A ‘MARIJUANA ARMS RACE’
Smiths Falls at the centre of Canada’s green rush
The journey to the centre of Canada’s marijuana economy begins on a stretch of country road.
It weaves through a patchwork of cornfields and hamlets before settling in Smiths Falls — a town that boasts a stone mill, a Lion’s Club that meets every second Thursday and a factory that grows cannabis by the tonne.
The building on Hershey Drive looks barren. Weeds sprout between cracks in the asphalt parking lot and its stucco walls betray its dated architecture.
For roughly 40 years, this place manufactured enough Hershey’s Kisses to crown Smiths Falls the “Chocolate Capital of Ontario.” But in 2007, Hershey’s laid off 600 workers, shuttered the factory’s doors and moved its operation to Mexico.
Today, the plant is home to Canopy Growth and its Tweed brand of medical marijuana.
There’s an element of absurdist humour to this: the place that once churned out untold crates of Reese’s Pieces now grows medical marijuana strains with names such as Lemon Skunk and Boaty McBoatface.
“The joke never gets old,” says Adam Greenblatt, who’s spearheading Tweed’s expansion into Quebec. “They used to make munchies here — now we induce them.” Here’s where the joke ends. Since November, the company has swallowed competitors in Quebec and Ontario in a pair of deals worth an estimated $430 million. As it stands, Canopy is valued at $1.6 billion — making it the most lucrative marijuana operation in Canada.
Now the company wants to break into the largely untapped Quebec market. Last fall, Canopy bought a 90-acre farm outside of Drummondville and Greenblatt is hustling to get more doctors and patients on board with Health Canada’s medical marijuana program.
Meanwhile, Canopy CEO Bruce Linton announced last month that Canopy will triple its production in short order. Linton, who founded the company four years ago, is guiding the company on an aggressive campaign that will see Canopy pour millions into new labour and construction costs. He isn’t alone. Competitors such as Aphria and Aurora Cannabis are also pouring a cash into expansion projects that one market expert has dubbed “the great marijuana arms race.”
This strategy isn’t without its risks.
Canopy’s frenetic growth is outpacing the demand for medical cannabis in Canada.
It already supplies about one third of the medical space, but the end game is for the company to accommodate something much bigger: a national, legal recreational market.
A study by the Deloitte auditing firm pegs the size of that market north of $22 billion a year.
While the Liberal government has promised to introduce legislation to legalize recreational marijuana later this year, it could take until 2018 before a new law is on the books.
And that’s only if the Senate signs off on the bill. Even so, Canopy welcomes the challenge.
“We’ve overcome longer odds,” Linton said. “I think this is our moment; I think we’re on the cusp of something big.”
Adam Greenblatt has a sort of slacker chic esthetic to him.
The 32-year-old sports a short but unkempt crop of hair and his jawline suggests he’s either trying to grow a beard or hasn’t bothered to shave in weeks.
He wears a jacket, button shirt and oxford-shoe combination but still looks like he just rolled out of bed.
Greenblatt carries this juxtaposition with him in conversation.
He’ll rattle off sections of the Criminal Code and quote a line from Seinfeld in the same breath — “That’s gold, Jerry! Gold!” is a common refrain.
This duality is also at the centre of his work.
Greenblatt meets with Quebec doctors, lawmakers and its business community in hopes of growing Tweed’s foothold in the province.
But he also has the unique challenge of reaching into the province’s underground network of medical marijuana users in hopes of drawing them into the legal system.
“Quebec is sort of an enigma. You’ve some of the highest rates of marijuana use in the country and some of the lowest participation in the legal system,” Greenblatt says.
“It’s an untapped market and one with so much potential. But there’s also a really strong underground economy of growers and dealers who work outside the system.”
The numbers support Greenblatt’s claim: of the more than 100,000 patients who buy medical cannabis through the Health Canada-approved system, about 3,000 live in Quebec.
There are 38 licensed producers of medical marijuana across that country but just one in the province — the Hydropothecary farm near Gatineau.
Greenblatt knows about Quebec’s black market because he was once immersed in it.
He used to grow pot out of a duplex in Montreal — supplying a dispensary that operated “outside” the Health Canada program.
His customers, he says, suffered from chronic pain, degenerative nerve conditions and a variety of ailments for which they received a doctor’s prescription to use marijuana.
He says they dipped into the “grey market” because, at the time, the Health Canada program was too cumbersome. Patients had to get a licence to grow their own weed or order the cannabis from one of the few governmentapproved producers.
“I won’t hide from my past, I’m proud of my roots as an activist and someone who fought for patients rights,” says Greenblatt.
“The fact is, many of the people who work (for Canopy Growth) come from that world. The industry needs expertise and where else is it going to come from? It comes from people who worked in the shadows.”
The dispensary system continues to thrive in Canada’s major urban centres.
