Forget the US, Canada’s Cannabis Industry has Big Potential

Ryan Allway

December 17th, 2015

Feature Stories, Policy

Canada has been rapidly moving toward legalization following Justin Trudeau’s election as Prime Minister in late-2015. Shortly after taking office, he sent mandates to the Minister of Justice and Attorney General to look into implementing recreational marijuana legalization across the country, following up on a campaign promise to make it a priority if elected. The move could fast-track legalization and create new opportunities for investors.

“The election of Trudeau will accelerate the timing of full legalization of marijuana in Canada,” said Matt Karnes of GreenWave Advisors, a leading marijuana industry research firm. “We don’t think it is likely that there will be many hurdles in passing recreational legalization.”

While there are likely to be few actual barriers to approval, the process could become a lot more time-consuming than many were hoping. Colorado’s Director of Marijuana Enforcement told CBC that the challenges involved with regulating edible marijuana and drug-impaired driving could make the laws a lot harder to implement in reality. The program’s development could also end up costing a lot more to enact than the government initially budgeted.

“I expect that the move to recreational legalization will take longer than many hope or expect as the leaders take their time to make sure it is done right,” said Alan Brochstein, CFA, a leading marijuana industry analyst and founder of 420 Investor – a community for investors to learn, explore, and profit from marijuana companies. “The federal government will need to work with provincial governments to fully implement the solution, which will elongate the process.”

Strong public support and Trudeau’s promise to move things forward should swing the pendulum in favor of legalization – even if it takes longer than many expect to implement. According to many advocates, the cost of legalization will be far exceeded by the revenue potential from taxing the drug and the industry’s profit. Colorado’s income from recreational marijuana, after all, has already wildly surpassed the government’s expectations.

Health Canada estimates that the country’s medical marijuana industry could reach $1.3 billion by 2020, but the recreational marijuana industry could be worth as much as $5 billion per year.

“I have estimated that the legal recreational market could conservatively be $2-4 billion based upon 35 million residents and assuming prices are $7 per gram or so, but I have seen higher estimates,” said Brochstein.

Existing Producers

There are many different companies that are well-positioned to capitalize on the legalization of recreational marijuana. In many ways, the 26 existing licensed producers under the Marihuana for Medical Purposes Regulations (MMPR) could be best positioned to take advantage of the immediate opportunities available in the space given their existing infrastructure that has already been extensively vetted by the Canadian government.

Canopy Growth Corp. (TSX-V: CGC) (OTC: TWMJF) is the largest licensed producer of medical marijuana under the MMPR regulations following its acquisition of Bedrocan this year. In November, the company reported Q2 sales that increased 44% sequentially to $2,466,121 with over 7,300 patients enrolled in its program. The company’s $7.7 million cash position also puts it on strong financial footing when it comes to future expansion.

“We already have operational production facilities, broad brand recognition, and the best customer service in the business,” said Bruce Linton, CEO of Canopy Growth Corp. “This is a unique opportunity and one that we have been anticipating for a long time. It’s difficult to know which rules will pass from the current system as it evolves, but we feel that we’re in the poll position and still lean enough to excel under any regulatory model.”

Organigram Holdings Inc. (TSX-V: OGI) (OTC: OGRMF) is another leading licensed producer that has focused on selling only organic products to consumers. In October, the company announced that it was targeting Q1 sales of $900,000 with nearly 2,000 active registered patients. Management has been largely focused on building a high quality brand focusing on its Maritime heritage and theme, while developing the most efficacious product possible.

“We highly anticipate that the same regulations will be put in place for recreational as medical at the manufacturing level,” said Organigram Holdings Inc. CEO Denis Arsenault. “The current system works in the eyes of Health Canada. We, as licensed producers, have learned the manufacturing process, have access to capital, and will be first to supply the market. Those advantages will give us tremendous advantages initially.”

Finally, Aurora Cannabis Enterprises Inc. (CSE: ACB) (OTC: ACBFF) is one of the most recent recipients of a license after announcing the award on November 30th. The company’s primary differentiator in the market is taking a holistic approach to healing with a 55,200 square foot Alberta production facility capable of producing 5,400 kilograms per year. Management anticipates reaching full production by May of 2016.

“Aurora believes in a holistic approach to health and wellness and the healing power of nature,” said Aurora Cannabis Chief Brand Officer Neil Belot. “As the industry’s most culture and community minded LP, Aurora is well positioned to lead through 2016 and beyond as it becomes legal for people to access cannabis without requiring a doctor’s authorization.”

Aspiring Producers

Many other companies have built out facilities in preparation of an eventual approval under the MMPR and potentially any future recreational legalization measures.

Supreme Pharmaceuticals Inc. (CSE: SL) (OTC: SPRWF) is one of the most advanced companies operating in this segment. After completing its pre-license inspection in December, the company is well on its way to securing a license producer status. Its flagship 342,000 square foot greenhouse located in Ontario could provide it with enough scale to become a very low cost producer in the market, offering patients the best overall value.

“Supreme’s foundation is to be the premier, large-scale producer of cannabis,” said Supreme Pharmaceuticals Inc. CEO John Fowler. “We achieve this in large part through our innovative, hybrid greenhouse production facility. For medical patients this means that supreme can produce affordable medical marijuana with the best dollar value in the market. This should hold true in the recreational market as well.”

A number of other aspiring licensed producers stand at earlier stages of approval. In the past, some of these organizations have been critical of Health Canada for its slow approval times that has kept companies out of the market for a long time. Many analysts expect these approval times to pick up with the incoming administration as medical and recreational marijuana legalization become a priority for the government.

Ancillary Products & Services

Many other companies provide ancillary services that support the cultivation of medical marijuana, which could eventually pivot to take advantage of the increased demand for recreational marijuana growing.

“Ancillary products are of great interest in the U.S. and Canada,” says Poseidon Asset Management’s Director & Chief Investor Morgan Paxhia. “Canadians have only so far had access to flower, which is mostly consumed by smoking. We find this as a major disservice to medical patients. We see an opportunity for companies that provide true alternative ingestion technologies such as high quality vaporizers.”

Paxhia pointed to VapeXhale’s flagship product, called Evo, as a leader in the industry when it comes to vaporizing both the flower and concentrates on the market.

The benefit of many of these companies is that their products can be sold in other countries beyond Canada without regulatory risk, including the U.S. In addition to vaporizers, these companies may include consulting firms, software companies, and other technology companies developing ways to consume or share cannabis.

Looking Ahead

The Canadian cannabis market looks extremely promising in 2016, thanks to Justin Trudeau’s campaign promise to legalize recreational marijuana. With many different opportunities to capitalize on the market, investors may want to consider diversifying north of the border.

Ryan Allway

About Ryan Allway

Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.

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