Pubdate: Wed, 18 Mar 2015
Source: Georgia Straight, The (CN BC)
Copyright: 2015 The Georgia Straight
Author: Travis Lupick


As a result of policy changes introduced by the Conservative
government, corporations are taking over medicinal cannabis,
concentrating business in the hands of people with ties to Big Pharma.

One morning in February, Nanaimo councillors and business leaders met
in an industrial area about 20 minutes from the city's downtown.

The building they stood before is nondescript. But, recounted Sasha
Angus, CEO of the Nanaimo Economic Development Corporation, "It's like
a vault wrapped by Fort Knox wrapped in a castle.

"Cameras, vibration sensors, and a lot of time and effort," he
continued, describing the facility's security measures. "There's a
vault that's two feet thick with more vibration sensors. It's about
one level below a nuclear-missile silo."

What all those precautions keep safe is one of the largest marijuana 
grow-ops in Canada: 60,000 square feet, with plans to scale up to an 
operation more than five times that size, according to a rezoning 
application that Nanaimo council approved last December.

Angus noted that the group was impressed by the facility, which is
more akin to a pharmaceutical laboratory than your stereotypical
marijuana operation. There are white walls, bright lights, and glass
cages holding dozens of strains and thousands of plants.

"It's incredibly clean," Angus said. "Each room is designed with
perfect climate control and all of the different pieces that you need
to make sure you have the best-quality product for your patient."

Asked if there was anything seedy about Nanaimo's most respected
citizens touring a grow-op, Angus noted that the company, Tilray,
cultivates a medicinal product with a federal licence. He suggested
that nothing separates it from any other legitimate business that
calls Nanaimo home.

"We actually helped bring them to town," Angus added. "They're a great
corporate citizen."

Corporate may be the operative word.

Tilray declined requests for an interview. However, the company's new
CEO and a 25-year pharmaceutical veteran, Greg Engel, recently shared
his thoughts on marijuana in an online essay published by the
Huffington Post.

"Medical cannabis was grown in dangerous and unsanitary conditions
without any form of oversight or standards to ensure consistency,
quality, safety and integrity," he wrote. "That's changed under the
new system as we are transforming the industry to be more like the
pharmaceutical industry."

Engel's article ran under the headline, "Why I'm leaving big pharma
for medical cannabis". A look at B.C.'s authorized marijuana producers
reveals the transition may not have been much of a shift.

The creation of an expensive pot oligarchy

On April 1, one year will have passed since Health Canada's Marihuana
for Medical Purposes Regulations (MMPR) replaced the previous set of
rules. There have been public stock offerings, American investment
bankers have entered the game, and buyouts and mergers have seen
millions of dollars change hands.

Tilray is one recipient of 25 licences issued under the MMPR, which,
in the words of Health Canada, "establishes the conditions for a
secure and efficient system that provides access to marihuana".

The MMPR requires that all 55,180 Canadians authorized to possess
medicinal marijuana (as of October 2014) fill their prescriptions via
mail order from federally approved producers.

According to Health Canada, 1,224 companies have applied since the
introduction of the MMPR. Of those, 881 were refused or withdrew from
the process. Meanwhile, about 320 remain under review.

By October 31, 2014 (the period for which Health Canada supplied
data), 16 of the 25 companies licensed sold 1,400 kilograms of dried
marijuana. (Nine companies can cultivate but are still waiting for
final approval to sell.)

The government expects all of these numbers to grow. "The proposed
MMPR would enable an entirely new industry to be created in Canada,"
reads a 2012 assessment. That document estimates by 2024, the size of
the market will expand to 450,000 consumers spending $1.3 billion annually.

In October 2013, the Straight reported smaller business owners warned
Health Canada's new system would create an expensive pot oligarchy.
Now, they say that prediction is coming true.

Eric Nash has grown medicinal marijuana in Duncan, B.C., with an old
Health Canada permit since 2001. But he's struggled since the
introduction of the MMPR, stuck doing consul-tancy work for other
companies until Health Canada gives his company, Island Harvest, final
approval to sell.

"Health Canada does not want small producers in the program," he said.
"It looks like we can't be a piece of this industry as a small
business, and that is really unfortunate."

According to Nash, the most obvious proof of Health Canada's
preference for corporate growers is the startup costs associated with
security requirements. "You can't even get into it now for $1
million," he emphasized. "It pretty much eliminates the ability for
small business to take part."

Nash's estimate for security costs roughly matches numbers provided by
everyone interviewed for this story. To grow marijuana in accordance
with Health Canada regulations, businesses are spending $500,000 to $1
million or more before they can even begin to sell product.

Stringent requirements on matters like security and bookkeeping must
be met on a continual basis. According to the government's 2012
analysis, that will cost producers between $290,000 and $395,000 a

John Moeller is the cofounder and general manager of Broken Coast
Cannabis, which also grows in Duncan. In a telephone interview, he
told the Straight the struggle for his group (whose operation covers
just 12,000 square feet, compared to Tilray's planned 345,000) wasn't
so much financial as it was bureaucratic.

