Pubdate: Sun, 25 May 2014
Source: New York Times (NY)
Copyright: 2014 The New York Times Company
Author: Ian Austen


Hershey stopped producing chocolate in Smiths Falls, Ontario, six
years ago. The work went to Mexico, but the factory remains, along
with reminders of the glory days: A sign that once directed school
buses delivering children for tours. A fading, theme-park-style
entrance that marks what used to be the big attraction - a "Chocolate
Shoppe" that sold about $4 million of broken candy and bulk bars a

The once ever-present sweet smell of chocolate is gone, too. In the
high-ceilinged warehouse, where stacks of Hershey's bars and Reese's
Peanut Butter Cups once awaited shipment, the nose now picks up a
different odor: the woody, herbal aroma of 50,000 marijuana plants.

Clinical, climate-controlled rooms with artificial sunlight house rows
upon rows of plants at various stages of growth. In the "mother room,"
horticulturalists use cuttings to start new plants. The "flowering
rooms" are flooded with intense light 12 hours a day to nurture nearly
grown plants in strains with vaguely aristocratic names like Argyle,
Houndstooth and Twilling.

The new owner of this factory, at 1 Hershey Drive, is Tweed Marijuana.
It is one of about 20 companies officially licensed to grow medical
marijuana in Canada.

A court ordered the government to make marijuana available for
medicinal purposes in 2000, but the first system for doing so created
havoc. The government sold directly to approved consumers, but
individuals were also permitted to grow for their own purposes or to
turn over their growing to small operations. The free-for-all approach
prompted a flood of complaints from police and local

So the Canadian government decided to create an extensive, heavily
regulated system for growing and selling marijuana. The new rules
allow users with prescriptions to buy only from one of the approved,
large-scale, profit-seeking producers like Tweed, a move intended to
shut down the thousands of informal growing operations scattered
across the country.

The requirements, which went into effect in April, are giving rise to
what many are betting will be a lucrative new industry of legitimate
producers. The government, which will collect taxes on the sales,
estimates that the business could generate more than 3.1 billion
Canadian dollars a year in sales within the next decade.

"It's just so rare that you have an industry that's growing but which
has a huge established market," said Chuck Rifici, Tweed's chief
executive. "A year ago, if you asked me if I'd be working while
looking at thousands of pot plants, I would never have thought that
would be the case." Before deciding to focus on the marijuana
business, he worked as a financial consultant to technology start-up
companies in Ottawa, less than an hour's drive to the north.

Canada is not unique in transforming once-forbidden cannabis into a
legal, or at least tolerated, proposition. The Netherlands has long
allowed personal possession and cultivation of small quantities while
allowing commercial sales through licensed cafes. Spain permits
growing for personal use. Portugal has decriminalized possession of
small quantities of all drugs.

In the United States, 20 states and the District of Columbia have
legalized medical marijuana; both Washington State and Colorado have
legalized recreational use with conditions.

But marijuana remains illegal under federal law, creating uncertainty;
the federal government, for example, recently banned state-legal
marijuana growers from using federal water on their crops.

Canada's across-the-board law, by contrast, provides a cohesive set of
regulations, laying the groundwork for a group of companies to set up

"That was really important for us as investors," said Brendan Kennedy,
chief executive of Privateer Holdings, a marijuana private equity fund
based in Seattle that started Tilray, one of Canada's new legal
growers. "People talk about the Colorado model; people talk about the
Washington model. I think someday they'll talk about the Canada model.
By creating a tightly regulated federal system, by creating a federal
license, by making it difficult to navigate in and capital-intensive,
Canada has attracted a different kind of player into this industry."

'Why Not Smiths Falls?'

For most of its recent history, Smiths Falls (population 9,000) was
defined by two things: the 19th-century canal that passes through its
center and the chocolate-scented air. The Hershey plant, which had
about 800 employees at its peak, was a vital part of the economy.
Until a recent repainting, the town's water tower featured the
Hershey's logo and declared Smiths Falls "the Chocolate Capital of

"It was a huge tourist attraction for the town," Dennis W. Staples,
the town's mayor, said of the Hershey's factory, which lured about
400,000 visitors a year. "They were without a doubt an excellent
corporate citizen." The company sponsored sports teams and hockey
tournaments and helped underwrite a "chocolate and railway" festival
each summer.

The relationship seemed so fixed - the factory had been there for more
than 40 years - that Mr. Staples was a bit puzzled in February 2007
when reporters called asking for comment on Hershey's plan to leave
town. No one had told Mr. Staples. "Probably not the best way to
communicate to the mayor," he said.

Hershey shut down its conveyor belts in 2008. But that was just the
beginning of the bad news for Smiths Falls. A year later, the province
of Ontario closed a nearby home for up to 2,650 developmentally
disabled adults. Stanley Tools, an industrial company, left, as did
two other American manufacturers. And a portion of the Canadian
Pacific Railway's old transcontinental line, for which Smiths Falls
was a regional hub, was ripped up. In all, about 1,700 jobs vanished,
according to Mr. Staples.

