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Business in Vancouver

Legalised pot set to spark new joint ventures in Canada

Prospect of legalisation next year has medical marijuana industry poised for growth

PUBLISHED : Monday, 10 October, 2016, 11:16am
UPDATED : Monday, 10 October, 2016, 11:21am

The Canadian federal government’s legalisation of marijuana for recreational use is still months away, but already a nascent cannabis industry is experiencing some of the exuberance the dot-com sector must have felt in the mid-1990s.

This week’s International Cannabis Business Conference will be the third marijuana conference held in Vancouver in the span of one month, which speaks to the interest investors and entrepreneurs are taking in marijuana, including Dundee Capital Markets, which earlier this year invested C$9 million (US$6.8 million) in a Moncton medical marijuana company called Organigram.

The medical marijuana industry has spawned a number of marginal players – from illicit dispensaries to failed junior miners jumping into the cannabis space – many of which are expected to be weeded out once the industry becomes fully regulated and taxed.

But it has also spawned some serious players, like Canopy Growth Corp, a medical marijuana company that, in 2014, went from a penny stock to a C$500 million (US$377 million) company almost overnight. In July, the company graduated from the TSX Venture exchange to the big board. Its shares were trading last week at C$5.49.

Even serious science institutes are getting in on the game. Last week, Genome BC announced a C$500,000 investment in Anandia Labs.

Founded by University of British Columbia (UBC) adjunct professor Jonathan Page, who co-led the first genome sequencing of cannabis sativa, Anandia Labs specialises in testing medical marijuana and using genomics for plant breeding.

Because pesticide use is a concern in any product consumed by humans, Anandia also plans to use genomics to develop pest-resistant strains.

“It’s one of the top things on our list – to start looking at disease resistance,” Page said. “A lot of the chemicals that are used and are being found in cannabis products are because of fungal diseases.”

One sector that expects to benefit from the marijuana industry is cleantech and energy savings companies. Legend Power, for example, recently received an order for one of its energy management systems from a licensed marijuana grower.

“It’s probably one of the most – if not the most – energy-intensive industries per square foot that there is,” said Erik Wolfe, senior manager of channel sales for Legend Power.

“So if you look at the growing business opportunities within that sector, a lot of BC companies – a lot of Canadian companies – can offer some pretty sound solutions that will help reduce the cost to grow.”

BC has for decades enjoyed notoriety for producing some of North America’s most potent marijuana. But that doesn’t mean the province will dominate the legal cannabis industry. Ontario has already emerged as the dominant medical marijuana player.

There are 35 licensed medical marijuana growers in Canada. Eight are in BC; 20 are in Ontario. Of the 17 members of Cannabis Canada Association – seven of which are publicly traded companies – only two are based in BC.

Once marijuana is legalised for recreational use, the established, licensed growers are hoping their substantial investments will pay off by expanding into the recreational market.

But NDP Finance critic Carole James fears the BC government isn’t doing enough to position BC to capitalise on legalisation.

Earlier this year, James and Public Safety critic Mike Farnworth went to Washington and Oregon states, both of which have legalised marijuana, to meet with officials and get a better idea of what the BC government should or shouldn’t do when it comes to developing and regulating a legal cannabis industry.

“Everybody we met with, regardless of who they were, [said] you can’t start too early,” James said. “It’s incredibly complex – that the preparation work is enormous, much larger than anybody imagined and that you need to be proactive.”

The BC government is taking a wait-and-see attitude toward the legalised cannabis industry. It’s waiting to see what kind of regulatory framework the federal government comes up with when it introduces legislation in the spring of 2017. James thinks that’s a mistake. She said the BC government should be laying the groundwork now.

“It’s complex, it requires the involvement of a number of different ministries and government,” she said. “It needs to be done right, and we need to get started.”

Canada’s medical marijuana industry is still relatively small. The 35 companies with licences to grow marijuana are restricted to selling to customers through the mail. There are roughly 80,000 Canadians currently buying medical marijuana from licensed producers.

But once recreational marijuana use becomes legal and regulated, the industry has the potential to become as big as tobacco, said Werner Antweiler, associate professor at UBC’s Sauder School of Business.

“In comparison, I think it’s going to be in the magnitude of the tobacco industry, eventually” he said.

But he cautions governments against milking the industry too heavily or expecting huge tax gains in the first few years. Antweiler pointed out that there will be startup costs for the provincial and federal governments.

“Governments should not go in with the expectation of making a lot of money on this at first, because, first of all, it will take money to set up the governing system for this, which means regulation, monitoring what the companies are doing.”

Nor should governments expect the marijuana black market to disappear overnight. Until there is nationwide legalisation in the US, there will still be a demand for illegally grown pot.

Antweiler also noted that, although cigarettes are legal, that hasn’t prevented a black market in Quebec, thanks to high taxes.

“Initially, it’s important to keep the taxes low, in order to kill off the illegal markets,” he said.

Getting a reliable estimate of how much a domestic marijuana industry would be worth is proving difficult. But Colorado, which legalised recreational marijuana use in 2014, provides a good snapshot.

According to the Denver Post, marijuana sales hit US$1 billion in 2015, generating US$135 million in tax revenue. Health Canada has estimated a mature medical marijuana industry will be worth C$1.3 billion (US$981 million)and CIBC Economics has estimated the recreational market to be worth 10 times that.