"The application itself was very large and very complex, with a lot of
facets to it," he said. "Writing and understanding it was a challenge
in itself, and then you have to put it all into practice and build the
facility accordingly. That is definitely not a simple thing for a
small company to do. And it looks like it's getting more difficult."

Whistler Medical Marijuana Corporation founder Christopher Pelz is a
fan of the new rules. Noting his company offers organic pot certified
by the Fraser Valley Organic Producers Association, he argued
regulation is what's required to help clean the industry of unchecked
pesticides and chemical fertilizers.

Pelz argued the most determined can make it, but he agreed regulatory
costs will likely weed out most mom-and-pop shops.

"The evolution of the business after 12 months here [since the MMPR
took effect] is showing that the capital costs are favouring the
bigger companies," he said. "What likely will start to happen is
you'll maybe see the bigger companies start to absorb the people that
are in the lineup."

A trend towards a smaller number of larger producers

Health Canada has long refused to grant the Straight an interview on
the topic of marijuana. A bolded message at the top of its website on
marijuana emphasizes the Conservative administration's opposition to
the medical applications of cannabis. "The Government of Canada does
not endorse the use of marijuana, but the courts have required
reasonable access to a legal source of marijuana when authorized by a
physician," it reads.

The B.C. Ministry of Finance declined a request for an interview on
the taxation of marijuana. According to spokesperson Jamie Edwardson,
Ottawa's system dictates medicinal marijuana is taxed based on a
person's province of residence. B.C. does not collect provincial sales
tax on medicines and, since marijuana sold under the MMPR is
classified as such, the province is seeing little in the way of
financial benefits from medical cannabis. (Marijuana sold for
recreational use would be a different story. When the previous
minister, Kevin Falcon, was in office, he shared his thoughts on pot's
potential: "The revenues are very enticing to this particular minister
of finance," Falcon said in 2012.)

The MMPR is presently in the courts, subject to a lawsuit that claims
a prohibition on cultivation for personal use is a contravention of
the Canadian Charter of Rights and Freedoms. John Conroy, the lawyer
arguing that case, told the Straight a victory for his clients
wouldn't necessarily disrupt the business of Health Canada's
established growers.

"A lot of people make their own beer, a lot of people make their own
wine-it hasn't been a problem for the brewers," he said. "I don't see
personal production preventing the development of the market."

B.C.'s authorized growers have so far mostly decided to remain private
companies. But a number of MMPR-licensed operators across Canada have
gone public. A look at three Ontario businesses reveals the value of
legitimate operations and a licence from Health Canada.

When in August 2014 Bedrocan Cannabis Corp. appointed a trio of former
life-science executives to its board of directors and went public
through a reverse takeover, the company's stock price tripled, from 40
cents a share to $1.17, on the first day of trading. In October 2014,
Mettrum Health Corp. debuted on the TSX and its stock price jumped
from 15 cents to $2. And when Tweed Inc. named a former DelMar
Pharmaceuticals executive to its board of directors, its stock
recovered from a near low of $1.80, surging to $2.88.

Tilray is owned by Lafitte Ventures, a Nanaimo company that in turn is
owned by Seattle-based Privateer Holdings. Privateer has made
headlines for an influx of cash worth millions it received in January
from Founders Fund, a major financial player in Silicon Valley run by
PayPal founders Ken Howery and Peter Thiel.

Financing a number of B.C.'s other private marijuana operations is a
group of investment bankers and entrepreneurs based in Toronto.
According to the website of PharmaCan Capital, the group owns 100
percent of In the Zone Produce, which is located in the Okanagan
Valley; holds a 21.5-percent stake in Whistler Medical Marijuana
Corporation; and has the option to acquire a 25-percent interest in
Evergreen Medicinal Supply, an MMPR applicant based in Victoria.

On the phone from Toronto, PharmaCan president and CEO Paul Rosen said
investing in cannabis is just like investing in other sectors in which
he's had dealings.

"Marijuana as a black-market industry is probably very different from
other industries," he said. "But participating in the delivery of a
regulated program where government is giving licences to companies-the
fundamental principles that would guide a business to success or
failure are highly relevant to the emerging legitimate
medical-marijuana industry."

Marijuana sellers in U.S. states that have legalized pot for
recreational use have encountered trouble banking on account of
federal laws that still outlaw the drug. But in Canada, Rosen
reported, that hasn't been a problem. He noted Toronto-Dominion Bank
handles the money for two of PharmaCan's marijuana investments, the
Bank of Nova Scotia deals with a third, and Moneris Solutions
processes credit-card payments. "We don't have issues opening bank
accounts at all," he said.

Where does Rosen see the industry headed?

"There is a trend line forming towards a lesser amount of larger
licensed producers rather than a larger amount of smaller licensed
producers," he concluded. "I'm quite confident Health Canada wouldn't
look credibly at any company if they were not larger in scale. I think
the likely minimum capital to get a licence is measured in millions,
not hundreds of thousands, of dollars."
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MAP posted-by: Matt