At first, Hershey promised to help the town find a new business to
take over the plant. A flavored-water company expressed interest but
couldn't get the money together. In 2012, Hershey sold the plant to a
holding company controlled by the Omnicom Group, the ad-agency giant.
The new owner inquired about demolition permits last summer.

Around the same time, Mr. Rifici, who lives in Ottawa, showed up in
Smiths Falls.

Mr. Staples and the town council were supportive. They believed that
Tweed would help stem, even if just a little, the outflow of jobs and

"If it's going to happen somewhere in Canada, why not Smiths Falls?"
Mr. Staples said. "It's an opportunity to be part of an industry
that's sanctioned by the federal government," he said. "It's going to
create 100 jobs."

The mayor also had a personal reason. When his younger brother was
dying from colon cancer 11 years ago, marijuana was the only way he
found relief from his pain.

Despite the warm welcome, Tweed has had to overcome the stigma of a
once-illicit business. Mr. Rifici said the factory owner wouldn't
lease the plant to a start-up focused on marijuana. So Mr. Rifici and
his business partner Bruce Linton had to form a small investment pool
to buy the plant for an undisclosed amount.

Even once in the building, Mr. Rifici said it was impossible to get a
bank loan to buy equipment. Initially, Tweed raised money from private
investors. More recently, the company has tapped the public markets
for 15 million Canadian dollars by issuing stock.

Other licensed marijuana-growing operations have faced similar
impediments. When Privateer decided to start Tilray, for example, Mr.
Kennedy crisscrossed Canada to find the right spot. It was apparent,
he said, that Privateer would hit resistance in many areas. Illegal
growing operations had attracted widespread negative publicity for
destroying rental houses with mold and creating fire hazards with
their lighting systems.

In Nanaimo, British Columbia, Mr. Kennedy found economic development
officials who eagerly courted Tilray. The city was looking for new
businesses to offset a gradual decline of the forestry and fishing
industries, the region's historical economic base. The officials
introduced local zoning bylaws that made it easier for the medical
marijuana industry to operate.

Tilray has since bought a building for $3.5 million and spent $17
million to renovate it. The company employs 65 people, with plans to
increase that number to 100. "One hundred new jobs in a community of
less than 100,000, that's a big deal," Mr. Kennedy said.

Still, he said it took a while to find a bank that would deal with a
marijuana grower. The Royal Bank of Canada eventually agreed to take
Tilray's account and to process its credit card transactions.

Nor has Tweed won over everyone in Smiths Falls. Like many small,
blue-collar towns in rural North America, it has an illegal-drug
problem, mainly crack cocaine and marijuana.

Darlene Kantor, 50, works as a building manager, and she says she is
thrilled that Tweed came to town with its jobs and millions of dollars
of investment. "But my main concern is: Is it going to make the
illegal drugs more rampant?" she said.

Some are more skeptical about whether Tweed will be able to provide
many jobs. "They were talking about creating jobs and such, and it's
not going to, it's not going to do anything," said Andrew Brinkworth,
18, outside the downtown Tim Hortons. "A lot of people here have
criminal records, and they're not going to be able to get a job at the
plant if they have a record."

A 300-Page Application

Dressed in a casual shirt and slacks, Mr. Rifici, 39, is built from an
entrepreneurial mold. His fast speech and seemingly inexhaustible
enthusiasm appear to be byproducts of pitching start-up ideas to
investors, or anyone who will listen, for two decades.

His early interest in the Internet came from playing simple,
text-based games. "Slaying virtual dragons with someone from Australia
from my computer in my parents' basement in 1991-92 was eye-opening to
how the Internet would fundamentally alter how we lived," he said. "So
I had to get involved in some way."

In 1995, during his third year of computer engineering studies at the
University of Ottawa, he decided to start an Internet service
provider. He sold the business in 2003 for 1.1 million Canadian
dollars ($1 million) to a larger competitor, Cybersurf, where he
became chief financial officer. Over the next two decades, he helped
start a dozen tech companies.

His interest in politics indirectly inspired his marijuana business.
Mr. Rifici, who volunteers as chief financial officer of the Liberal
Party of Canada, one of the three main national parties, closely
tracked the evolution of marijuana laws.

In October 2012, Health Canada, the federal agency responsible for
drug controls, published a long, technical list of proposed reforms.
One thing caught his eye: Under the new approach, customers could buy
only online or through call centers, types of systems that his
Internet businesses had operated.

