By Tony C. Dreibus
Canada’s medical marijuana industry is undergoing a sizable shift on several fronts, creating both opportunities and difficulties for business owners.
A ruling by the country’s top court has opened the door for the sale of cannabis oils, giving licensed producers a new avenue to serve patients, boost revenues and expand the market.
Yet these same companies are facing unexpected competition from scores of illegal dispensaries that the federal government has not shut down and local officials are now attempting to regulate.
At the same time, there are signs that the industry could be poised for some consolidation, as two of the largest licensed producers announced a blockbuster merger and another big player recently laid off dozens of employees.
“It’s fair to say that these are big changes,” said Michael Lickver, a Toronto attorney who works with cannabis companies. These changes, he said, affect hundreds of companies, from licensed producers to security firms.
Under Canada’s Marihuana for Medical Purposes Regulations (MMPR) – enacted in 2013 as part of sweeping changes to the country’s MMJ framework – licensed companies were only allowed to produce, process and sell dried flower via mail to certified patients (storefront dispensaries are banned).
Last month, however, the country’s Supreme Court ruled that medical marijuana patients can possess marijuana derivatives under the law – not just flower.
In the wake of the ruling, Health Canada clarified the law, saying in a memo that licensed companies can now process and sell cannabis oils, which patients can then use to make their own edibles at home.
The ability to ship cannabis oil rather than just flower may open a new revenue stream for licensed producers, and several have already started preparing to produce extracts.
Aphria, for example, is opening space to house newly purchased extraction equipment, said Vic Neufeld, CEO of the company.
As non-smokeable forms of cannabis become available, more patients will register for Canada’s MMJ program and more doctors will be willing to prescribe marijuana, Neufeld said. That, in turn, will lead to larger revenues for producers licensed to grow and dispense cannabis.
“The new rule … allows us as licensed producers to address a very big hurdle – smoking as a form of intake is not what most consumers prefer, so we think the market is really going to grow,” he said.
Some insiders feel the law doesn’t go far enough. Licensed producers, for example, are not allowed to actually produce edibles.
That opens a realm of potential health issues for patients who have little or no experience in creating infused cookies or brownies, Lickver said.
Still, Health Canada heeded warnings from within the industry to move to quickly implement rules allowing companies to sell cannabis oil, which could help prevent patients from tapping the black market or illegal dispensaries for such products.
While the introduction of cannabis oils will help the industry as a whole, licensed businesses still face some steep competition from illegal dispensaries.
All dispensaries were supposed to close after the country adopted the new rules in 2013. But many remain open in several cities out west, and new ones have continued to pop up.
Local attempts to legitimize the operations have exacerbated the situation as of late.
Vancouver’s City Council, for instance, voted in June to implement a bylaw that puts in place regulations governing dispensaries in the city, which currently number around 100. The move effectively legalizes these businesses at the local level.
The city council’s move has raised the ire of not only federal officials but also licensed cultivators, who argue that they are at a disadvantage because the dispensaries don’t have to meet the same regulatory burdens and testing requirements.
These illegal operations also are taking patients away from licensed businesses: Aprhia’s Neufeld said his company doesn’t have a single patient registered in or around Vancouver, for example.
“That part is frustrating because we spend a lot of money to meet those regulations, and when we have some form of competition, they don’t incur those costs,” Neufeld said. “It’s not a level playing field.”
Dispensaries have a different view, of course.
Adam Greenblatt – the co-owner of Sante Cannabis, Quebec’s first specialty clinic focusing solely on uses for medical marijuana – said Vancouver’s shift to regulating dispensaries was well-conceived.
Cracking down, especially when marijuana has gained acceptance in both Canada and the U.S., will just push people to the black market, he said.
“Keeping them criminal doesn’t work,” Greenblatt said. “Vancouver, by taking an activist approach, challenges the federal government to reassess its own regulations, so it’s a good thing that they’re regulating dispensaries.”
The bylaw created by the city council will be enough to stem the growth of dispensaries because many won’t be able to meet the financial or regulatory requirements, he added.
“It’s not like there’s going to be weed for everyone in the corner store – it’s regulated in a sensible way,” Greenblatt said.
Regardless, the illegal dispensaries are creating headaches for licensed businesses.
What some would like to see is a shift toward a more integrated market in which dispensaries, including those in Vancouver, are required to purchase cannabis from the licensed producers. That would go a long way to quell any hard feelings between the two sides – but it’s unclear if that solution is even an option at this point.
It’s not just the laws that are shifting — some of the biggest players in the industry are also seeing change. Signs of consolidation, or perhaps the need for consolidation, are everywhere.
Two of the biggest licensed producers in Canada, Tweed Marijuana Inc. and Bedrocan Canada, last month announced they are merging. That could force other producers in the country to consolidate to stay competitive, experts say.
At the same time, there are signs that the market is not as robust as some predicted.
Tilray – owned by U.S.-based Privateer Holdings, the parent company of Leafly and Marley Natural – laid off 61 workers in June. Some observers said the move is not surprising because many licensed producers appear to have grossly overestimated demand.
Indeed, the 18,512 registered medical marijuana patients in Canada may simply not be enough to sustain the 25 companies that are licensed to cultivate, process or sell cannabis in the country, let alone the dozens of other firms that support the industry, said Lickver, the Toronto attorney.
So a wave of mergers – and possibly some business failures – could be in the cards.
“What you’re seeing is the growth of a nascent industry,” Lickver said. “There’s increased competition, and the number of patients are increasing, but not very quickly, so it’s a small pie for 25 people to eat. There’s going to be more consolidation — there’s no way to avoid that. It’s a textbook life cycle for any industry.”
Tony Dreibus can be reached at [email protected]