Pubdate: Sat, 18 Jan 2014
Source: National Post (Canada)
Copyright: 2014 Canwest Publishing Inc.
Contact: http://drugsense.org/url/wEtbT4yU
Website: http://www.nationalpost.com/
Details: http://www.mapinc.org/media/286
Author: Brian Hutchinson

A BIG BUSINESS GROW-OP

Communities Across Canada Prepare For A Wave Of Marijuana
Investment

Brendan Kennedy doesn't fit the stereotypical image of a marijuana
grower. Neither do his two partners at Privateer Holdings Inc., a
Seattle based venture capital firm. They are former software
executives, all armed with MBAs. Mr. Kennedy, who is Privateer's chief
executive, and Michael Blue, his chief financial officer, were
schooled at Yale.

They've worked with Disney Co., Microsoft Corp. and Nextel
Communications Corp. Now they're risking millions of dollars on pot,
and the corporatization of weed. Privateer has recently made
marijuana-related investments in its home state of Washington, where
adults may now legally possess cannabis for recreational use, and
where wholesale production and retail store sales will begin this
year. But Privateer's involvement in Washington is peripheral, limited
to companies that service marijuana growers and provide consumers with
information.

"We don't invest in U.S. companies that touch the product directly,"
says Mr. Kennedy, noting the existing conflicts in state and federal
law. They are not so shy about Canada. Privateer's boldest, most
hands-on investment is just a 40-minute flight north of Seattle, in
pot friendly Nanaimo, B.C.

Six weeks from now, the three Seattle sharpshooters expect they'll
have hired 40 full-time workers from around the province. They'll be
growing, processing and packaging for sale medical-grade marijuana
inside a $3-million, 35,000-square-foot warehouse on the Nanaimo
waterfront, next to a pulp and paper mill and just down the road from
a BC Ferries terminal.

Privateer's new Canadian subsidiary purchased the building this month.
Mr. Kennedy expects to spend another $6.5-million to $7-million on
capital improvements, including equipment required to raise potent
marijuana plants. The venture capitalists might never have come to
Nanaimo - or even considered crossing the border - had they not been
encouraged by the Canadian government.

On April 1, rules governing medical marijuana production in this
country will dramatically change. No longer will the 37,000 Canadians
currently licensed to possess cannabis for medicinal use be permitted
to grow their own, or purchase from small-scale producers, as they've
allowed since 2001. Come April, medical marijuana users must buy
directly from commercial-sized, profit-seeking operations authorized
to grow and sell pot by Health Canada, in accordance with strict new
regulations. Patients will still need a document signed by a
health-care practitioner to buy medical weed, but they will no longer
require a Health Canada permit.

Health Canada cited a number of reasons to favour regulatory reform,
in a lengthy analysis it prepared in 2012. It noted that recent
Canadian court decisions supported its own position, "that dried
marijuana for medical purposes should be produced and distributed as
much as possible in the same manner as a medication." The analysis
mentioned that under the old system, registered users "generally
dislike the application process, and the fact that only a single
strain of marijuana is available for purchase."

It also raised issues around security and safety for patients who grow
their own: "The potential for diversion of marijuana to the illicit
market due to limited security requirements, the risk of violent home
invasion by criminals attempting to steal marijuana, fire hazards due
to faulty or overloaded electricity installation to accommodate
high-intensity lighting for its cultivation, and humidity and poor air
quality."

For the new producers, the stakes are high. By Health Canada's own
estimate, the number of licensed medical marijuana consumers will
increase almost tenfold in the next decade, to approximately 309,000,
as more evidence about the drug's efficacy emerges, and more doctors
become willing to prescribe it to patients. Health Canada estimates
that by 2024, the "legal marijuana supply industry" may have annual
revenue of $1.3-billion.

There's going to be money in legitimate marijuana for Canadian
municipalities as well; licensed producers authorized under Health
Canada's new Marihuana for Medical Purposes Regulations (MMPR) will
grow, process and package dried cannabis from secure facilities, such
as the one Privateer is re-fitting in Nanaimo. Each operation will
purchase local power. They will pay local business taxes. They will
each require dozens of employees, from white-collar executives to
horticulturalists and botanists to security staff.

It's no wonder that communities across Canada are preparing for a wave
of legitimate marijuana investment, and are rewriting local zoning
regulations to accommodate the big operators. Charlottetown, Hamilton,
Edmonton, Surrey and dozens of places in between are all getting ready
for a potential green rush.

Privateer scoured the country for an appropriate grow op location. The
search led them all over Ontario, across the Prairies and into B.C.
One town offered up tax breaks and other incentives. The town of
Kapuskasing, in Northern Ontario, sent Privateer a package describing
potential grants and loans, and touting its "relatively remote
location," its "potential access to source of CO2 to enhance cannabis
production," and its "planned research greenhouse that could
complement a company's needs."

Nanaimo wasn't "actively looking" to land a business in the medical
marijuana sector, says Nanaimo Economic Development Corp. CEO Sasha
Angus, but Privateer liked what the city had to offer. The Americans
seemed to know their stuff, and they impressed local authorities with
their button-down approach to business. "These are not your Cheech and
Chong type characters," says Mr. Angus. "They are Ivy League."

Other communities don't share the enthusiasm for licensed grow ops. A
number of local governments in B.C.'s Lower Mainland, including
Abbotsford and Delta, has decided they want nothing to do with them,
Health Canada approved or not. Delta's municipal staff are drafting
bylaw amendments that would ban the production, processing and sale of
medical pot. A similar prohibition is under consideration in
Abbotsford, which has more than its share of drug-related crime.

