Pot firms rat­tled,

Al­low­ing home grow­ers may ‘dis­rupt’ li­cenced pro­duc­ers

National Post (Latest Edition) - - FRONT PAGE - Peter Koven

Canada’s nascent med­i­cal mar­i­juana in­dus­try is be­ing thrown into new tur­moil by a court rul­ing that threat­ens to un­der­cut its busi­ness model.

Lead­ing pot pro­duc­ers such as Canopy Growth Corp., Aphria Inc., Aurora Cannabis Inc. and Met­trum Health Corp. came into be­ing for one spe­cific rea­son: The fed­eral gov­ern­ment in­tro­duced rules in 2014 that re­quired pa­tients to buy mar­i­juana from li­cenced pro­duc­ers. Prior to that, pa­tients were get­ting li­cences to grow at home, mak­ing it dif­fi­cult for Ottawa to reg­u­late the sec­tor.

The de­ci­sion Wed­nes­day from fed­eral court judge Michael Phe­lan could bring el­e­ments of the old sys­tem back. He gave pa­tients the right to grow their own cannabis, ar­gu­ing the cur­rent sys­tem re­stricts ac­cess to the drug.

It is an­other po­ten­tial game- changer for this in­dus­try, which al­ways seems to be in some stage of tran­si­tion. Cur­rently, the li­cenced pot pro­duc­ers are fight­ing com­pe­ti­tion from il­le­gal dis­pen­saries and try­ing to launch new oil- based prod­ucts ( af­ter a sep­a­rate court rul­ing le­gal­ized them).

Share prices fell across the sec­tor Wed­nes­day as in­vestors re­acted to Judge Phe­lan’s de­ci­sion. But the de­clines were mod­est, in part be­cause no one is cer­tain what im­pact the rul­ing will have. Canopy shares dropped six per cent, while Aurora shares fell nine per cent.

“There’s a lot more ques­tions than an­swers at this point,” said Aaron Salz, an an­a­lyst at Dundee Cap­i­tal Mar­kets.

Noth­ing changes in the short term, be­cause the gov­ern­ment has six months to re­write the law.

Health Canada has al­ready in­vested enor­mous time and money into de­vel­op­ing the cur­rent reg­u­la­tory sys­tem, and can’t be ea­ger to go back to the draw­ing board. Like­wise, the rul­ing is frus­trat­ing for many li­censed pro­duc­ers, which have spent mil­lions of dol­lars de­vel­opi ng pro­duc­tion fa­cil­i­ties that meet strict se­cu­rity and prod­uct qual­ity stan­dards. Now they face the risk of los­ing busi­ness to home grow­ers who won’t have to deal with the same reg­u­la­tions.

But Canopy pres­i­dent Mark Zekulin main­tained he is not con­cerned about los­ing mar­ket share. He thinks most peo­ple are happy with a sys­tem that de­liv­ers a high­qual­ity prod­uct to their door at a rel­a­tively low price.

“There’s a lot of peo­ple who don’t want to be con­vert­ing t heir base­ment or closet into a high- grow grow­ing area,” he said.

Neil Belot, Aurora’s chief brand of­fi­cer, ar­gued there should be plenty of room for both li­censed pro­duc­ers and home grow­ers. He said he is happy about the court de­ci­sion, not­ing that it shows Canada has come a long way in re­duc­ing the stigma around mar­i­juana and high­light­ing its health ben­e­fits.

Salz said it makes sense for Ottawa to al­low home grow­ing if it also cracks down on the more than 100 il­le­gal dis­pen­saries that have popped up in Canada, mainly in Toronto and Van­cou­ver. But if it al­lows both, he said it could be “po­ten­tially dis­rup­tive” for the li­censed med­i­cal pro­duc­ers.

The court rul­ing does not ad­dress the big­gest is­sue fac­ing the mar­i­juana sec­tor: the re­cre­ational mar­ket.

The med­i­cal pot mar­ket is tiny, with about 40,000 reg­is­tered pa­tients. The amount of money the li­censed pro­duc­ers can make by ser­vic­ing this cus­tomer base is very limited. But as­sum­ing the fed­eral gov­ern­ment le­gal­izes re­cre­ational use, the cus­tomer base will grow ex­po­nen­tially.

Ex­perts said it is un­clear what im­pact this de­ci­sion could have on the re­cre­ational mar­ket, if any. If it only af­fects the med­i­cal mar­ket, it may look in­signif­i­cant for the pro­duc­ers in the years ahead.

For now, the rul­ing just adds more un­cer­tainty to an in­dus­try that al­ready has a lot of it.

“Noth­ing sur­prises me in this sec­tor any­more,” Zekulin said. “Ev­ery few months there’s some­thing new that is ex­cit­ing and po­ten­tially changes the land­scape.”

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