “reasonable access” to cannabis as a medicine in Canada, and are likely to keep that right for a long time going forward. However, we’re still figuring out what “reasonable access” means – we’ve gone through several evolutions in the law trying to get to a system that satisfies both patients and the courts. Second, the draft Cannabis Act presented in April, which would provide for a recreational cannabis regime in Canada, maintains the current medical system and is designed to run alongside it – but the federal government has indicated that it will re-evaluate the need for the two parallel systems once the recreational framework is well established. (The Task Force on Cannabis Legalization and Regulation recommended that the federal government re-examine the two systems after five years.)
Will the recreational cannabis infrastructure ultimately become what “reasonable access” means in Canada, therefore making a medical system redundant?
Mike Gorenstein made the case that, as we’ve seen in other jurisdictions, there remains an enduring need for a medical cannabis industry that provides for patients in a way that a recreational cannabis system isn’t designed to do.
Many US cannabis businesses struggle with finding the right investors due to residency restrictions. Are there any residency restrictions on licensed producers of cannabis in Canada?
No! The ACMPR provide that in order to apply for a producer’s licence, you must either be an adult individual who ordinarily resides in Canada or a corporation that has its head office in Canada or operates a branch office in Canada.
Corporations formed in Canada often – though not always – require a certain proportion of the directors of a company be resident in Canada. Apart from that, the ACMPR do not concern themselves with the shareholder profile of licensed producers. Only directors and officers need to be divulged and approved in the application process.
Tilray, backed by Seattle-based venture capital firm Privateer Holdings, became the first American-owned licensed producer in Canada in April of 2014. We do, however, see the government showing more of an interest in shareholders of licensed producers in the draft Cannabis Act, which requires that an application for a cannabis-related licence or permit set out “financial information” that includes information about the applicant’s shareholders or members and who controls the applicant, directly or indirectly.
Health Canada has received over 1,500 applications for producer’s licences thus far, and hundreds of active applications remain in the queue. Will the existing licensed producers have a head start over the applicants in line?
There’s a big advantage to being early to the party. In addition to being able to develop with less competition for resources such as capital, media attention, and – importantly – patients, early licensed producers often had access to unique cannabis genetics used by growers operating under prior regulations. Currently, licensed producers are typically only able to access cannabis strains from other LPs, making it difficult to develop unique strains that will set one LP apart from the others. As Mike Gorenstein explained, one of the most valuable assets of Peace Naturals Project Inc., a licensed producer which Cronos Group acquired outright last fall, was its large genetics bank.
Time is also a resource – because it allows LPs to form relationships with patients, smooth out their operating procedures, and expand their facilities to scale up production ahead of an anticipated recreational cannabis market. And expansion is in: last week, Peace Naturals broke ground on the largest purpose-built indoor cannabis production facility in the world, a 315,000 square foot behemoth which Cronos calculates will bring Peace Naturals’ total estimated production capacity to 40,000 kilograms of cannabis on an annualized basis.
Peace joins other LPs in dramatically scaling up – including Aurora, which is constructing an 800,000 square foot facility outside of Edmonton, Alberta, and Aphria, which has approved expansions to its greenhouses which it says will cover a million square feet.
For more information on the Marijuana Business Conference & Expo, or to view our presentation slides and photos from the event, check out our blog post here.
It’s Raining Med!
It’s cannabis season in Toronto, with top-notch industry events such as the Canadian Cannabis Business Conference and the Lift Expo taking over the town (the latter being held next door to a bodybuilding expo – what a combo). In the midst of all the conferencing and expo-ing, the cannabis news gods thought fit to bestow the following gifts:
Humongous licensed producer MedReleaf has unveiled its final prospectus. MedReleaf sold $100 million worth of shares in its going-public transaction, making it North America’s largest cannabis IPO, and valuing MedReleaf at about $858 million post-money.
The Markham, Ontario-based licensed producer has much to boast about: it claims to serve 20% of the Canadian medical cannabis market, and reported $19 million in sales in the year ended March 31, 2016.
Among the company’s top risk factors disclosed in its prospectus: unforeseen changes in laws, including the expected implementation of the Cannabis Act and any changes to the cannabis reimbursement policy administrated by Veteran’s Affairs Canada (VAC). VAC reimburses Canadian armed forces veterans for up to three grams of dried marijuana (or its equivalent in cannabis oil) per day.
We smoked them out
Newstrike Resources (HIP.V), the parent company of licensed producer Hemisphere Pharmaceuticals Inc. announced on Tuesday May 30 that it has teamed up with iconic Canadian band the Tragically Hip.
Newstrike is not the first LP to partner with celebrities: Canopy Growth Corporation (WEED.T) linked arms with “cannabis connoisseur” (their words) Snoop Dogg in early 2016, and Organigram (OGI.V) paired up with the Trailer Park Boys last November.
But the fun may not last forever: advertising a narcotic to the public is a criminal offence under the Narcotic Control Regulations to the Controlled Drugs and Substances Act. While the line on what constitutes “advertising” can be hard to find, the draft Cannabis Act puts its foot down on the matter – it expressly prohibits promoting cannabis by means of endorsements.
Guten Tag, Deutschland!
Germany is a hot new market for Canadian licensed producers – in no small part due to the fact that chronically ill patients will be entitled to health insurance coverage for marijuana.
On May 26, licensed producer Aurora Cannabis Inc (ACB.V) announced that it had acquired German medical marijuana wholesale importer, exporter, and distributor Pedanios GmbH, to which licensed producer Peace Naturals Project Inc. has been exporting cannabis since October of 2016.
Canopy Growth Corporation acquired German pharmaceutical distributor MedCann GmbH in November, 2016.
Fun with funds
Cannabis investments are lighting up south of the border: Forbes reports that First Trust Portfolios, a hedge fund which Forbes says has $105 billion in assets under management, has filed to register a unit investment trust called Medical Cannabis Portfolio Series. It’s the American answer to Horizon ETF’s Medical Marijuana Life Sciences ETF (HMMJ.T) announced a couple of months ago.
Forty-five licensed producers
Ah, ah, ah! Health Canada issued the 45th producer’s licence to First Access Medical Inc., wholly owned by CSE-listed Beleave Inc. (BE.C) on May 18. Congratulations to the Beleave team!
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Andrea Hill is a corporate and securities lawyer with SkyLaw Professional Corporation in Toronto. Recognized as one of Canada’s leading legal experts in corporate cannabis law, Andrea writes for the Globe and Mail about cannabis laws, and works with a broad variety of clients in the cannabis space, including publicly-listed licensed producers of marijuana, licence applicants, and ancillary businesses such as tech companies focused on the cannabis industry. For more information about Andrea, visit the SkyLaw website here.Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.