Today the federal government task force on marijuana released their report to the public detailing their recommedations for how the new cannabis framework will be created. In short, their proposal is a massive step forward in the cannabis industry – which will undoubtedly fuel investor frenzies to get ahead of this new industry. They proposed the new legislation would be called the Cannabis Control Act.
Let me take some time to provide key highlights of the recommendations, after which I’ll provide my comments as to what all of this means, and what I will predict will happen in 2017-2018.
First, their report is just that – a report. It is not legislation, and it is not binding to the government to implemenet all/any of these recommendations. However, given how much stakeholder input (“buy-in”) was gathered, my opinion is the Trudeau Government will adopt all of these recommendations, perhaps with some additional proposals. The next step for the Government is to draft legislation and publish these in Canada Gazette Part I, which is likely going to be in April/May, and after a few months of consultation, they will officially publish revised legislation in the Fall of 2017, at which time the new legislation will become law.
Now for the report. Essentially, the task force is proposing that we have two parallel systems for cannabis – a medical, and a “legal” (aka recreational) system. The medical system will continue as is under the Access to Cannabis for Medical Purposes Regulations (ACMPR) until the legal system has had time to be implemented. One important change under the ACMPR, however, is the recommendation to eliminate designated growing for medical product. The task force was of the opinion that the designated growing system would be unnecessary moving forward. The report also hinted that the ACMPR system may be merged into the legal system at some point in time, perhaps in 2022 when the report is recommending a five year review of the program. But for the time being, they are proposing two parallel systems.
Much of the report focuses on the legal system, and as such I find it hard to decipher how many of their recommendations for the legal system would spill over to the medical system. For example, they are recommending that the provinces/cities decide the rules of what retail stores would be allowed to sell legal product – but would this also apply to medical product? The report mentions that “patients were clear that there should be a dedicated medical access retail option” (p.47), but shies away from making a specific recommendation to this effect. The report also discusses the possible role of pharmacies in dispensing medical cannabis, but it also expresses concerns they heard from medical associations in allowing this. The lack of clarity on how many of their recommendations will apply to medical product, is a theme throughout the report.
The New Recreational Cannabis Market
Let’s focus on the new legal market first. The task force is recommending that retail (in-person) sales be allowed for legal cannabis. This is a major change, one which I have been predicting for some time. However, they will let the province decide on a per-province basis what types of retail stores will be allowed to sell. There is one caveat here – they are strongly recommending that cannabis not be sold wherever alcohol or tobacco is sold. Liquor control boards – you have some thinking to do. Perhaps a new “cannabis control board” for each province? If the feds adopt their recommendations here, it means specialty cannabis stores – not liquor stores – that would be allowed to sell product.
Retail sales will regulated and licensed – and they will be routinely inspected, licensed and regulated. This is not like tobacco or alcohol, it’s going to be more tightly controlled. They are recommending staff be formally trained to help consumers understand the risks of taking the products, not to sell to minors, etc. Imagine 10,000 specialty cannabis retail stores across the country and what that will look like.
The legal age to purchase legal cannabis will be 18. They are recommending this is the standard for all provinces.
Producing legal cannabis will fall within a new regulatory framework requiring demonstrated quality, good production practices and security standards. This is of particular importance to our company, as our services focus on exactly this. Achieving a licence to produce cannabis under the medical system (ACMPR) is stringent and extremely challenging, and which is why we are recruited. The report is recommending adopting much of the licensing requirements from the medical, to the legal industry. This means having a quality program, trained staff, product testing, and very tight inventory controls. I do believe the security requirements will be less stringent than what we see on the medical side right now; the report definitely hints at that.
What I greatly appreciated in the report, however, was their comment that they want to encourage a diversity of cannabis producers on the legal side. In other words, they don’t want to set up the system that only favours large corporations with deep pockets. They fully acknowledged that they do not want the cannabis supply to be dominated by a handful of large players. I found this very encouraging.
Perhaps what is more astonishing is they are propsoing that outdoor cultivation be allowed, with security measures in place. Immediately my mind jumped to British Columbia’s temperate climate. Outdoor cultivation, if licensed and regulated, would absolutely lower the investment requirement to become a legal producer. Without the expense of heavy brick/mortar infrastructure and electricity bills, in theory a craft cultivator could have one or two harvests per year and cultivate exclusively outdoors. The implications are significant. Instead of requiring $3 million to invest in a new cannabis production facility, $500,000 could potentially be enough. Or lower. It will be very interesting to see which producers will gravitate towards the outdoor growing.
Advertising – there will be heavy restrictions on advertising, including plain packaging for product. This is not a surprise, given that they do not want to encourage consumption; they only want to legalize it. However, the report did comment that limited advertising could be allowed in adult-only areas (whatever this could entail).
Edibles. This is a massive step forward. They put a great deal of thought into these recommendations. Essentially, they are recommending that the government allow cannabis edibles, so long as they do not contain ingredients like caffeine or alcohol, and as long as they are not in a format that could appeal to children (e.g., gummies). They also have to have plain package and child-proof containers. Beverages? Absolutely. Suddenly the food manufacturing industry will now be retooled for cannabis manufacturing. The implications for the industry are significant.