But his background didn't prepare him for the regulatory strictures of
the medical marijuana business. Accustomed to developing start-ups on
the fly with little capital, Mr. Rifici and Mr. Linton, another Ottawa
entrepreneur who is Tweed's chairman, underestimated the money they
would need by a factor of three, largely because of the government's
regulatory demands. The application ran 300 pages, not including
attachments. And before they could even submit applications, Tweed and
other growers had to secure sites for their operations and obtain all
local permissions. Applicants who passed the initial vetting then had
to pass a final, two-day inspection.

The requirements are significant. Growers must have sophisticated
carbon filtration systems to prevent the smell of marijuana from
wafting outside. They must maintain high-security measures like
biometric thumbprint readers. Employees need to pass rigorous security
checks, conducted by the Royal Canadian Mounted Police, which take
four to six months.

"If I knew how much regulatory overhead there would be from the
beginning, I would have probably been just as excited about the
industry," Mr. Rifici said. "But I might have thought that I might not
be able to get there.

"Nothing like a bit of ignorance to allow you to move

The red tape was part of an effort to reform Canada's initial approach
to medical marijuana. In court filings, the government suggested that
the old system had become little more than a legal veneer for
recreational growers, with a significant amount of marijuana making
its way to illegal operations. Health Canada said users, on average,
grew enough marijuana to roll 54 to 90 cigarettes a day, far beyond
what they needed for personal use.

"There was big, big diversion going on," Brent Zettl, the chief
executive of Prairie Plant Systems, the company that grew and
distributed the government-supplied marijuana under the old system.
The company is now among the newly approved growers. "They ducked
behind legitimate patients and used them," he said.

Trying to Convince Doctors

Walking the vast, 425,000-square-foot factory, Mr. Rifici talks
animatedly about Tweed's next steps. Just behind the new entrance of
glass and shiny stainless steel, he has carved out space for a gift
shop. He also hopes to lure a craft brewer into the unused portion of
the factory. He wants to make 1 Hershey Drive a destination for
tourists again.

Tweed is taking a subdued, almost artisanal, approach to its branding,
avoiding the Cheech-and-Chong vibe of some rivals. Many of its
marijuana strains are named after fusty fabrics like tweed, as well as
people and places associated with such clothes. The Herringbone strain
is supposed to help with depression. Bakerstreet is used to treat
anxiety. Donegal is promoted as a pain reliever.

But the industry faces an uphill battle, as prominent doctors,
researchers and even the Canadian Medical Association are advising
against prescribing marijuana at all. Marijuana, they say, has not
been through the testing and approval process required for other

Dr. Mary-Ann Fitzcharles, a rheumatologist and professor of medicine
at McGill University in Montreal, was the lead author of a widely
publicized paper recommending that, without clinical evidence,
marijuana should not be prescribed for rheumatoid arthritis. About 65
percent of users in Canada under the old system said they suffered
from that condition. She compares the medical claims for marijuana to
those once made for tobacco.

"I don't think any physician today would say: 'I suggest you take up
smoking cigarettes to deal with your anxiety,' " Dr. Fitzcharles said.

So Tilray, Prairie Plant and Tweed are creating sales teams to
persuade doctors to prescribe marijuana. Tweed's chief medical
adviser, Dr. John Gillis, an emergency-room and chronic-pain doctor in
Dartmouth, Nova Scotia, is working to develop best practices for
prescribing marijuana. Christopher Murray, who worked with a Canadian
agency that evaluates new drugs and medical technology, leads a
"medical education and outreach" group for Tweed.

A Fine Legal Line

When Tweed shipped its first two orders directly to customers on May
5, about half of the company's management watched, partly for
ceremonial reasons but mostly to make sure that its elaborate,
government-mandated inventory-tracking system worked. Employees
weighed the total inventory before doling out the shipments onto
smaller scales calibrated to 0.01 gram. The marijuana was dropped into
boxes bearing Tweed's logo and then, to meet government requirements,
vacuum-packed into odor-blocking bags. Then came a final check on the
scales before the two parcels left in standard courier pouches that
did not bear Tweed's name.

As with many in the new industry, Tweed repeatedly cites a Health
Canada forecast suggesting that the user base will grow to more than
400,000 from about 40,000. But some analysts wonder how the industry
will reach such levels. Mr. Zettl is one of the few players who
acknowledges that many buyers will probably be recreational users with
sham prescriptions.

Like most people in the medical marijuana trade, Mr. Rifici rejected
suggestions that the industry was ultimately counting on the
introduction of an open, legalized market. But there is such a
possibility. Justin Trudeau, the leader of the Liberal Party, has
vowed to legalize marijuana if he takes power in elections scheduled
for next year, and polls suggest that the idea has widespread support.

Mr. Rifici, speaking over the drone of dehumidifiers in the production
facility, said that "the difference between medical marijuana and
nonmedical marijuana is one of legislation."

"And at the end of the day," he added, "our product is essentially
high-quality marijuana under a medical platform."
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