The business of marijuana: As legalization looms, who is poised to profit?
by Tracey Lindeman
Published in the Montreal Gazette on Dec. 19, 2015
IS MARIJUANA THE NEXT BILLION-DOLLAR INDUSTRY IN CANADA?
If you ask people who work at medical-marijuana companies like Tweed and Hydropothecary — which have invested millions of dollars to comply with Health Canada’s strict rules governing medical marijuana — the answer is, “we sure hope so.”
Last month, on Nov. 13, Prime Minister Justin Trudeau sent Justice Minister Jody Wilson-Raybould a mandate letter asking her to work with the public safety and health ministers to “create a federal-provincial-territorial process that will lead to the legalization and regulation of marijuana.”
Companies that have established themselves as medical-marijuana producers under the regulations are poised to dominate the recreational marijuana market if and when it comes to be.
“We have a really solid chance at building a billion-dollar company,” says Sébastien St-Louis, the CEO of Hydropothecary, a Gatineau producer of medical marijuana.
When his company launched in 2013, St-Louis says the first $3 million of investment came from friends and family. The next $3 million to $4 million came from Bay St. Now, on the heels of Canadian Cannabis Corporation’s $28-million acquisition of Hydropothecary, the company is working toward securing an influx of investment from Quebec’s larger venture funds.
“It is big-money business,” St-Louis says.
Hydropothecary depends on the horticultural prowess of Louis Gagnon, the company’s master grower and longtime producer of fresh-cut flowers, to produce quality medical marijuana.
The company owns three greenhouses on 65 acres of land in Gatineau. “By April, we’ll be operating in just under 50,000 square feet,” he says — a sizeable operation by Canadian standards.
“By and large, I think the most eventful thing in this is that it has been non-eventful.”
A little over two years ago, the idea for Hydropothecary began as an early summer fireside chat over beers with a friend who happened to work at Health Canada. Health Canada’s rules had just come into effect, laying down an incredibly strict framework with which to license marijuana growers and sellers.
St-Louis stayed up all night, writing down business ideas. Hydropothecary was incorporated as a Canadian business by the end of the summer.
“As an entrepreneur, you always have to be a little crazy,” he says.
As one of just 26 companies licensed to grow or sell marijuana in the country — and the only one licensed in Quebec — St-Louis’s timing could not have been better. Health Canada says 1,012 applications to become a licensed producer have been refused or withdrawn since the rules were introduced in June 2013. The requirements are so precise that applicants have little room to err. Bottom line: It’s really, really hard to get a licence.
Having one of the rare licences is like having a golden ticket to see Willy Wonka.
Ontario-based Tweed is also one of the chosen few — and, for what it’s worth, it’s located in a former chocolate factory, at 1 Hershey Dr. in Smiths Falls, Ont.
A lawyer by trade, Mark Zekulin started off as legal counsel at Tweed in 2013; now he’s the president. He never saw that coming when he was at law school.
“I certainly did not,” Zekulin says, laughing.
Tweed recently bought Bedrocan Canada — the child company to Dutch parent Bedrocan — in an acquisition worth about $60 million. However, the companies won’t be merged; rather, Tweed, Tweed Farms and Bedrocan Canada are sister corporations now housed under the umbrella Canopy Growth Corporation.
Zekulin says the acquisition helps round out Tweed’s friendlier approach to the market by pairing it up with a very serious, very medical, very established company that has been in business in the Netherlands for more than 30 years. For the last 12 years, Bedrocan has been under contract to supply the Dutch government with high-quality medical marijuana.
“This is the reason we acquired Bedrocan,” Zekulin says. He likes that the company has been at it for three decades, “and through that process they’ve completely standardized their genetics and their growing process.”
WHAT AM I GETTING? THE PUSH FOR STANDARDIZATION
Standardization for any form of medicine is obligatory, whether it’s grown in a greenhouse or manufactured in a lab.