CBD and other non-psychoactive cannabis derivatives/substances are being recommended to remove from the cannabis framework; the suggestion in the report was that they could fall within the natural health products framework (under the Natural Health Product Regulations). Our company started in this space, and this would be an interesting transition for such products.
Software for inventory tracking was also mentioned as a recommendation, that the government itself should implement a software platform across the entire industry to track product. This could mean the end of private software platforms currently on the market, as I can’t see Health Canada promoting one specific platform. This is a large gray area for me, and we shall see what they propose.
Mail ordering will be maintained, in that consumers could potentially still order legal cannabis from a legal producer via the mail. So, this means that legal producers will need to have an online retail component just like medical producers currently do.
Personal cultivation will be allowed, if Canadians want to grow their own recreational cannabis for their own use, with a limit on the number of plants they can grow. Outdoors or indoors.
How to Apply to Sell or Produce Legal Cannabis
This will of course be the most asked question for us in the months ahead. The flurry of companies and enterpreneurs will all be eager to apply for licensing under the new legislation. Is there any way to get a head start?
In theory (and we’ve been saying this for the last year), a company could apply to become a producer on the medical side right now, and down the road transition into a recreational licence. Based on the language of the report, I would say this is absolutely going to be an option.
The report suggests on page 49 that medical producers could be producing product for the recreational market as well. It does not outright state this as a recommendation, but the report does discuss a potential problem arising should medical producers focus their sales to the legal market instead – leaving medical clients without product. The task force is recommending that the government keep a watchful eye on whether medical producers will be providing sufficient supply, and is also recommending that the government possibly dictate how much inventory a producer could provide to the medical side versus recreational side. Reading between the lines, my opinion is that if a company is currently in queue to become a producer of medical marijuana under the ACMPR, that they are adequately preparing for the legal market – and for a legal licence of production.
Currently, to achieve a producer licence (LP) for medical cannabis requires a hefty amount of patience (2 years), resources ($3M to $5M investment for medium facility) and expertise (quality, regulatory, cultivation, security) to “convince” Health Canada to grant a licence. Few companies have achieved this to date. The system has been slow, which has discouraged applicants. However, with the new legal market coming to Canada, the task force has absolutely acknowledged that supply will need to be ramped up – and quickly.
On page 7 the report mentions that “Canada’s governments will need to move swiftly to increase or create capacity in many areas relating to the production and sale of cannabis”.
Typically, with Health Canada a facility licence (e.g., MDEL, DEL, SL) takes 6 months (180 days) to process, which is the common standard for facilities in horizontal industries like pharmaceutical or natural health. I would imagine Health Canada would begin to work quickly in taking on more staff and pushing tremendous resources.
But I know Health Canada. They won’t react in time – they will try, and they will forecast a certain number of applications, but the industry will send in four times what they anticipate. And there will be a backlog. Which, of course, means that the sooner an application goes in, the stronger the advantage in getting licensed first. 2017 will be a very busy year for our firm.
With regards to the retail sale of legal cannabis, the report made some interesting comments about provincial monopolies of the distribution of cannabis. They are encouraging it. In the same way that the liquor control boards dominate the distribution of alcohol in Ontario, for example, we can expect to see something similar in some of the provinces for cannabis.
Keep in mind that distribution is not the same as retail sales, and that if provinces decide to control the distribution of cannabis to resellers, that this would not be expected to eliminate private cannabis shops. On the contrary, my opinion is that the small cannabis shops will proliferate, alongside government cannabis shops.
The task force was gunshy about discussing pharmacy dispensing – however, I do believe that if medical cannabis is permitted through retail storefronts (which the report discusses), that pharmacies would likewise be permitted to sell pre-packaged medical cannabis. But as far as dispensing medical cannabis (i.e., filling prescriptions), the task force did not think this was appropriate given it is not an approved drug.
To be an approved drug in Canada, a cannabis product would have to achieve a Drug Identification Number (DIN) – a costly endeavour, not for the faint of heart. However, the task force is basically saying that (1) psychoactive (i.e., medical) cannabis shouldn’t be a natural health product; (2) pharmacies probably shouldn’t dispense (fill scripts) cannabis if it isn’t an approved drug; and (3) they will encourage R&D in the industry to allow for cannabis to achieve DIN’s to pave the way for this. There is a pharmaceutical opportunity in the background, therefore, but for now it does appear that pharmacies would be limited to pre-packaged product for medical sale. I do not believe pharmacies would be allowed to sell legal cannabis, however – but there was no specific comment about this. We shall see what their proposals are through the regulations.
Designated Producers and ACMPR Licence Stackers
The report had a lot of commentary on the abuses of the MMAR, MMPR and ACMPR systems that have been put into place in the last decade. In particular, the abuses about being a designated grower (MMAR, ACMPR) where someone becomes a grower on behalf of several people and ends up actually growing far more than they were licensed. And selling to the black market and illegal dispensaries.
We are also seeing something like this with “licence stacking” where a large commercial facility could house multiple Canada Post addresses in the same building, and separating grow rooms for different individual growers.
It is clear from the report that the task force wants the production of legal and medical product to be tightly controlled, regulated and observable. Regular inspections. High standards for inventory tracking and security measures. Good production practices and quality programs. What they don’t want is to turn the clock back to the old days where legacy growers could have thousands of plants outside of the government’s general awareness.