Pot firms rattled,
Allowing home growers may ‘disrupt’ licenced producers
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.”