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Canadian Medical Marijuana

The Medical Marijuana ("MMJ") marketplace in Canada is growing so quickly that the regulators are having a hard time keeping up.

Hundreds of companies and individuals have applied to become licenced producers of MMJ, far more than Health Canada, the regulator had anticipated. To understand the industry understanding how the rules changed is vital.

The rush to obtain producer licences was triggered by a change in the MMJ regulatory scheme which went into effect March 31, 2014. Prior to this change Canadians who required MMJ had three options to obtain the MMJ they needed.

  • produce their own under a Personal Use Production Licence
  • designate a grower who was licenced as a Designated Person Production Licence
  • Purchase from Health Canada via a contracted private company

The majority of the 22,000 individuals who were qualified patients in 2012 produced their own MMJ or had a designated person produce it for them. Only 13% of qualified patients accessed their MMJ through the Health Canada program.

While this system seemed to work well for the qualified patients Health Canada became concerned about the potential fire, electrical and chemical risks posed by the small growers. It also became concerned with what it referred to as "diversion" where licenced persons took surplus MMJ and either sold it or gave it to non-qualified persons. Marijuana remains an illegal drug in Canada so "diversion" was seen as a significant issue.

The new regulations sought to bring the system under tighter regulatory control. First off, the old licences were scrapped and people who had been growing were supposed to destroy their stocks of MMJ as well as the means to grow it. (However, an injunction was granted March 21, 2014 which suspended the operation of the new rules until a constitutional challenge could be heard. At time of writing that injunction remains in effect.)

The new rules replace the "grow your own" regulations with a scheme which requires MMJ users to obtain a "medical document" from a healthcare practitioner to become a qualified user. The now qualified user then registers with a licenced producer which is required to verify the medical document. Once verified the qualified user is allowed to purchase the lesser of 150 grams or 30 times the daily quantity prescribed of MMJ.

This is designed to be a closed system where MMJ users have only one legal means of obtaining the MMJ they require. However, the system allows for many licenced producers.

The licencing process itself, notwithstanding the existing injunction, is in full swing. Applicants for licences have to meet Health Canada standards for quality assessment, cleanliness and pesticide use. As well, to prevent "diversion" licenced MMJ grow-ops must be in secured buildings. Security clearances and background checks for employees are required as is camera monitored tracking in and out of the product. As well, licenced growers are required to demonstrate the capacity to perform the record keeping such a system demands.

The market for MMJ in Canada is forecast by Health Canada to go from an estimated 40,000 qualified patients today to 450,000 qualified patients over the next ten years. Between an aging population and an expanding range of medical uses, demand for MMJ is predicted to significantly increase.

Based on a 1 gram per day per patient at a selling price of $7.50 per gram, the market in ten years is anticipated to be worth approximately 1.2 billion dollars annually.

Companies entering this market which are able to obtain licences and successfully operate compliant grow ops anticipate capturing a part of this growing market. And, as part of that capture they will be seeking to enroll qualified patients to their programs. Obvious first mover advantages have brought many companies to the start line.

Looking down the road, the expertise acquired in growing MMJ and dealing with a tight regulatory regime will be useful in the event that recreational marijuana use comes to Canada as it has to the American states of Washington and Colorado. In both these states, production and distribution of marijuana is regulated along the lines of the Canadian MMJ model.

A new listing in the medical marijuana space which I am following is FVPI - FV Pharma International Corp. More on this company in the next day or so. It seems to have hit a sweet spot.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.