Pubdate: Sat, 25 Feb 2017
Source: Montreal Gazette (CN QU)
Copyright: 2017 Postmedia Network Inc.
Author: Christopher Curtis
Pages: A16-A17


Companies that produce marijuana for the medical market are pouring
millions into expansion projects in preparation for the legalization
of recreational pot in this country. However, as Christopher Curtis
reports, they face big challenges - including a still-thriving
underground market.

SMITHS FALLS, ONT. The journey to the centre of Canada's marijuana
economy begins on a stretch of country road in eastern Ontario.

It weaves through a patchwork of cornfields and hamlets before
settling in Smiths Falls - a town that boasts a stone mill, a Lion's
Club that meets every second Thursday and a factory that grows
cannabis by the tonne.

The building on Hershey Dr. looks barren. Weeds sprout between cracks
in the asphalt parking lot and its stucco walls betray a painfully
dated style of architecture.

For more than 40 years, this place manufactured enough Hershey's
Kisses to crown Smiths Falls the "Chocolate Capital of Ontario." But
in 2007, Hershey laid off 600 workers, shuttered the factory and moved
it to Mexico.

Today, the plant is home to the Canopy Growth Corporation and its
Tweed brand of medical marijuana.

There's an element of absurdist humour to this: The place that once
churned out untold crates of Reese's Pieces now grows medical
marijuana strains with names like Lemon Skunk and Boaty McBoatface.

"The joke never gets old," says Adam Greenblatt, who's spearheading
Tweed's expansion into Quebec. "They used to make munchies here and
now we induce them." Here's where the joke ends. Last week, shares in
Canopy Growth were trading at $12.69 on the Toronto Stock Exchange, up
from $3.15 last July.

Since November, the company has swallowed competitors in Quebec and
Ontario in a pair of deals worth an estimated $430 million. As it
stands, Canopy is valued at $1.6 billion - making it the most
lucrative marijuana operation in Canada.

Now the company wants to break into the largely untapped Quebec
market. Last fall, Canopy bought a 90-acre farm outside Drummondville,
and Greenblatt is hustling to get more doctors and patients on board
with Health Canada's medical marijuana program.

Last month, CEO Bruce Linton announced Canopy will triple its
production in short order. Linton, who founded the company four years
ago, is guiding it on an aggressive campaign that will pour millions
into new labour and construction costs.

He isn't alone. Competitors like Aphria and Aurora Cannabis are also
injecting cash into expansion projects that one market expert has
dubbed "the great marijuana arms race."

This strategy isn't without its risks.

Canopy's frenetic growth is outpacing the demand for medical cannabis
in Canada. It already supplies about one-third of the medical space
but the end game is for the company to accommodate something much
bigger - a national, legal recreational market.

The Liberal government is to introduce legislation to legalize
recreational marijuana this year, and it may take until 2018 before a
new law is on the books. A study by the Deloitte auditing firm pegs
the size of an eventual recreational market at more than $22 billion a

However, there are hurdles ahead. One is the Senate, where the
Conservatives hold a majority and must sign off on the bill.

Even so, Canopy welcomes the challenge.

"We've overcome longer odds," Linton said. "I think this is our
moment, I think we're on the cusp of something big."

Greenblatt has a sort of slackerchic esthetic to him.

The 32-year-old sports a short but unkempt crop of hair and his
jawline suggests he's either trying to grow a beard or hasn't bothered
to shave in weeks. He wears a jacket, button shirt and Oxford-shoe
combination but still looks like he just rolled out of bed.

Greenblatt carries this juxtaposition with him in conversation.

He'll rattle off sections of the Criminal Code and quote a line from
Seinfeld in the same breath - "That's gold, Jerry! Gold!" is a common

This duality is also at the centre of his work.

Greenblatt meets with doctors, lawmakers and the business community in
Quebec with the aim of growing Tweed's foothold in the province.

At the same time, he is trying to reach into the province's
underground network of medical marijuana users and draw them into the
legal system.

"Quebec is sort of an enigma," he said. "You've got some of the
highest rates of marijuana use in the country and some of the lowest
participation in the legal system.

"It's an untapped market and one with so much potential. But there's
also a really strong underground economy of growers and dealers who
work outside the system."

The numbers support his claim. More than 100,000 patients buy medical
cannabis through the Health Canada-approved system, but only about
3,000 live in Quebec.

Likewise, there are 38 licensed producers of medical marijuana across
the country, but just one in the province - the Hydropothecary farm
near Gatineau.

Greenblatt knows about Quebec's black market because he was once
immersed in it. He used to grow pot out of a duplex in Montreal,
supplying a dispensary that operated "outside" the Health Canada program.

His customers, he says, suffered from chronic pain, degenerative nerve
conditions and a variety of ailments for which they received a
doctor's prescription to use marijuana.

