Canada’s marijuana industry lights up as legalization loo‎ms

In October, Canadians elected a Liberal government whose platform included a pledge to legalize marijuana for recreational use (File photo: AP) 

 

Peter Kovessy,

From inside a former Hershey chocolate factory some 80 kilometers outside Canada’s capital, Bruce Linton is planting the seeds to tap into what’s expected to become a multibillion-dollar industry virtually overnight.

Linton is the CEO and co-founder of Tweed Marijuana, one of 26 Canadian companies licensed to cultivate and sell pot to customers with legal permission to consume cannabis for medicinal purposes.

Sales are already growing by 40 per cent each quarter, Linton said, and reached nearly $3 mln in the six months ended Sept. 30.

But that will likely pale with what’s ahead.

In October, Canadians elected a Liberal government whose platform included a pledge to legalize marijuana for recreational use. With the stroke of a pen, lawmakers will essentially be creating an entirely new regulated industry that some analysts speculate could be worth between $1.8 bln and $3.6 bln annually.

“The Liberal government’s election takes what’s a substantial, rapidly growing business, and makes it – well, you just look at it and go, ‘Oh boy. We really need to get more done,’” Linton said.

Using cannabis for medicinal purposes in Canada has been legal under certain conditions since 2001. However, it was a 2014 legislative change, which mandated patients to obtain their marijuana from a licensed grower, that turned it into a serious business.

“At that point, the investment community began to pay closer attention because the introduction of a legal, commercialized industry created the potential of a critical-scale industry,” said Paul Rosen, the CEO of PharmaCan Capital, a Toronto-based financing company that funds medical marijuana cultivators.

Rosen said he criss-crossed the country in 2014, visiting some 200 of the 1,300 firms that would eventually apply for a coveted cultivation licence.

Risky

It’s a risky investment, as would-be producers had to spend large sums of money readying their facilities without any guarantee from government regulators that they’d be allowed to grow marijuana. Linton said the first $6.5 mln he raised was spent on basic security and a growing room prototype for inspectors to evaluate.

Had it not been approved, Linton once quipped to a reporter, Tweed would have been left with a very expensive facility for growing tomatoes or other vegetables.

Ultimately, Tweed received a licence, as did five of the eight producers backed by PharmaCan, which has deployed more than $7.9 mln in capital to date.

While Rosen said he expects some of PharmaCan’s assets to be cash-flow positive in 2016, he predicts 2017 will be “the big breakout year” as a regulated recreational market emerges.

“I expect that the current regulated medical marijuana industry will be the backbone of a supply chain for both the recreational and medical market,” he said.

One reason for the optimism is that the government will presumably want to squeeze the black-market growers and dealers who currently supply recreational marijuana users out of a future regulated market.

Hugo Alves, a partner at law firm Bennett Jones, said companies licensed medical marijuana growers are best positioned to steal this market share.

“They have the biggest production capacity, the tightest quality control and their facilities are subject to very strict security protocols,” he said. “The government will want them to grow and produce.”

How customers will actually buy marijuana remains one of the biggest questions surrounding Canada’s legalization plans.

Under the current medical regulations, cannabis can only be shipped directly from a producer to approved customers. But that hasn’t stopped dispensaries from opening – particularly in Vancouver where municipal politicians have moved to license the shops – including some who are hoping to gain a foothold in advance of full-blown legalization.

But at the same time, several Canadian provinces have said they want marijuana sold through their existing network of government-run liquor stores.

While distribution will be a compelling sector for marijuana businesses, new opportunities will also open up for legal, marketing and financial service firms, Alves said.

He added that markets will also emerge for high-tech entrepreneurs to develop, for example, a reliable marijuana roadside test similar to an alcohol breathalyzer for police officers to detect impaired drivers

“This is a legislative change that has the ability to create an industry,” Alves said.