Canadian Cannabis Industry Overview

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by Sumit Mehta, CEO, MAZAKALI

Cannabis legalization continues its global march towards decriminalization with Canada joining Uruguay as the second country in the world to legalize the cultivation, sale and consumption of cannabis.  On June 19th, 2018, the Canadian Senate passed Cannabis Bill C-45 by a 52-29 vote to become the first G7 nation in the world to decriminalize this ancient plant. France, Germany, Italy, Japan, the UK and the United States round out the rest of the G7 and collectively represent ~60% of net global wealth.

European import potential presents a large opportunity for Licensed Producers (LPs) in Canada, many of which are enjoying healthy valuations as public companies on the TSX and the CSE. Many LPs are also running clinical trials in an effort to open more doors for insurance reimbursement. While Canada today is an exclusively medical market, a federally regulated medical program along with the absence of provincial criminal law leads to a nationally uniform production, quality assurance and labeling environment. Comprehensive regulation within the world’s 10th largest economy will have widespread economic, social, and psychological impact as human creativity ultimately manifests itself into future business practices.

Canadian LPs operating under the Access to Cannabis for Medical Purposes Regulations (the “ACMPR”) are fewer in number and larger in size than their counterparts in the United States. As of August 6th, 2018, a total of 115 LPs operated in Canada under retail and cultivation licenses. Each LP licensed for sale may deliver cannabis by mail across Canada for medical use. Of the 115 LPs, 62 are in Ontario and 25 are in British Columbia.  The remaining 28 are distributed among Alberta, Manitoba, Nova Scotia, New Brunswick, Prince Edward Island, Québec and Saskatchewan.

While only two forms of ready-to-use cannabis may be sold in Canada (Cannabis Oil and Dried Flower), expansion into edibles and other delivery methods supports an optimistic outlook towards market expansion. 

Cannabis Oil:  In Canada, “cannabis oil” is essentially an extract with decarboxylated phyto-cannabinoids in a liquid oil carrier.  Cannabis oil may be formulated for ingestion or topical use. ACMPR requirements effectively exclude cannabis oil suitable for smoking or vaporizing. The only authorized dosage form for cannabis oil is a capsule or similar dosage form for use either as a pill or a suppository, with a maximum dosage of 10 mg/unit.  Butane and other organic solvents are not permitted, driving some LPs to use olive oil, grapeseed oil, or coconut oil. No additives may be included in cannabis oil other than those necessary “to maintain the product’s quality and stability”.

Dried Flower:  The ACMPR prohibits sale of flower that is pre-rolled or in any other dosage form.  Most LPs sell intact flower, while some also offer milled flower.  Single strains with 1:1 THC:CBD ratios are commonly available. Pre-rolls, up to a gram each, will be available for sale post October 17th, 2018.

Bill C-45 “An Act Respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts”, provides for three key changes – Non-medical Adult UseStore-Front Sale and Product Diversification.

Non-medical Adult Use: Bill C-45 deschedules cannabis from the CDSA to create a regulated adult use market. Cannabis stores will control distribution to the adult-use market in a manner similar to Canadian liquor stores. Criminal penalties remain for sale to minors as well as illicit distribution.

Store-Front Sale: Bill C-45 allows provinces to regulate storefront sale of cannabis. Currently, all cannabis dispensaries in Canada contravene the CDSA. Notwithstanding contravention of the CDSA and potential criminal penalties, some municipalities have issued business licenses to cannabis dispensaries. These business licenses combined with inconsistent enforcement has resulted in great confusion over the current state of the law.

Product Diversification: While Bill C-45 does not regulate any cannabis products for sale beyond those currently available under the ACMPR, the draft Cannabis Act includes a schedule of saleable products that may be expanded to include additional products. The Act provides the government the power to regulate cannabis accessories and packaging.

Concentrates and manufactured edible products may be sold a year after the law takes effect.

While there is much room for inclusion and accommodation in the current bill, Canada has the unique responsibility to set an example for the rest of the world. This forward-thinking regulation serves as a framework for other governments around the world and as the legal and political foundation of a global movement away from plant prohibition.

Home to the deepest and most liquid publicly traded cannabis markets, many US companies have listed on Canadian exchanges to take advantage of their liquidity. While the Canadian markets offer a plethora of opportunities, reasonable due diligence and valuation focus prior to capital deployment remains advisable. Canada’s cannabis legalization is a monumental step towards our eventual return to a world blessed by the healing properties of this plant. This period of prohibition and propaganda will prove to be an aberration of rational thought as we continue our 10,000 year relationship with this ancient superfood.

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Ross Silver is the CEO and founder of Sylva International. Mr. Silver is a Registered Investment Advisor with over 15 years experience in equity research, investment banking, and asset management. Mr. Silver served as a consultant for the National Institutes of Health and holds a Series 65 securities license.

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