Pubdate: Fri, 19 Dec 2014
Source: Globe and Mail (Canada)
Copyright: 2014 The Globe and Mail Company
Author: Grant Robertson
Page: B1


Marijuana Inc. Part one of a two-part series on the rise of medical
marijuana as big business in Canada.

Inside the rush to profit from medical marijuana

Dennis Arsenault couldn't believe what he was seeing. When his
company, OrganiGram Inc., made its debut on the TSX Venture Exchange
this summer, the shares suddenly shot up.

The high valuation didn't make sense - not even to Mr. Arsenault, and
he was the company's chief executive officer.

Just a few weeks earlier, OrganiGram, an upstart producer of medical
marijuana based in Moncton had been valued privately at just over
$40-million. But on the open market, speculators feverishly drove up
the total value of its shares to nearly $120-million in late August.

It wasn't that Mr. Arsenault didn't believe in the future of his
business. OrganiGram is one of only 15 companies to land a highly
coveted federal licence in Canada's new medical marijuana sector,
touted as a potential multibillion-dollar industry in the years to

But the company hadn't made a dime yet. OrganiGram was probably a year
away from pulling in meaningful revenue - and it was already worth
nine digits in the stock market.

"I was just shaking my head," Mr. Arsenault said of that first week of

What happened was exuberant, if irrational, and OrganiGram wasn't the
only company feeling the surge.

Investor appetite for Canadian marijuana stocks also turned rival
Tweed Inc. of Smiths Falls, Ont., into a $100-million company before
it had even logged its first shipment to patients.

Sooner or later, everyone was jumping on the marijuana

Mining exploration companies, frustrated by lacklustre interest in
their stocks, were turning themselves into marijuana businesses overnight

Companies such as Supreme Resources and Affinor Resources were
suddenly rebranding themselves as Supreme Pharmaceuticals and Affinor
Growers - specialists in a new field - to entice investors. And they,
too, saw their stock prices lift.

It's a market craze that has made early investors rich, and left a
large number of retail shareholders in some cases clutching
near-worthless paper, as stocks suddenly plummet.

The industry has attracted more than its share of colourful players,
from stock touts and salesmen to the multinational tobacco
conglomerates, which are keeping a close eye on the developing
marijuana business.

But had it not been for a failed Health Canada policy more than a
decade ago, the pot stock bubble that dominated the Canadian markets
for much of 2014 would have never happened.

Ottawa's efforts to build a new industry from scratch has resulted in
an experiment that is moving marijuana sales from the back alley to
the capital markets. It is a historic moment, and it is fraught with
problems: It is the birth of Marijuana Inc.

'Open to abuse'

The first time Health Canada attempted to set up a medical marijuana
program, the government lost control of it.

In 2000, the Supreme Court of Canada ruled that patients who use the
drug to treat conditions ranging from glaucoma and epilepsy to the
pain associated with cancer treatment had a legal right to possess
marijuana. Furthermore, the government had a legal duty "to provide
reasonable access" to the drug for that purpose.

In other words, Ottawa could not expect patients to venture on to the
streets to obtain something that was considered, in this case, to be

Despite objections from the Canadian Medical Association - which
argues that the medicinal benefits had not been proved in clinical
tests - Health Canada had little choice. So, by 2001, the government
reluctantly designed a program through which patients with a
prescription could obtain the controlled substance either by growing
it themselves or buying it from someone else with a prescription or
from a government contractor. It seemed like the simplest solution to
Ottawa's problem.

But according to hundreds of pages of Health Canada documents obtained
under the Access to Information Act, the program quickly began to
spiral out of control.

What began with 100 patients at the program's inception grew to 4,000
in its first three years. By late last year, no fewer than 21,986
people had prescriptions to grow medical marijuana.

This demand sent costs soaring. Documents show that about $6-million
was needed to operate the program in 2005, a figure that had climbed
to $17.5-million by last year.

With that growth came more severe concerns. In 2012, Health Canada
commissioned consulting firm Delsys Research Group to scrutinize the
program. The resulting 180-page report, which was obtained by The
Globe and Mail, showed the federal department was failing miserably to
manage its own policy.

Between 2003 and 2010, police discovered 190 cases of crime relating
to marijuana licences. Some offences were violent - about 8 per cent
involved attacks or home invasions - but that wasn't the biggest
concern. Police also believed that some licences were producing "well
in excess of their authorized daily amount" and much of that was
finding its way to the street.

Not only did Health Canada not have enough inspectors to enforce the
rules, it needed either permission or a warrant to make sure a home
grow-op was complying with regulations.