More than 500,000 Canadians have a prescription to use medical cannabis, according to Health Canada. But only one fifth of those patients actually participate in the government’s program — which requires people to mail-order their cannabis from a licensed producer.
This means that the majority of patients are either growing their own, buying it off a dealer or going to an illegal storefront.
Today’s legal marketplace offers a wider variety for patients. In 2013, Health Canada began licensing dozens of growers who could sell their product through the government-regulated program.
This has brought variety and quality into the fold but, for many patients, there’s no clear incentive to buy into the system. For one thing, insurance providers don’t cover the cost of medical marijuana because it hasn’t gone through enough clinical testing.
There have also been issues with a breakdown in the supply chain — last year, a labour dispute between Canada Post and the federal government stalled the delivery of cannabis to thousands of patients across Canada.
Perhaps because of this, many remain loyal to the black market. They keep their prescriptions in hopes that, if they’re ever arrested on possession of narcotics charges, it will serve as a sort of get-out-of-jail-free card.
“A lot of patients have a connection to their local dispensary that began years before the current system was in place,” says Marc-Boris St-Maurice, who founded Montreal’s first dispensary in 2000.
“We were arrested, our product was seized, we went to court and spent a small fortune to fight for legal access to medical marijuana.”
In a way, the Health Canada program exists because of people like St-Maurice.
It was dispensary owners who acted as a go-between for patients with a legitimate need for pot and growers in the criminal underground. The police raids of dispensaries and subsequent court appeals paved the way for the first laws codifying access to medical cannabis in 2001.
The new federal program, in which patients deal directly with suppliers, leaves dispensaries out in the cold.
But while the program made strides in 2016 — nearly tripling the number of patients on its rolls in the span of one year — Health Canada’s data suggest the black market remains a major source of medical cannabis.
By the government’s own calculations, there are still hundreds of thousands of medical marijuana patients who use illicit means to get their medicine.
“People assume that the strength of criminal operations in Quebec is that they dominate the drug trade through intimidation and violence (of rival dealers),” said one source, who once managed marijuana grow houses for the Hells Angels. “Yes, the implication of violence and outright violence is sort of the glue that holds everything together. There’s no denying that.
“But above all else, the bikers oversee an efficient system with regulated prices, a near limitless supply of weed and distribution channels that reach into every corner of the province,” said the source, who spoke on the condition of anonymity.
“Everybody knows a dealer they can text, every dealer has a supplier and every supplier has a network of grow operations they can tap into. Most people can have weed delivered to their house within minutes of sending a text message. That’s what the government is competing with.”
Despite its gruff exterior, the Smiths Falls factory is a far cry from some of the ramshackle grow-ops that feed the black market. Gaining access to the facility is like walking into Batman’s lair. Visitors pass through a labyrinth of security cameras, bolt-locked doors and checkpoints before arriving at the factory entrance.
From there, a steel door will only open if an employee with security clearance presses their thumb on a biometric scanner and swipes a pass-key.
Within the factory, there are additional layers designed to protect Canopy’s cash crop. The finished product is stored in vacuum-sealed bags and locked behind a stainless steel vault with doors thick enough to withstand an explosion.
The vault can hold upwards of $150 million in product.
Access to the flowering rooms is also tightly monitored. That space — a climate-controlled room where buds the size of a child’s fist sprout from hundreds of plants — is off limits for most workers.
“The flowering process, that’s where so many of the disease vectors can get into the plants,” says Jordan Sinclair, Tweed’s communications manager. “This process is designed to make it nearly impossible for the product to get contaminated.”
To Sinclair’s point, employees wear a new pair of white coveralls, a hairnet and sanitize their hands every time they enter the facility. This, Greenblatt argues, is one of the main advantages the legal economy has over the black market.
“There are growers who use space heaters and fans to dry their weed. You have trimmers who work at (an illegal) grow house and they’ll be cutting the buds, go to the bathroom and forget to wash their hands before they get back to work,” Greenblatt says.
“That’s how rot sets in. Some people I know speak of smelling Windex on their pot. But I tell them their dealer isn’t spraying cleaner onto the pot, that’s the smell of ammonia.”
It’s an untapped market and one with so much potential. But there’s also a really strong underground economy of growers and dealers who work outside the system.
It takes roughly four months for Canopy to grow a new crop. That time frame includes lab testing designed to detect contaminants in the weed but also to determine how potent the drug is.
The factory is also subject to regular inspections by Health Canada.
For a company was just a blip on the radar a few years back, the sheer scale of its infrastructure is impressive. Canopy employs about 170 factory workers, lab technicians, sales representatives and a Cannabis Cup-winning “master grower.”
It also staffs two call centres at its Smiths Falls offices, a lab in Toronto, a 350,000 square foot greenhouse in Niagara on the Lake and has some 29,000 registered patients using Tweed products.
