On Wednesday, federal justice minister Jane Philpott announced at the UN special session that Canada’s approach to drugs must change, specifically that “We will apply these principles to marijuana. To that end, we will be introducing legislation the spring of 2017 that ensures that we keep marijuana out of the hands of children and profits out of the hands of criminals.”
This is the first formal announcement from the Trudeau Government of a specific timeline for introducing new regulations surrounding recreational marijuana in Canada. Philpott’s statement was bold and direct, reflecting the Liberal Government’s belief in an evidence-based regulatory approach to illicit drug use.
The significance of this speech is tremendous. Because many politicians have made and broken promises from their election platform, marijuana reform does not appear to be one of them. For those of you who may not know, the new government in Canada (elected in the fall of 2015) promised to regulate and de-criminalize recreational marijuana, which was a bold new direction in the war against drugs. The previous government, under Stephen Harper, held tight the notion that any step towards decriminalization / legalization of marijuana would plunge Canadians into irreversible harm.
Also for our readers who do not know much about medical marijuana in Canada right now, there are a few dozen licensed producers of medical marijuana selling legal medical marijuana (through delivered packages) patients across Canada. There are a hundred more companies in queue waiting to become licensed.
I wanted to take a moment to predict where the cannabis industry in Canada is going. The title of this article is appropriate – because we are heading (finally) into a bullish market where everyone will want to claim their stake.
Update on Medical Marijuana Licensing
First I’d like to highlight some changes in the medical marijuana program. By way of background, our company is hired to achieve their production licence issued by Health Canada. We write the full quality system procedures, shepherd the process and respond to Health Canada information requests during the screening stage. What we’re seeing these days, is Health Canada is spending the majority of their resources on older files, not newer files. This means that if an applicant had submitted their MMPR application before October or so last year, that they are being fast-tracked compared to newer applicants. Today, any new application may take 10 months before the first review is even started.
The good news out of this, however, is twofold. First, if you’re an older applicant and have been waiting in the queue for a while, you will start to see movement on your file. And the other good news is that overall Health Canada is putting more energy into reviewing files in general – and their intention is to issue more and more licences over the upcoming year. The previous government was concerned about flooding the market with too much inventory, and so they were keeping applicants in queue until they felt the industry needed (or could sustain) more producers. Today, however, the Liberals do not seem to be concerned about this, and instead seem more keen on working through their backlog and letting the market decide who will survive/flourish.
Medical marijuana is expected to run in parallel with recreational marijuana sales in 2017 onwards. The Allard decision suggests that the Trudeau government should start allowing dispensaries (and other storefront resellers) to sell medical marijuana, in order to provide a better quality / diversity of marijuana product to consumers. We also have it on good intel that pharmacies will soon be allowed to sell medical marijuana at their pharmacy locations. If in-person sales are to be allowed (and I believe they will be), medical marijuana will have a fighting chance of succeeding in the marketplace. Historically the growth of the medical marijuana industry has been slower than anticipated, which is mostly due to the restrictions on how product can be sold/shipped (online).
Also, keep in mind that extracts and derivative forms of marijuana may not be allowed for recreational use when we see the new regs in 2017. For example, CBD oil is available now as medical marijuana, but would it be allowed in 2017 to be sold for “pill popping” recreationally? I doubt it. Recently, Vanessa’s Law was enacted to give the government more power in compelling recalls of unsafe drugs – and which was part of a broader approach to crack down on prescription drug abuse. So, allowing a medicine to be used recreationally wouldn’t seem fitting. This means that, if there is indeed a parallel system of medical and recreational cannabis in 2017 onwards, that we’ll likely see the derivatives stay in the medicinal category. This gives medical marijuana producers a niche market. Creams, salves, tinctures, extracts, capsules. These will stay in the medical category most likely.
So we’re seeing Health Canada pay a lot more attention to old files these days. Most of our newer applications (after say October) have received very little attention, in fact. But what we are also noticing, is that when an MMPR file is being reviewed by Health Canada, they’re paying closer attention to the details and are faster at responding. There is a heightened activity at the review stage. This is good news for investors, who have been anxious about the long licensing delays historically. 2016 will likely see many new LP’s coming to market, giving confidence to new startups that there is a viable future ahead of them.