According to government documents, the department attempted to carry
out 75 such inspections without a warrant in 2010. In only 27 cases
did anyone answer the door and, of those, roughly half refused to let
the inspectors in. Based on statistical modeling of existing police
data, Delsys estimated as much as 35 per cent of Health Canada's
licences may involve "some degree of misuse and diversion of marijuana
intended for medical use into the illicit market."

Even legitimate growers were raising questions. One man sent an e-mail
to Health Canada in 2012, which The Globe and Mail obtained through
access to information, saying he had never been inspected in six years
to see if he was complying with the law.

In another e-mail, a physician warned Health Canada that he had seen a
patient authorized to produce 40 grams of marijuana per day who was,
in the doctor's opinion, producing at least 20 times what his average
daily prescription should be. "This is obviously not all being used by
one patient," he wrote.

Another physician told Health Canada of seeing patients who'd been
given prescriptions to grow "excessive amounts." He added: "Somebody
has clearly dropped the ball on this one."

One doctor complained of a colleague he knew in a nearby community,
"who for $50, would sign anyone's form."

Soon officials at Health Canada were forced to admit things had gone
awry. In a draft of a 2013 letter signed by Louis Proulx, assistant
director of the Bureau of Medical Cannabis, the department stated
bluntly that its program "was widely open to abuse." The reference was
deleted before the final draft of the letter was sent (to an unknown
recipient), but it was clear Health Canada needed to scrap the program.

That decision would set the stage for a historical shift - the
creation of a large-scale medical marijuana industry run by private
companies. Rather than retool its efforts, Ottawa wanted out of the

A new industry

Health Canada concluded it would be better to license a few
large-scale producers, rather than dole out thousands of individual

This new industry, the Delsys report said, could be quite lucrative.
"It is anticipated that the regulated market will grow to be
reasonably large, competitive and profitable," the report explained,
adding that Canada has 450,000 projected users of medical marijuana.
"Provided they obtain support of a healthcare practitioner, these
persons could potentially make a strong market base."

That estimate got people in the business world thinking. "The federal
government said, 'We think there will be about half a million people
who have a prescription over the next few years in Canada,' " said
Bruce Linton, founder of Tweed Inc., one of the first producers to
land a federal licence. "Everybody in the market said, 'If the
government thinks that's the number, it's going to be a lot bigger,
and a lot faster.' "

With the lure of big profits hanging over these licence applications,
Health Canada introduced a two-stage approval process. First,
candidates had to design a secure operation, which would be subject to
federal approval. Then they had to build that operation, risking the
capital up front, without knowing if a licence would be granted.

Even with those unusual hurdles, the response was overwhelming. Health
Canada, originally concerned that not enough companies would seek a
licence, received more than 1,000 applications between last fall and
this summer. At one point, 25 were coming in every week.

Applicants knew what a licence was - a permit to make money. "There's
no denying, there is tremendous wealth that is going to be created
from this," Mr. Arseneault said, comparing the situation to alcohol in
the U.S. "You can go back to Prohibition - it's the same concept.
There is a race mentality."

Andrea Hill, a securities lawyer at Toronto-based Wildeboer Dellelce,
says the licences are like winning lottery tickets. "When these
[companies] go public, they've consistently been going public at
market capitalizations of $70-million plus."

OrganiGram's $120-million debut was an example of this, as was Tweed's
market capitalization of more than $100-million. With every licence it
issues, Health Canada is essentially minting millionaires.

"It's a constitutionally protected drug-dealing industry," Ms. Hill
said. "There's not very many of those."

But most companies pursuing these licences are playing a longer, more
speculative game, betting that the market will be even bigger in the
future, should the drug be legalized.

That idea is not far-fetched. Ethan Nadelmann, head of the Drug Policy
Alliance, a powerful lobby group that has been instrumental in having
marijuana made legal in Colorado and Washington state, sees Canada as
inevitable, having embraced the medical market.

And with legalization comes a huge opportunity for

"We all stand today at the intersection of something relatively unique
in American history," he said. "If you look at other movements for
freedom and justice - movements around gay rights, or women's rights,
or civil rights =C2=85 the sudden transformation of those fields did not
have these remarkable economic consequences."

The emergence of a legal marijuana industry in North America is worth
"tens of billions of dollars," Mr. Nadelmann said, reiterating that
"if somebody asks me what's going to be the next country to legalize
marijuana, my bet is Canada."

Statements like that have brought a wave of speculative investment
north of the border.

The impending invasion

The push for a legal marijuana market is hardly new. Industry
documents show that the tobacco industry has sought a way into the
business for decades.

And if Canada were to make the drug broadly legal, many in the
marijuana sector believe it's only a matter of time before the tobacco
companies claim a significant chunk of the market for themselves.

