‘We’re going to have a shortage’ – New Canada LPs won’t be ready to meet rec marijuana demand

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By Matt Lamers

Canadian regulators have been approving new marijuana producers at a speedier clip, but it may not be enough to avert a supply shortfall when the nation’s recreational cannabis market rolls out next summer.

Few, if any, of Canada’s newest licensed producers (LP) will be in a position to seriously meet demand for recreational cannabis next July, when legalization is slated to go into force across the country, according to industry insiders.

That’s because, after a producer is licensed to cultivate marijuana, one to two years usually elapse before an LP gets a permit to sell the product. A shortage of seeds and clones, sky-high costs and tough regulatory requirements are contributing to the bottleneck.

A potential supply crunch is one of the biggest concerns facing the industry.

“With the cultivation licenses handed out today, you won’t have extra product for market for July 1,” predicted Beacon Securities analyst Vahan Ajamian. “New licensee today will definitely help for 2019 shortages, but on Day One, it won’t do much.”

He added: “We’re going to have a shortage.”

Health Canada, the government body responsible for doling out cultivation and sales licenses, streamlined the application process in June to reduce the backlog of LP applicants and head off a potential future supply shortage of cannabis.

As a result, 14 cultivation licenses have been handed out in the past four months, compared to just six in the previous four months, bringing the number of licensed medical marijuana producers to 58.

However, only a little more than half of the LPs — 33 — are allowed to sell cannabis to registered medical consumers, while the rest are still in the process of gaining that authority.

MMJ producers that secure all the necessary licenses would be in line to participate in the nation’s new recreational program.

How long does it take? 

Getting a sales license often takes a year or more. Below are recent examples of the time that elapsed between when a grower received a license to cultivate and then a permit to sell cannabis.

  • One year: Toronto-headquartered Green Organic Dutchman was granted a sales license in August after receiving its cultivation license in August 2016.
  • 18 months: THC BioMed, based in Kelowna, British Columbia, also was authorized to sell dried marijuana last month after getting a harvesting license in February 2016.
  • 16 months: Supreme Pharmaceuticals of Toronto received its cultivation license in March 2016 and had its sales permit in hand in June 2017.
  • 14 months: Green Relief, based in Hamilton, Ontario, received its sales license in April, a little over a year after getting its cultivation license.
  • One year: Weed MD, based in Toronto, was awarded a sales license in April after getting a cultivation license in April 2016.

“I don’t see them going materially lower than that any time soon,” Ajamian said, referring to the time between securing a license and selling marijuana.

What’s the holdup?

Three factors are creating bottlenecks for companies seeking sales licenses.

  1. Genetics

Companies can’t grow anything without seeds.

After a company gets a license to cultivate, it needs seeds or a clone — otherwise known as genetics — to begin growing. But there aren’t enough companies willing to sell them, according to industry sources.

Sometimes it takes too long for new cultivators to get them, or it’s not economical.

“Of the licensed producers, very few have cannabis genetics for sale. And of those companies willing to sell starting materials, most require royalties on future sales and clone cuttings that are cost prohibitive for prospective producers,” said Jeff Barber, chief financial officer for DOJA Cannabis Company, a newly licensed LP based in Vancouver.

Royalties also can be too pricey for prospective producers.

“There aren’t enough genetics options that are economically viable,” Barber said. “You have a handful of companies controlling the lion’s share of the genetics. The strain selection is often limited to producers’ tier 2 or 3 strains, and can you really blame them? Why would you sell your competitor your best genetics?”

  1. Capital

While established LPs have been raising capital at a record clip – over 1 billion Canadian dollars ($822 million) so far this year – cash for prospective marijuana sellers has been harder to come by. Also, a new company can burn through millions of dollars in the time it takes to go from being permitted to grow to being allowed to sell medical cannabis.

“Health Canada is doing what it can to issue companies licenses to cultivate, but that’s only the first part of the equation to increasing the supply of cannabis,” Barber said. “To move the needle on supply, you need more licenses to sell and greater access to capital for licensed producers to scale up production.”

  1. Inspection

Health Canada mandates all prospective sellers to grow two cannabis crops. A third-party lab must test the two batches, after which the results are sent to Health Canada.

Next there is an onsite presales license inspection.

Fail that, and it’s back to square one.

“If you’re approved for cultivation tomorrow, there’s still a process you have to go through in having multiple crops approved by Health Canada,” said Ben Ward, CEO of Toronto-based LP Maricann.

He noted that only postpones the time when a new LP can begin generating sorely needed revenue. “If you’re not already selling, you’re at a disadvantage in the market from a cultivation perspective,” Ward said.

Not impossible

Despite the capital and regulatory hurdles, some of Canada’s newest LPs say they’re up for the challenge.

DOJA Cannabis Company is among those that hopes to buck the bottleneck trend.

After four years of working through the application process, DOJA received its license to cultivate on June 16 and now hopes to have its sales license in hand in the first quarter of 2018, putting the company in a strong position to build brand awareness heading into the opening of the recreational market.

“Our goal is to receive our license to sell in less time from receipt of a cultivation license than any producer before us,” Barber said.

However, Barber thinks that would be an exception rather than a norm going forward.

“Historically it has taken 12 to 18 months for producers to receive licenses to sell,” he said. “I’d be surprised if any of the companies licensed to cultivate in the next three months are going to be licensed to sell come July 1.”

“It doesn’t matter how many companies have licenses to cultivate if they can’t sell.”

Matt Lamers can be reached at mattl@mjbizdaily.com

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