They dipped into the "grey market," he says, because the Health Canada
program was too cumbersome at the time. Patients had to get a licence
to grow their own weed, or order cannabis from one of the few
government-approved producers.

"I won't hide from my past," Greenblatt said. "I'm proud of my roots
as an activist and someone who fought for patients rights.

"The fact is, many of the people who work (for Canopy Growth) come
from that world. The industry needs expertise, and where else is it
going to come from? It comes from people who worked in the shadows."

The dispensary system continues to thrive in Canada's major urban
centres. More than 500,000 Canadians use medical cannabis, according
to Health Canada. But only one-fifth participate in the federal
government's program, which requires people to mail-order their
cannabis from a licensed producer.

The majority of patients, then, are either growing their own
marijuana, buying it off a dealer or going to an illegal storefront -
despite the existence of a legal marketplace.

In 2013, Health Canada began licensing dozens of growers who could
sell their product through the government-regulated program, bringing
variety and quality into the fold. Many patients, though, see no clear
incentive to buy into the system.

For one thing, the cost of medical marijuana is not covered by public
health care or private insurance providers. Users pay out of pocket,
and prices are generally comparable (though federal sales tax applies
under the government plan).

There have also been issues with a breakdown in the supply chain with
the government program. Last year's labour dispute at Canada Post
stalled delivery of cannabis to thousands of patients across the country.

Whatever the reasons, many patients remain loyal to the black market,
and keep their prescriptions only as a protection against arrest if
ever they are found to be in possession of marijuana.

"A lot of patients have a connection to their local dispensary that
began years before the current system was in place," noted Marc-Boris
St-Maurice, who founded Montreal's first dispensary in 2000.

"We were arrested, our product was seized, we went to court and spent
a small fortune to fight for legal access to medical marijuana."

In a way, the Health Canada program exists because of people like
St-Maurice. Dispensary owners acted as a go-between for patients with
a legitimate need for pot and growers in the criminal underground. The
police raids of dispensaries and subsequent court appeals paved the
way for the first laws codifying access to medical cannabis, in 2001.

The new federal program, in which patients deal directly with
suppliers, leaves dispensaries out in the cold - at least in theory.

Certainly the program has made big strides. In 2016, it nearly tripled
the number of patients on its rolls. Still, Health Canada data suggest
the black market remains a major source of medical cannabis, with
hundreds of thousands of patients using illicit means to get their

One reason might be that it's more efficient that way.

"People assume that the strength of criminal operations in Quebec is
that they dominate the drug trade through intimidation and violence
(of rival dealers)," said one source, who once managed marijuana grow
houses for the Hells Angels. "Yes, the implication of violence and
outright violence is sort of the glue that holds everything together.
There's no denying that.

"But above all else, the bikers oversee an efficient system with
regulated prices, a near limitless supply of weed and distribution
channels that reach into every corner of the province.

"Everybody knows a dealer they can text, every dealer has a supplier,
and every supplier has a network of grow operations they can tap into.
Most people can have weed delivered to their house within minutes of
sending a text message.

"That's what the government is competing with."


Despite its gruff exterior, the Smiths Falls factory is a far cry from
the ramshackle grow ops that feed the black market.

Gaining access to the facility is like walking into Batman's lair.
Visitors pass through a labyrinth of security cameras, bolt-locked
doors and checkpoints before arriving at the factory entrance.

 From there, a steel door will open only if an employee with security
clearance presses their thumb on a biometric scanner and swipes a pass-key.

Within the factory, there are additional layers designed to protect
Canopy's cash crop. The finished product is stored in vacuum-sealed
bags and locked behind a stainless steel vault with doors thick enough
to withstand an explosion.

The vault can hold upwards of $150 million in product.

Access to the flowering rooms is also tightly monitored. That space -
a climate-controlled room where buds the size of a child's fist sprout
from hundreds of plants - is off limits for most workers.

"The flowering process, that's where so many of the disease vectors
can get into the plants," said Jordan Sinclair, Tweed's communications
manager. "This process is designed to make it nearly impossible for
the product to get contaminated."

Employees wear white coveralls and hairnets, and sanitize their hands
every time they enter the facility. This, Greenblatt argues, is one of
the main advantages of the legal economy over the black market.

"There are growers who use space heaters and fans to dry their weed.
You have trimmers who work at (an illegal) grow house and they'll be
cutting the buds, go to the bathroom and forget to wash their hands
before they get back to work," Greenblatt said.

"That's how rot sets in. Some people I know speak of smelling Windex
on their pot. But I tell them their dealer isn't spraying cleaner onto
the pot; that's the smell of ammonia."

It takes roughly four months for Canopy to grow a new crop. The time
frame includes lab testing designed to detect contaminants in the weed
and determine how potent the drug is. The factory is also subject to
regular inspections by Health Canada.