Documents newly uncovered in the University of California's archives
show that Big Tobacco first became interested in the early 1970s, as a
U.S. presidential commission was about to recommend marijuana be
decriminalized, and similar talk was circulating in Canada.

In a handwritten internal memo, George Weissman, then president of
Philip Morris Inc., said the maker of Marlboro cigarettes needed to
seize the moment, given the potential upside.

"While I am opposed to its use, I recognize that it may be legalized
in the near future and put on some sort of restricted sale, if only to
eliminate the criminal element," he wrote.

"Thus, with these great auspices, we should be in a position to
examine =C2=85 a possible product [and] at the same time, co-operate with

the government."

Another unsigned internal memo offered up a rationale for the tobacco
giant's planned expansion into pot: "We are in the business of
relaxing people who are tense and providing a pickup for people who
are bored or depressed. The human needs that our product fills will
not go away. Thus, the only real threat to our business is that
society will find other means of satisfying these needs."

One particular concern appears to have rattled Philip Morris - the
fact that young people were gravitating toward marijuana, which meant
a lost generation of customers. "Many regard marijuana as an
alternate, and perhaps superior, method of satisfying the needs that
cigarette smoking satisfies," the memo read. "In this situation,
business theory strongly suggests that we learn as much as possible
about this threat to our present product."

When the commission's recommendation to legalize pot was quashed by
Richard Nixon's administration, the company's foray into marijuana
also halted. Philip Morris never spoke publicly about its strategy.
Discussions in Canada also lost momentum.

However, a similar internal memo from executives at rival R.J.
Reynolds Tobacco Co., maker of Camel cigarettes, shows that the
industry revisited the subject in 1992 amid rumours that "certain
European countries" were on the verge of legalizing the drug, raising
"the possibility of its future, more frequent use."

Today, with Canada and more than 20 U.S. jurisdictions now permitting
marijuana for medical use, along with legalization in some states, the
tobacco companies say they have no plans to explore the business, but
that hasn't left the rest of the sector at ease.

Inside the industry, the possibility of Big Tobacco entering the fray
is referred to as the "impending invasion." The consensus is that when
the market reaches the point where significant profits are being made,
the cigarette makers will muscle their way in. That notion - accurate
or not - has helped to feed the appetite for marijuana stocks, raising
the spectre that some companies could be takeover targets, triggering
lucrative shareholder payouts if that day ever comes.

Pot stock billionaire

The same fever over marijuana stocks that emerged in Canada also ran
rampant south of the border. With numerous U.S. states moving to
legalize marijuana - Alaska and Oregon approved ballot initiatives
this year - the resulting stock-market frenzy sent company valuations
into the billions.

The king of North American pot stocks - and undoubtedly the company
destined to be the lasting symbol of the marijuana stock bubble - is
Las Vegas-based CannaVest Corp.

>From early 2013 to the spring of this year, when the hype over
marijuana stocks was at its most dizzying heights, CannaVest shares
shot up more than 1,200 per cent to $160. At that price, the company
was worth more than $3-billion, despite having almost no profits and
only an indirect connection to marijuana: CannaVest claimed to be a
producer of hemp-based compounds.

Nevertheless, its largest shareholder, Las Vegas lawyer Bart Mackay,
became the first pot-stock billionaire, at least on paper.

Canada got its own symbol of the pot stock craze in Toronto-based
Satori Resources Inc. With shares in the junior mining sector slumping
more than 40 per cent early this year, Satori announced out of the
blue that it was exploring new opportunities in agriculture - namely
medical marijuana.

It was far from alone. Satori was one of several dozen miners to have
gone this route, joining Supreme Pharmaceuticals and Affinor Growers.
The way Satori founder and chairwoman Jennifer Boyle sees it, public
companies need a story to take to investors. If you find something
that works, use it. She is unapologetic.

"In a downward market, which the mining industry is, if there is
something that you can raise money on, it's our obligation to consider
it," Ms. Boyle said. "If you can't beat 'em, join 'em."

It reminds her of the heady days of the tech boom in the late 1990s
when mining companies slapped dot-com on their name just to capture
some of the money flooding into that market.

"Mining was headed for the tank back then and these dot-com companies
were doing very well, so a lot of the mining promoters converted
themselves into high-tech companies," she said. "Then when that all
blew up, they went back to being mining companies. It was mining
dot-com back then. Now it's mining dot-pot."

This has sapped credibility from the sector, analysts say. "A lot of
times, you'll find people that are telling these great stories," said
Allan Brochstein, one analyst who follows the sector. "There's a lot
of people that are in the marijuana industry - [but] they're not in
the marijuana industry. They're in the stock-promotion industry."