This rigorous structure may be Canopy’s saving grace in the cutthroat world of medical marijuana. At least, that’s what market experts say.
Since the Toronto Stock Exchange began listing licensed marijuana producers in 2013, the market has seen a sort of “green rush.” In January, the 26 most valuable marijuana stocks had a combined worth of $3 billion.
“Half of those companies, they’ll probably flame out in the next few years,” says Chris Damas, a market analyst and editor of the BCMI Report. “There are so many whatifs and so many unknowns about the industry but the one thing we do know is supply and demand. That’s the one irrefutable rule of the markets.
“And the way it’s going right now, there’s going to be way too much supply for the medical space. If and when a legal, recreational market opens up, that could change. But for now, if you do the math — and not enough investors do the math — we could see a huge drop in prices. That alone could wipe out a good chunk of the companies out there.”
Damas, a former chemist, has studied the expansion plans for the industry’s eight biggest players, breaking them down to the last square foot. By his reckoning, Canopy Growth, Aphria, Aurora Cannabis and the others will combine to increase annual production by 240 tonnes within three years.
The companies, he says, are locked into a “marijuana arms race” to increase production.
It is “a competition to see who can plan the biggest expansion and raise the most public dough,” says Damas. “They’re gearing up for the arrival of a legal market. This isn’t meant for just the medical space.”
As it stands, patients are in on pace to buy a little more than 24 tonnes of dried cannabis through Health Canada this financial year, according to its market data. In other words, the companies are planning for something more than 10 times bigger than the current market.
For this strategy to pan out, the Liberal government’s plan to legalize recreational pot can’t come quickly enough, Damas says.
“Canopy is a good business. It’s well run, it has a clear strategy and, with Tweed, a brand that people connect with,” says Damas. “I mean, they have an exclusive deal to distribute Snoop Dogg’s brand of marijuana in Canada. They’re going to stand out and these sorts of things will help them emerge as a big player in the recreational market.
“But no one — not the smartest CEO or the best sales force — is immune to the laws of supply and demand. So when I see all of these companies raising millions to expand their business — and when I see their stock prices soaring based solely on speculation — that’s something that worries me.”
Ken Lester has also been following the frenetic run on marijuana stocks. Lester, a business professor at McGill University, says we can look to the past for hints about what may be in store for the industry.
“You look at the rise of the automobile in the early 1900s. At the beginning you had something like 102 car companies,” said Lester, the president of Lester Asset Management. “Within a few years that number was down to three. Look at computers: In the 1980s there must have been 200 companies manufacturing computers. By 2005, it was down to a handful.
“So what you’re seeing now, the easy profits, the speculation, the gold rush mentality, most companies won’t emerge from this unscathed. In the end, it will likely be Canopy and a handful of others left standing.”
There are other potential setbacks for these emerging giants.
Damas cautions that the workers who grow, trim and harvest marijuana may see the billion-dollar valuations within the industry and begin demanding concessions from their employers. The 50 employees at MedReleaf in Markham, are fighting for the right to unionize in a legal battle before Ontario’s Agriculture, Food, and Rural Affairs Appeal Tribunal.
Seven years ago, the Montreal police descended on five dispensaries in the city, seizing tens of thousands of dollars in marijuana and arresting 35 people on trafficking charges.
Greenblatt wasn’t among those carted off by police that day, but his product was. Today he jokes that his cannabis edibles “were so good, they ended up in four different police evidence lockers.”
It would have been hard, at the time, to imagine marijuana shares trading for billions of dollars on the Toronto Stock Exchange. But even when cops were kicking down dispensary doors, Greenblatt never doubted the industry’s potential.
“A lot of us looked at the future and saw something huge,” said Greenblatt. “That’s what’s happening right now. That bright future is materializing itself.”
Many of the dispensary owners and growers from back then have integrated into the mainstream — taking their expertise to publicly listed companies such as Canopy, Aurora Cannabis and Aphria, among dozens of others. But many look at the rapidly transforming industry with apprehension.
Since he opened his dispensary in Montreal nearly 20 years ago, StMaurice has continued to fight for legalization. He even joined the federal Liberal party and pestered Justin Trudeau about the issue years before the Montreal MP would go on to become Prime Minister.
“I had some chances to work with the big guys but I’m happy doing my thing,” said St-Maurice, who still runs Fondation Marijuana on Saint-Laurent Blvd.
“My worry is that a lot of these companies benefited from the expertise of dispensary owners, from their struggle to legalize marijuana and now a lot of us will be left behind. I think there’s room for us and for the big companies in this new marijuana economy.”
What you’re seeing now, the easy profits, the speculation, the gold rush mentality, most companies won’t emerge from this unscathed. In the end, it will likely be Canopy and a handful of others left standing.