The Future of Recreational Marijuana
The more interesting news these days is the recreational side. If we are indeed seeing new regulations being published in the spring of 2017 (less than a year away), this means that final regulations will be published in the summer of 2017, with applications for recreational cultivation opening up in the Fall of 2017. This is the first timeline we’ve received from the government, and it is very encouraging.
So let’s back up a bit. How many producers of recreational cannabis can the industry support? No one knows, but we can make an educated guess. In the city of Vancouver, there are close to 176 marijuana dispensaries, servicing a population of around 600,000. That is, for every dispensary there are 3,400 patients supported. Canada has 35 million residents, which in theory means around 10,200 dispensaries across the country supporting around 200,000 patients. The numbers are very difficult to make sense of, partly because many people buy medical marijuana for recreational use, and also there is a great deal of medical consumption not sold through the Vancouver dispensaries (i.e., black market or personal growing). But if we assume 10,200 dispensaries across the nation by 2020, this is a tremendous growth opportunity for medical marijuana retail sales. This would be around 72,000 kg per year (assuming 30 grams/month per patient, among 200,000 patients across Canada). Last year the legal marijuana producers sold around 3,000 kg, by contrast, from around 20 producers. If we extrapolate this to the nation, my guess is that Canada could support around 480 licensed producers of medical marijuana operating at the same level as today. (Realistically, most producers today are in the red because they’re banking on future sales, and perhaps a more realistic forecast of the number of producers is closer to 250 or 300.)
For recreational sales, naturally we would expect the numbers to be greater. Imagine alcohol after the prohibition was lifted, how many alcohol producers were on the market compared to the number today. It is a staggering growth. Especially if we look at the craft beer movement in the last decade. I believe very strongly that recreational cannabis will follow the same principles of marketing and sales as the craft beer movement, because for the consumer the taste, touch and visual experience of purchasing marijuana – and knowing where it’s grown – is very important. The cannabis tourists in Colorado can tell you all about this.
So let’s say Canada could support 250 medical marijuana producers, and I would guess that the number of recreational producers to be closer to 800. Yes, I’m pulling this number out of my head, but I can’t imagine it being less than the number of medical producers, and I do imagine there will be many smaller cultivators focusing on specialty strains and unique marketing propositions to gain a small market share. I’m confident that the new recreational marijuana industry will encourage many small players, provided they meet Health Canada’s requirements (TBA).
As of today, Health Canada has turned down most of the medical marijauna applicants. Around 100 are in queue at the final review stage, and likely another 100 are advancing to that stage. This shouldn’t deter any company from entering into the arena, however; many of these early applicants have not built out facilities yet, and many are drying up on funds due to Health Canada’s waiting game.
I also believe that a medical producer would likely be grandfathered / allowed to enter the recreational market, perhaps a dual licence of some kind. Perhaps they will separate the cultivators from the manufacturers at some point. In other words, an MMPR applicant in queue today, would likely be grandfathered into recreational sales in the future. Some producers are betting heavy this will happen (such as Tweed). I believe it’s a reasonable assumption.
So what does that mean today?
It means today there are too few applicants to produce marijuana in Canada. It may seem like a daunting process, going through the Q&A with Health Canada and building quality and security procedures to protect Fort Knox, but this trial by fire has a payoff. The truth is there aren’t enough applicants today to service the industry in 2018.
If this is true, and I believe that it is, the Trudeau government will have a new problem on their hands: lack of legal supply. Fast forward to late 2017 when marijuana is decriminalized and retail sales start to open up, and the shelves are empty. Retailers would only be allowed to purchase from licensed recreational cultivators (which may not be many at that time), and the medical marijuana producers wouldn’t have enough inventory to supply them. The black market would still be a viable option for Canadians – after all, if you want to get high, and you can’t buy it from your local dispensary, where would you go?
In order to pull this off, the Trudeau government would have to ensure that there is an adequate supply. This means less red tape and more resources put to licensing recreational cultivators. So, while the wait times today may seem lengthy, I don’t imagine we would see this in the future.
Contact us today to learn how NHP Consulting can help applicants achieve a license to producer and sell medical and recreational marijuana.