Licensed Producers Expect to Enter Recreational Market

Canada’s current medical cannabis market could easily flip to produce for recreation, if legalization is passed.

The country’s current 26 licensed producers manufacture medicinal cannabis for up to 40,000 patients enrolled in the government’s Health Canada program, with a total worth of $80 – $100 million.

If cannabis is legalized, Dundee Capital Markets analyst Aaron Salz said the market could be worth $5 billion.

“The Canadian marijuana space could be set for another revolution,” Salz said.

Wildeboer Dellelce LLP lawyer Andrea Hill said when Colorado legalized recreational cannabis, the government worked with existing medical marijuana producers.

With the Liberal Party’s victory, and promise to legalize cannabis once in office, licensed cannabis producer stocks jumped higher Tuesday morning

If legalization takes place, licensed producers like Canopy Growth Corp (formally Tweed) CEO Bruce Linton think it will largely benefit those already providing legal cannabis.

“I have a material production advantage over somebody that is trying to move their facilities around to avoid being busted,” said Bruce Linton.

Current Liberal Party chief financial officer Chuck Rifici co-founded Tweed and served as its CEO until he resigned in 2014.

Even though Justin Trudeau ran on a platform of legalization, Linton said he doesn’t expect complete decriminalization to take place.

“I think what it will do is create a platform which takes the current lawful provision of marijuana on a medical basis and extends that platform to provide it to venues which will be permitted to distribute it,” he said.

Linton said the industry is likely to grow, with legalization opening the market, not into areas of already high cannabis consumption like British Columbia (where independent dispensaries have eaten into the licensed producers‘ profits), but among new users.

“I never thought [British Columbia] was a primary market from day one, and if your goal was to convert them, that almost seems like an evangelical mission,” Linton said. “What I wanted to do was aim in the market where you have Baby Boomers, 12 to 13 million people in total, high income, the capacity to pay, fixed address, disproportionately elderly or older generation than other provinces – that seemed like a heck of a corridor to focus on.”

Another possibility is the entry of even bigger players entering the market, from tobacco or pharmaceuticals.

Salz said Big Tobacco, with a similar business but declining smoking rates, would likely enter the market by buying up existing producers in Canada 

A 2014 study in the The Milbank Quarterly found that “since at least the 1970s, tobacco companies have been interested in marijuana and marijuana legalization as both a potential and a rival product…as public opinion shifted and governments began relaxing laws pertaining to marijuana criminalization, the tobacco companies modified their corporate planning strategies to prepare for future consumer demand.”

The report stated that, in order to avoid the cannabis market being dominated by companies “seeking to maximize market size and profits,” policy makers should be aware the tobacco industry (along with the food and beverage industries) are prepared to enter the market with “the intention of increasing its already widespread use.”

“The concern will be that they make a hostile takeover bid or pursue [a takeover] very aggressively,” Linton said. “But those are good problems to deal with.”