Pubdate: Tue, 03 Nov 2015
Source: Ottawa Citizen (CN ON)
Copyright: 2015 Postmedia Network Inc.
Contact: http://www.canada.com/ottawacitizen/letters.html
Website: http://www.ottawacitizen.com/
Details: http://www.mapinc.org/media/326
Author: James Bagnall
Page: A7

THE MARIJUANA MARKET

Legalization Would Take a Multi-Billion-Dollar Industry in From the Shadows

"We will legalize, regulate and restrict access to marijuana" - 
Liberal Party of Canada

Of the dozens of promises that make up the Liberal Party election 
platform, this one could have the greatest lasting impact on Justin 
Trudeau's administration - and the country as a whole, according to 
industry experts who are eyeing a potentially sizzling new market.

In part, it's a matter of scale. If the Liberals succeed in 
legalizing marijuana, an estimated 1.2 million Canadians could 
eventually use legal variants of the drug daily - and perhaps another 
2.5 million will consume them occasionally. This assumes Canadians 
will embrace new rules as people have in Colorado, which legalized 
marijuana for recreational use following a 2012 referendum.

But the epic size of the Liberals' policy shift also has much to do 
with its complexity. For starters, the government must address two 
very different, though interlinked, situations.

Part of the industry - involving medical marijuana - has been legal 
in Canada for more than a decade but has been undergoing a profound 
shift since April 1, 2014. That's when rules were changed in favour 
of industrial-scale suppliers and away from homegrown operations.

Alongside the legal medical regime is the much larger black market 
involving the sale of recreational marijuana. This 
multi-billion-dollar-a-year industry is Trudeau's main target.

The Liberal party's rationale for legalizing its products is 
straightforward. "Canada's current system of marijuana prohibition 
does not work," the policy reads. "It does not prevent young people 
from using marijuana and too many Canadians end up with criminal 
records for possessing small amounts of the drug."

But shifting hundreds of thousands of marijuana users from illegal 
sources of supply to legitimate ones will involve a series of 
difficult choices, not least of which are: who should be allowed to 
produce it, how should recreational pot be sold, and where can it be 
consumed. The best bet for now, according to industry insiders, is 
that the major source of supply will come from today's medical 
marijuana producers, who will continue to sell directly to patients 
while recreational strains will be sold through retail outlets, akin 
to liquor control outlets or Beer Stores.

This still leaves open the question of who would own these outlets.

Chuck Rifici, a director of Aurora Cannabis of Alberta (and chief 
financial officer of the Liberal Party of Canada) notes medical 
marijuana producers might very well get into the retailing game. "The 
only difference between medical and recreational marijuana is how 
it's sold," he says. "Licensed producers would love to own a retail component."

The Liberals will also have to take account of the current kingpins 
of the marijuana economy: criminals who are facing the loss of great 
chunks of their lucrative trade. Canada's police services will have 
to weigh in with counters to the criminals' likely responses. Will 
the criminals threaten legitimate producers or will they move more 
aggressively into the distribution of harder drugs such as cocaine?

Regardless of how the industry evolves, the police would like a 
better system for determining whether drivers are impaired. In 
Colorado, the legal limit is five nanograms of THC (the active 
ingredient in marijuana) per millilitre of blood, but the law is 
controversial because people do not absorb THC in similar ways.

Trudeau has promised to set up a task force to address these and 
other issues before establishing a new regime, suggesting it may be 
years before recreational marijuana becomes legal. The task force 
will include representatives from all levels of government, along 
with experts from police and health services.

Just how serious the Liberals' pledge to put Canada in the vanguard 
of marijuana law reform is should become evident Wednesday when 
Trudeau unveils his cabinet. The key members on this file - aside 
from the prime minister himself - will be the ministers of health and justice.

Their briefing notes will be studded with insight from decades of 
study of marijuana use. But underlying everything is a simple 
reality: this industry and the policies that inform it appear to have 
acquired nearly unstoppable momentum.

Indeed, three of the most important obstacles are now being removed:

Capacity: When Health Canada changed the rules last year, the new 
producers weren't quite ready. But licensees have since invested tens 
of millions of dollars in new facilities, substantially increasing 
capacity and quality.

Image: Prompted by recent legal rulings, Health Canada recently 
issued licences to a dozen firms for the production of cannabis oil, 
which can be ingested through food or pills. This not only removes 
the stigma associated with smoking marijuana, it opens up the 
possibility of creating a whole new class of pharmaceuticals, not to 
mention groceries. Medical marijuana producers are already laying the 
groundwork.