The calls for standardization for recreational weed will likely multiply as well as Canada barrels toward legalization. After all, it would likely be perceived as gauche for a substance newly sanctioned by government to land people in hospital ERs due to inconsistent potency.
So how can growers ensure the product they are selling is the same every single time?
Dany Lefebvre, the owner of Vert Médical in St-Lucien, near Drummondville, says the only way is to grow marijuana in a perfectly controlled chamber.
Growing in greenhouses or in open fields has too many variables, he says: sunlight hours, pests, precipitation.
“It’s really important for medical cannabis to be standardized medicine,” he says.
Lefebvre has been waiting a while to get a medical-marijuana licence from Health Canada, but he’s trying not to think about the possibility he might never get one. In 2014, Vert Médical received a hefty investment from PharmaCan Capital, which paid for a $1-million state-of-the-art indoor growing facility.
Having a functional facility in place is a requirement for getting a licence from Health Canada. Among the building requirements:
— security measures such as surveillance cameras pointed toward any place where marijuana is present;
— a fence around the property;
— walls built following specific guidelines;
— ducts and pipes must be outfitted with bars to prevent unauthorized access.
Having those things, however, does not guarantee the issuance of a production licence.
Health Canada says more than 700 applications have been returned to applicants because they failed to meet the basic requirements of the preliminary screening.
There is no cap on the number of licences, but the strict conditions make it impossible for people without significant financial backing to get in on the weed game, which in turn limits the pool of people who stand to profit from medical, and ultimately recreational, marijuana.
Then there’s the idea being batted around to have it sold in liquor stores — surely a cash grab for state-controlled corporations. (Quebec’s SAQ employees union has asked has asked the Institut de recherche et d’informations socio-économiques to conduct a study on that possibility, La Presse has reported. The SAQ itself says it has no plans to sell pot in outlets, and that it is up to the government to decide how and where marijuana would be sold.)
Yet, from a federal or legal perspective, having fewer players could be a more desirable outcome, if only to have fewer people to police.
But what about a free market?
THE COLORADO EXPERIMENT
In Colorado, where weed is legal for recreational and medical use, the opportunities for commercialization can be seen. Rapper Snoop Dogg, for example, has his own line of premium weed products — Leafs by Snoop.
Still, the state has been very careful to make sure producers make only enough product to meet the demands of the population.
As the executive director of the Colorado Department of Revenue, Barbara Brohl has led the development of the state’s marijuana policy.
There’s no cap on the number of licences issued, and there’s no requirement that people making and selling weed have any prior experience doing so. Even so, Brohl says the number of permits issued on the recreational side of the market hasn’t caught up to the medicinal side.
She says there are 765 cultivation permits and 201 permits for edibles on the medical side; on the recreational side, there are 505 cultivation permits and 152 permits for edibles. “It’s been a steady, controlled rollout,” she says.
In Colorado, medical marijuana is taxed at the regular state level — 2.9 per cent — while recreational weed is subject to higher taxation. Producers pay a 15-per-cent excise tax, while recreational consumers pay a 10-per-cent premium on top of the 2.9-per-cent state sales tax. Since 2014, the state has collected $141 million in taxes on marijuana.
“This tax revenue doesn’t go into our general fund, and that was intentional. One, there’s a cost associated with regulating this industry and there’s a social cost that is addressed by this money,” Brohl says.
“But the real big reason, too, is because if you become reliant upon this money (by putting it directly into state coffers), we might become a little too reliant on it and it would not allow us to make a good policy decision.”
Here in Canada, Justin Trudeau said this week that any money that flows to public coffers through taxation of pot should go toward addiction treatment, mental-health support and education programs — not general revenues. For the Liberals, legalization of marijuana is about public health and safety, he says, and the federal government isn’t looking for a financial windfall.
Colorado has given a lot of thought to how marijuana should be managed. The rules are strict, but are also designed to help businesses comply while allowing for competition — something Canada could learn from as it gets ready to legalize marijuana.