For a company that was just a blip on the radar a few years ago, the
scale of its infrastructure is impressive. Canopy employs about 170
factory workers, lab technicians, sales representatives and a Cannabis
Cup-winning "master grower."

It also staffs two call centres at its Smiths Falls offices, a lab in
Toronto and a 350,000-square-foot greenhouse in Niagara on the Lake.
Some 29,000 registered patients use Tweed products.

This rigorous structure may be Canopy's saving grace in the cutthroat
world of medical marijuana. At least, that's what market experts say.

Since the Toronto Stock Exchange began listing licensed marijuana
producers in 2013, the market has seen a sort of "green rush." In
January, the 26 most valuable marijuana stocks had a combined worth of
$3 billion.

"Half of those companies, they'll probably flame out in the next few
years," said Chris Damas, a market analyst and editor of the BCMI
Report. "There are so many what ifs and so many unknowns about the
industry, but the one thing we do know is supply and demand. That's
the one irrefutable rule of the markets.

"And the way it's going right now, there's going to be way too much
supply for the medical space. If and when a legal, recreational market
opens up, that could change. But for now, if you do the math - and not
enough investors do the math - we could see a huge drop in prices.

"That alone could wipe out a good chunk of the companies out

Damas, a former chemist, has studied the expansion plans for the
industry's eight biggest players, breaking them down to the last
square foot. By his reckoning, Canopy Growth, Aphria, Aurora Cannabis
and the others will combine to increase annual production by 240
tonnes within three years.

The companies, he says, are locked into a "marijuana arms race" to
increase production.

"(It is) a competition to see who can plan the biggest expansion and
raise the most public dough," Damas said. "They're gearing up for the
arrival of a legal market. This isn't meant for just the medical space."

As it stands, patients are on pace to buy a little over 24 tonnes of
dried cannabis through Health Canada this financial year, according to
its market data. In other words, the companies are planning for
something more than 10 times bigger than the current market.

For this strategy to pan out, the Liberal government's plan to
legalize recreational pot can't come quickly enough, Damas says.

"Canopy is a good business - it's well run, it has a clear strategy
and, with Tweed, a brand that people connect with," Damas said. "I
mean, they have an exclusive deal to distribute Snoop Dogg's brand of
marijuana in Canada. They're going to stand out and these sorts of
things will help them emerge as a big player in the recreational market.

"But no one - not the smartest CEO or the best sales force - is immune
to the laws of supply and demand. So when I see all of these companies
raising millions to expand their business - and when I see their stock
prices soaring based solely on speculation - that's something that
worries me."

Ken Lester, a business professor at McGill University and president of
Lester Asset Management, has been following the frenetic run on
marijuana stocks, and says we can look to the past for hints about
what may be in store for the industry.

"You look at the rise of the automobile in the early 1900s. At the
beginning you had something like 102 car companies. Within a few years
that number was down to three.

"Look at computers. In the 1980s there must have been 200 companies
manufacturing computers. By 2005, it was down to a handful.

"So what you're seeing now - the easy profits, the speculation, the
gold rush mentality - most companies won't emerge from this unscathed.
In the end, it will likely be Canopy and a handful of others left standing."

There are other potential setbacks for these emerging

Damas cautions that the workers who grow, trim and harvest marijuana
may see the billion-dollar valuations within the industry and begin to
demand concessions from their employers.

Sure enough, the 50 employees at MedReleaf in Markham, Ont., are
fighting for the right to unionize in a legal battle before Ontario's
Agriculture, Food and Rural Affairs Appeal Tribunal.


Seven years ago, Montreal police descended on five dispensaries in the
city, seizing tens of thousands of dollars in marijuana and arresting
35 people on trafficking charges. Greenblatt wasn't among those carted
off, but his product was. Now he jokes his cannabis edibles "were so
good, they ended up in four different police evidence lockers."

It would have been hard, at the time, to imagine marijuana shares
trading on the TSE. But even when cops were kicking down dispensary
doors, Greenblatt never doubted the industry's potential.

"A lot of us looked at the future and saw something huge," he said.
"That's what's happening right now. That bright future is

Many of the dispensary owners and growers from back then have
integrated into the mainstream, taking their expertise to publicly
listed companies. But many look at the rapidly transforming industry
with apprehension.

Since he opened his dispensary on St-Laurent Blvd. nearly 20 years
ago, St-Maurice has continued to fight for legalization. He even
joined the federal Liberal Party and pestered Justin Trudeau about the
issue years before the Montreal MP would go on to become prime minister.

"I had some chances to work with the big guys but I'm happy doing my
thing," said St-Maurice, who still runs Fondation Marijuana on St-Laurent.

"My worry is that a lot of these companies benefited from the
expertise of dispensary owners - from their struggle to legalize
marijuana - and now a lot of us will be left behind.

"I think there's room for us and for the big companies in this new
marijuana economy."
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