Physicians: A huge bottleneck in the expansion of medical marijuana 
usage has been the reluctance of many doctors to prescribe it - in 
part because they don't know what dosages should be prescribed for 
various ailments. But in the past year, specialists such as Canadian 
Cannabis Clinics of Burlington have opened networks of clinics that 
allow physicians to refer patients for cannabis-related prescriptions.

All of this has special resonance in the National Capital Region, 
home to two of the country's most rapidly growing marijuana 
operations: Canopy Growth (parent company of Tweed Inc. of Smiths 
Falls) and Gatineau-based Hydropothecary, which is finalizing a 
$28-million deal to merge with Toronto-based Canadian Cannabis Corp. 
(no relation to the Burlington network of clinics).

The key to the latter deal is this: Canadian Cannabis Corp. (CCC) 
owns a network of medical clinics serving 180,000 patients, perhaps 
10 per cent of them potential medical marijuana customers. CCC 
applied - so far unsuccessfully - for a production licence. So it is 
acquiring a licence through its purchase of Hydropothecary instead.

"We're setting out to be the CocaCola of Canada," says Hydropothecary 
cofounder Sebastien St.-Louis in reference to the marijuana industry. 
Although his firm is the one being acquired, Hydropothecary will 
serve the entire Canadian market while CCC intends to open up new 
markets in other countries where marijuana is becoming legal.

The ground floor of the old Hershey's chocolate manufacturing 
operation in Smiths Falls has been given over to the production of 
medical marijuana for nearly two years under new owner Tweed Inc., 
but its potential really became evident only during the past few months.

Tweed was one of the first companies to take advantage of Health 
Canada's regime change. It secured a production license Nov. 18, 
2013, and spent nearly $20 million to equip the facility with grow 
rooms, a walk-in vault, security systems, shipping bays, odour 
control systems and hydroponic growing technology.

The learning curve has been steep. Tweed shipped its first marijuana 
product in May 2014 but quickly realized it couldn't harvest its crop 
quickly enough to meet demand from patients. Health Canada 
inspections took longer than expected; so did the growing cycles. 
Customizing the equipment also proved time-consuming. Most of the 
other 20-plus marijuana licensees across the country had similar issues.

"We were building something that had never been built before," says 
Bruce Linton, the chief executive of Canopy Growth, the corporate 
entity that owns Tweed. "Our original goal was to have product as 
soon as the legislation made it legal - we didn't. Then the goal was 
to have available in the summer (of 2014) - we didn't."

Tweed's engineering staff got to work, developing ways of reducing 
energy costs and experimenting with methods of feeding nutrients to 
different strains of marijuana to see what works best. The latest 
grow rooms at the Smiths Falls facility use one-third of the energy 
of the rooms installed last year - courtesy of customized air 
conditioning units and fan technology. Use of hydroponics - feeding 
plants nutrients purely through liquids rather than through soil - 
improved the speed and quality of marijuana grow cycles.

Tweed held off accepting orders from new patients until last 
December, when it was sure it could meet supply. Tweed is one of 
three wholly owned subsidiaries of Canopy Growth: the others include 
another industry pioneer, Bedrocan Canada of Toronto and Tweed Farms, 
a Niagara-on-the-Lake greenhouse operation that Health Canada five 
weeks ago licensed to produce marijuana on 350,000 square feet of 
growing space.

In the case of Tweed Farms, that was a tenfold increase from its 
previous licence and means it will be capable of producing about 20 
million grams of marijuana annually - far in excess of anticipated 
demand for years to come.

Tweed currently serves about 6,000 patients who consume about one 
gram per day - or 2.2 million grams per year. At an average price of 
around $7.50 per gram, that translates to a $16.4 million-a-year business.

Aaron Salz, an analyst with Dundee Capital Markets, estimates the 
Canopy Growth companies will have about 13,000 patients by next 
spring - representing 30 to 40 per cent of the predicted Canadian market.

Salz predicts the number of medical marijuana patients across the 
country will reach 100,000 by 2019 and 400,000 by 2024 - representing 
average annual growth of nearly 40 per cent. That's about one per 
cent of Canada's population and could be a conservative estimate: In 
Colorado, Oregon and Washington State, medical marijuana users make 
up roughly two per cent of the population.

The potential Canadian market can be seen in the fact that 3.4 per 
cent of Colorado's population use medical or recreational marijuana 
daily while another seven per cent consume occasionally.

The potential can also be seen at Tweed's Smiths Falls plant where 
just 165,000 square feet of the 530,000-square-foot facility is 
currently under cultivation.

"The rest is for whatever we need to do. It's a whole lot easier to 
go from 40 mph to 50 mph than to go from zero to 40," Linton notes.

The Liberals could discover the same applies to establishing a 
national recreational marijuana legal framework.
- ---
MAP posted-by: Jay Bergstrom