Some current medical marijuana consumers are uneasy, too, especially
those who would rather continue buying their product from small, local
growers, or cultivating their own. Under the new rules coming into
effect on April 1, only dried cannabis may be offered for sale, and it
must be mailed or couriered directly from the authorized producer to
the customer, in child-proof bottles. Patients who prefer to ingest
marijuana orally will have to make their own extracts and tinctures.
They will be permitted to possess a maximum of 150 grams of dried
marijuana, or 30 times their daily dose, whichever is less.

Lawsuits have been filed in Ontario and B.C.; plaintiffs are hoping to
stop Health Canada's new MMPR from being fully implemented. "My
clients have all learned how to grow marijuana properly and in
accordance to their requirements, for about $1 to $4 a gram," says
John Conroy, a B.C.-based lawyer who is helping four licensed
marijuana users challenge the MMPR on constitutional grounds. "They
have a right to produce their own medicine," says Mr. Conroy.

Others say the new rules will improve - even revolutionize - cannabis
production in Canada, and will benefit most consumers. While the
market won't be completely unfettered, patients will be able to shop
around and compare myriad varieties of marijuana that producers have
made for sale. Quality and consistency will be assured, thanks to
strict production controls. And the authorized licensed producers will
have to compete for business; that should keep prices down.

"Once it's fully mature, the new system will benefit patients
tremendously," says Ron Marzel, a Toronto lawyer and marijuana
advocate. "But in the short term, I think there will be a huge
shortage of product."

He notes that under the system being phased out, Canada's medical
marijuana patients were licensed to consume 190,000 kilograms of dried
cannabis last year. About 60% of medicinal pot was grown by the
licensed users themselves.

Can all that marijuana be replaced, quickly, by the new mega-farms?
The federal government says it can. While it has received "more than
400" authorized licensed producer applications from hopeful companies
and individuals, Health Canada says it has approved only eight. And
just four of the successful applicants "are ready to register
clients," according to a department spokesman.

Those include Saskatoon based CanniMed Ltd., a subsidiary of Prairie
Plant Systems Inc., the only private company contracted by Health
Canada to grow marijuana under the old regulations. Prairie Plant
Systems supplied about 20% of licensed patients in Canada with their
marijuana. Now it must battle for market share.

"Health Canada is monitoring producers closely," a department
spokesman said in response to questions from the National Post this
week. "We remain confident that there will be adequate production
levels under the [MMPR]."

But according to Privateer CEO Brendan Kennedy, Health Canada
officials "seemed very worried about production levels" in meetings
they held seven months ago. The feds anticipated a supply shortfall
and a dearth of qualified producers, he recalls.

"Health Canada had valid concerns" about the authorized license
applications they were receiving last year, says Mr. Kennedy. Many
displayed a "lack of sophistication" about the medical marijuana
industry, or had a "lack of capital," he says. The department "was
concerned about the ability of new licence holders to meet demand."

With all that in mind, the federal government encouraged his venture
capital firm to invest in the Canadian medical marijuana trade, says
Mr. Kennedy.

"We went to Toronto in June 2013 to meet with Health Canada and they
asked us to work with some of the applicants investing in Canada," he
recalls.

"They asked if we'd be interested in meeting with applicants who
needed funding. I believe that Health Canada reached out to us. They
asked us to come to Canada."

Asked if Health Canada has ever encouraged parties outside the country
to invest in new MMPR facilities, a department spokesman answered that
"all of the discussions between Health Canada and those interested in
becoming licensed producers are confidential.... Health Canada does
not provide business advice."

In fact, Privateer wasn't the only foreign firm attracted to Canada
for the new medical marijuana laws. Among the eight successful MMPR
applicants to date is Toronto-based Bedrocan Canada Inc., a creation
of Bedrocan BV, a wellestablished marijuana producer from Holland.
Bedrocan Canada and Bedrocan BV are in a "joint venture" to produce
and sell medical grade marijuana in Canada.

Under the MMPR, producers must be headquartered in Canada "or operate
a branch office in Canada and whose officers are all adults."
Privateer created its own Nanaimo based subsidiary - called Lafitte
Ventures Ltd. - and expects to begin hiring soon. They've got their
local permits, and blessing from municipal authorities. They've been
closely scrutinized and fingerprinted by the RCMP.

The Seattle entrepreneurs are now waiting for final approvals and
permits from Health Canada. Should they receive the green light, they
should be up and growing in March, just ahead of the April 1 rule change.

Mr. Kennedy acknowledges that he and his partners have taken some
risk, spending millions on infrastructure before obtaining a license
to grow and to sell. They've already worked with branding and
marketing experts to come up with a product name, Tilray, and an array
"standard and seasonal" marijuana strains they'll produce for sale.
These include "Bubba Kush," "White Widow," and "Lemon Haze," names
already familiar to aficionados.

And they already have two more Canadian locations in mind, one in
B.C., the other in southern Ontario.

[sidebar]

By the numbers:

477 Number of Canadians authorized to possess marijuana for medical
purposes in 2002

41,384 Estimated number of Canadians authorized to possess marijuana
for medical purposes under MMPR in 2014

308,755 Estimated number of Canadians authorized to possess marijuana
for medical purposes under MMPR in 2024

$10 to $15 Current street price, per gram, for dried
cannabis

$1.80 to $5 Price per gram when purchased for medical purpose by
licensed consumer, 2012

$7.60 Price per gram when purchased for medical purpose by licensed
consumer, under new MMPR in 2014

$1,686,600 Revenue to Government of Canada from sales of dried
marijuana and seeds, fiscal 2011--12

$1.3-billion Estimated revenue to "legal marijuana supply industry" by
2024  
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MAP posted-by: Jo-D