Donald Trump presidency will give Canadian pot firms a ‘head start’
Canada’s medical-cannabis companies say their American counterparts will continue to be stifled under the upcoming Trump presidency, during which Canadian growers will scale up to meet the domestic demand for recreational pot while preparing to enter the U.S. market as global industry leaders once prohibition there ends.
Last Tuesday, voters in California, Massachusetts, Nevada and Maine legalized the sale of recreational marijuana, joining four western states and Washington, in allowing adults to use the drug. Florida, Arkansas, Montana and North Dakota also voted for medical cannabis, which is now supported by a total of 29 states.
While one in five Americans will soon live in jurisdictions that have legalized recreational cannabis, president-elect Donald Trump has said he is against changing a federal law prohibiting the drug. That means the growth of U.S. companies will likely be stymied over the next four years by a number of barriers, including the inability to transfer the drug across state lines, blacklisting by risk-averse banks and not having access to capital from many institutional investors.
Mr. Trump has said that he is “100 per cent” in favour of medical marijuana. But even if a Republican-dominated federal government reclassifies cannabis away from drugs such as LSD and heroin to include it in a less-controlled group with fentanyl and oxycodone, companies would likely face years meeting a host of strict regulatory hurdles from the U.S. Food and Drug Administration before they can sell it as a medicine across the country.
During that time, Canada’s more than 30 commercial medical-cannabis growers say they will be expanding rapidly to meet Canada’s demand for recreational marijuana – which an estimated 4.6 million people will use at least once come 2018, according to a recent report by the Parliamentary Budget Officer. A handful of producers have received licences to export their products abroad to countries in Europe that have legalized medical cannabis, but current rules would need to be changed to allow for recreational pot to be shipped internationally.
“Canada’s position [is] to be to marijuana what Belgium is to diamonds,” said Chuck Rifici, a director of licensed grower Aurora Cannabis’s board and co-founder of Canada’s largest medical cannabis producer, Canopy Growth Corp. “Our federally regulated model allows scale that you can’t see south of the border.”
Fewer than 100,000 patients get prescriptions through the two-year-old federal mail-order system for medical marijuana, which has faced intense competition from the illegal storefront-dispensary sector. But John Fowler, president of Ontario-based Supreme Pharmaceuticals, said Canadian companies have a market capitalization of more than $200-million and are poised to be buyers of American cannabis firms once the drug is legalized stateside in five to 10 years.
“I’ve always maintained that the longer cannabis remains illegal in the United States, the bigger a head start Canadian companies have,” Mr. Fowler said. “These are real organizations being built with real capital, hard assets, real infrastructure, and that’s a whole world different from the types of businesses that are popping up from state to state.”
California, with its population greater than all of Canada, will eventually see larger companies start leading a recreational and medical market estimated to be worth $14-billion. But there are already more than 3,000 fragmented companies supplying the medical market, versus roughly 30 in Canada, and recreational sales are still many months away, Mr. Fowler said.
In the meantime, American investors will remain reluctant to take over the Canadian industry as long as they perceive a risk of angering the U.S. federal government, Mr. Fowler said. As an example of this reticence, he said a large investment fund recently cancelled talks with Supreme after someone in its legal department flagged a 2014 story in the New York Times where an unnamed U.S. Drug Enforcement Administration agent said the agency may start investigating marijuana investors.
“The money guys saw the opportunity and the lawyers shut it down,” he said.
Dan Sutton, managing director at Tantalus Labs, a late-stage applicant to Health Canada’s medical-marijuana production system, said that although Canadian companies cannot yet sell their cannabis in the United States, they can still offer their intellectual property and market their expertise at operating very sophisticated production facilities that grow pharmaceutical-grade marijuana.
He said American companies have already expressed interest in the technology behind Tantalus’s new Vancouver-area greenhouse, which employs quality-control mechanisms that allow commercial-scale cannabis production using a fraction of the energy and water typically needed.
Brendan Kennedy, CEO of Privateer Holdings, a Seattle-based private-equity firm that has several cannabis companies, said he sees opportunities for Canadian firms to license their brand to local American producers. He added that Tilray, a Nanaimo, B.C.-based medical grower owned by Privateer, will continue to pursue export and partnership opportunities in Australia and European countries, where medical marijuana is closer to becoming legalized nationally.
All producers agree that the question is not if, but when, the United States will craft federal medical and recreational cannabis laws.
Mr. Kennedy said he goes to Washington two to three times a year to lobby Republican politicians open to embracing the regulation of a substance requested by millions of their constituents.
“That’s where I feel I can change opinions and that’s where I can be most effective,” he said.