And while legalization has certainly led to an influx of pot tourists, the state hasn’t seen a massive uptake in new usage among residents.
“We are finding that people who used to consume marijuana before are still doing it, and the people who weren’t before still aren’t,” Brohl says. “By and large, I think the most eventful thing in this is that it has been non-eventful.”
WHAT’S NEXT FOR POT ACTIVISM?
Marc Emery believes marijuana will be legal in Canada by spring.
The British Columbia-based pot activist — “The Prince of Pot” to some — has been actively petitioning the government to legalize the drug for most of his adult life. He’s been outspokenly pro-Trudeau since the prime minister came out in favour of legalization.
But for Emery, the impending legalization of marijuana is more than a business opportunity: It’s an affirmation that what he’s been doing for two decades has mattered — that activism can influence public policy.
It’s been 25 years since a woman passed him his first joint — on Dec. 21, 1980 — and it was a love affair (with both the woman and the marijuana) from the start.
He says he has been arrested in Canada 28 times, in nine out of 10 provinces, and has been imprisoned globally 34 times for offences related to marijuana. Most recently, he served four years in the American prison system for mailing cannabis seeds to Americans, finishing out his sentence in an immigrant detention centre in the heart of Louisiana.
“That was the worst prison. It was a dirtbag county jail where they put people awaiting deportation,” Emery says.
He likes that Trudeau has admitted to smoking pot, as has Trudeau’s mother, Margaret. To Emery, having someone who has used the drug overseeing its legalization is comforting.
He expects the country’s new marijuana laws to permit the commercialization of the drug as it does the sale of alcohol. “Even though alcohol causes huge social problems, legal means legal,” he says. “I have no patience for anyone who comes back with a partial legalization.”
And what about the argument that legalization will make it easier for young people to get their hands on pot? Well, Emery says, young people have been getting their hands on illegal stuff for decades.
The next step, Emery continues, is pardoning all those who have been arrested and convicted under marijuana charges. “We don’t need new rules for pot,” he says. “We need an apology.”
And once pot is legalized here, Emery will continue to fight for legalized weed beyond Canada’s borders. And to do it, he’s betting on serving more time in foreign jails.
“If it’s going to be totally legal here, I’ll go around the world to help (other countries) do it,” Emery says. “(I’d tell them) ‘there’s nothing I’d love more than getting expelled from your country by bringing justice to it.”
Want to become a medical-marijuana user?
Step one: find a doctor who will write a prescription
Becoming a medical marijuana user under Health Canada’s rules isn’t complicated if you can find a doctor willing to write you a prescription for weed. But that has historically been difficult in Quebec because the Collège des Médecins here does not recognize marijuana as a therapeutic treatment.
For example, it’s possible to get medical weed in the province by participating in a medical study, and there is no shortage of open-ended medical studies. Some medical pot providers have access to a network of doctors who have previously prescribed marijuana — some of whom offer Skype consultations.
Once a medical document is in hand, there are only a few more steps separating the patient from his or her pot.
- Registering with a licensed producer involves sending the company your medical document and a registration form. This is a competitive space for providers — everyone wants to offer the fastest set-up service possible to catch the most customers. Once you’ve registered with one producer, though, you can’t transfer to another without a new medical document.
- Once the application is approved, it’s time to shop. Customers can evaluate the benefits of each strain online before ordering, as well as shop for vaporizers. Varieties with THC are psychoactive, producing the “high” often associated with weed, while strains with low-to-zero THC and high CBD content can offer therapeutic effects without the euphoria. Other cannabinoid formulations may also be offered. Prices generally range from $6–$12 a gram — about the going dealer rate in some Canadian cities, according to pot activist Marc Emery. (Remote areas are more expensive.) Many suppliers offer discounted “compassion” rates for people who can prove they earn less than a certain amount each year (for Tweed, the threshold is less than $29,000 a year).
- Then, there’s the wait for the package to come in the mail. Most suppliers require no minimum order and offer next-day delivery.