"You have to understand what type of industry you're investing in,"
said Mr. Arsenault of New Brunswick's OrganiGram. "There is a lot of
hype in the industry. And that's unfortunate."

For many of these stocks, the model is often the same. The insiders at
the company hold vast numbers of shares, often in the millions, which
they have been issued at a nominal price - often a fraction of a cent.
They list the company as a penny stock, or adopt marijuana as a
newfound business, and proceed to spin tales of bold plans to make
money by pursuing a licence. If the stock moves by a few cents, the
insiders can make hundreds of thousands, if not millions, of dollars,
over a period of months.

All that's required is a supply of willing investors, which the market
always seems to provide. "So many scams purport to allow Main Street
investors to get in on the ground floor of the next big thing," said
Gerri Walsh, senior vice-president of investor education for the
Financial Industry Regulatory Authority (FINRA), based in Washington.

Along with other regulators, FINRA took an unusual step warning
investors this year about pot stocks, urging people to do more
research in the frothy market.

"We were concerned that there might be some element of fraud or at
least pumping and dumping of these types of securities," Ms. Walsh

But with so many companies flooding the market, and at such a rapid
pace, there has been very little follow-up by those same regulators,
including FINRA. Health Canada admits it knows little of what Canadian
companies are doing in the markets, noting that it is not a financial

The right to get rich

If any one person captures the ethos of the marijuana stock bubble,
it's probably Todd Davis.

In June, the former stockbroker was a keynote speaker at an industry
event in Denver attended by marijuana executives from across Canada
and the United States. The Globe and Mail viewed a recording of his

Mr. Davis cut his teeth as a broker in the 1990s selling penny stocks
in fledgling biotech companies. He was no expert on the industry, but
it didn't matter, he explained. For every company with a story to
tell, there was an investor willing to believe in future riches. It
was easy money.

"I didn't know anything about biotechnology," Mr. Davis told the room.
"But I'm telling a story about something that's going to happen in the
future - and people were buying it. I would call 10 people and five
people would buy [stock] from me. And I was going 'This is awesome'
=2E We were making a killing."

These days, Mr. Davis runs a marijuana start-up and likens the
industry to his days of selling biotech stocks.

"What I wanted to talk about tonight is why we are all here," he told
the executives. "The primary function - besides our belief in cannabis
and what it can do for a patient or a person, and how it can benefit
life - is we're here to make money."

"It's a unique opportunity that's been presented to

But it is much more than just an opportunity to make money, he
explained. The industry is so ripe for the picking that everyone in
the room is entitled to get rich.

"You have the right to make a million dollars," he told the executives
in no uncertain terms. It was an opportunity none of them should waste.

But the good times in the stock market couldn't last

In Canada, marijuana stocks lost their lustre a few months ago as
investors started to realize that companies like Tweed and OrganiGram
would need several quarters, if not longer, to build their businesses
and start generating real earnings - just as Mr. Arsenault had
suggested. OrganiGram's stock now trades at less than 80 cents, well
off the $2.27 that shares garnered at their height.

South of the border, though, some marijuana companies grew impatient
when their shares began to slide. And so they found a new saviour.

With the deadly Ebola epidemic dominating global headlines in October
amid fears the virus might spread in North America, a new phenomenon
swept the capital markets. A company that claimed to be working on a
cure, a technology or a product that could somehow assist in the fight
against this deadly disease was suddenly a hot commodity.

One in particular was quick to capitalize.

On Oct. 13, former New Mexico governor Gary Johnson appeared on Fox
Business News ostensibly to discuss the U.S. government's response to

But Mr. Johnson wasted little time in divulging that he had, in fact,
recently been named chief executive officer of Cannabis Sativa Inc., a
company working on the use of medical marijuana to cure the disease.
"We actually believe we have efficacy with regard to treating Ebola,"
he said.

Was the company actually suggesting marijuana could

"If you're dying from Ebola, and it's a hail Mary," Mr. Johnson said,
"you're going to take the hail Mary."

It was the boldest and most far-fetched effort yet to promote a
marijuana stock - and proved to be quite good for business. The stock
climbed 33 per cent in the ensuing two weeks, and the market value of
Cannabis Sativa Inc. soared by $40-million.

With stocks now falling across the sector, such antics are a cry for
attention in a softening market.

The fact that share prices have cooled, though, is somewhat comforting
to Mr. Arsenault. The faster Canada can get away from the bubble
market, the better.

"Finally, the hype has started to come out, and people realize that
it's a business like any other business," he said.

"That's welcome. Anybody that sits there and says they've got this all
figured out, they're just blowing smoke at you."
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