One morning in February, Nanaimo councillors and business leaders met in an industrial area about 20 minutes from the city’s downtown.
The building they stood before is nondescript. But, recounted Sasha Angus, CEO of the Nanaimo Economic Development Corporation, “It’s like a vault wrapped by Fort Knox wrapped in a castle.
“Cameras, vibration sensors, and a lot of time and effort,” he continued, describing the facility’s security measures. “There’s a vault that’s two feet thick with more vibration sensors. It’s about one level below a nuclear-missile silo.”
What all those precautions keep safe is one of the largest marijuana grow-ops in Canada: 60,000 square feet, with plans to scale up to an operation more than five times that size, according to a rezoning application that Nanaimo council approved last December.
Angus noted that the group was impressed by the facility, which is more akin to a pharmaceutical laboratory than your stereotypical marijuana operation. There are white walls, bright lights, and glass cages holding dozens of strains and thousands of plants.
“It’s incredibly clean,” Angus said. “Each room is designed with perfect climate control and all of the different pieces that you need to make sure you have the best-quality product for your patient.”
Asked if there was anything seedy about Nanaimo’s most respected citizens touring a grow-op, Angus noted that the company, Tilray, cultivates a medicinal product with a federal licence. He suggested that nothing separates it from any other legitimate business that calls Nanaimo home.
“We actually helped bring them to town,” Angus added. “They’re a great corporate citizen.”
Corporate may be the operative word.
Tilray declined requests for an interview. However, the company’s new CEO and a 25-year pharmaceutical veteran, Greg Engel, recently shared his thoughts on marijuana in an online essay published by the Huffington Post.
“Medical cannabis was grown in dangerous and unsanitary conditions without any form of oversight or standards to ensure consistency, quality, safety and integrity,” he wrote. “That’s changed under the new system as we are transforming the industry to be more like the pharmaceutical industry.”
Engel’s article ran under the headline, “Why I’m leaving big pharma for medical cannabis”. A look at B.C.’s authorized marijuana producers reveals the transition may not have been much of a shift.
The creation of an expensive pot oligarchy
On April 1, one year will have passed since Health Canada’s Marihuana for Medical Purposes Regulations (MMPR) replaced the previous set of rules. There have been public stock offerings, American investment bankers have entered the game, and buyouts and mergers have seen millions of dollars change hands.
Tilray is one recipient of 25 licences issued under the MMPR, which, in the words of Health Canada, “establishes the conditions for a secure and efficient system that provides access to marihuana”.
The MMPR requires that all 55,180 Canadians authorized to possess medicinal marijuana (as of October 2014) fill their prescriptions via mail order from federally approved producers.
According to Health Canada, 1,224 companies have applied since the introduction of the MMPR. Of those, 881 were refused or withdrew from the process. Meanwhile, about 320 remain under review.
By October 31, 2014 (the period for which Health Canada supplied data), 16 of the 25 companies licensed sold 1,400 kilograms of dried marijuana. (Nine companies can cultivate but are still waiting for final approval to sell.)
The government expects all of these numbers to grow. “The proposed MMPR would enable an entirely new industry to be created in Canada,” reads a 2012 assessment. That document estimates by 2024, the size of the market will expand to 450,000 consumers spending $1.3 billion annually.
In October 2013, the Straight reported smaller business owners warned Health Canada’s new system would create an expensive pot oligarchy. Now, they say that prediction is coming true.
Eric Nash has grown medicinal marijuana in Duncan, B.C., with an old Health Canada permit since 2001. But he’s struggled since the introduction of the MMPR, stuck doing consultancy work for other companies until Health Canada gives his company, Island Harvest, final approval to sell.
“Health Canada does not want small producers in the program,” he said. “It looks like we can’t be a piece of this industry as a small business, and that is really unfortunate.”
According to Nash, the most obvious proof of Health Canada’s preference for corporate growers is the startup costs associated with security requirements. “You can’t even get into it now for $1 million,” he emphasized. “It pretty much eliminates the ability for small business to take part.”
Nash’s estimate for security costs roughly matches numbers provided by everyone interviewed for this story. To grow marijuana in accordance with Health Canada regulations, businesses are spending $500,000 to $1 million or more before they can even begin to sell product.
Stringent requirements on matters like security and bookkeeping must be met on a continual basis. According to the government’s 2012 analysis, that will cost producers between $290,000 and $395,000 a year.
John Moeller is the cofounder and general manager of Broken Coast Cannabis, which also grows in Duncan. In a telephone interview, he told the Straight the struggle for his group (whose operation covers just 12,000 square feet, compared to Tilray’s planned 345,000) wasn’t so much financial as it was bureaucratic.
“The application itself was very large and very complex, with a lot of facets to it,” he said. “Writing and understanding it was a challenge in itself, and then you have to put it all into practice and build the facility accordingly. That is definitely not a simple thing for a small company to do. And it looks like it’s getting more difficult.”
Whistler Medical Marijuana Corporation founder Christopher Pelz is a fan of the new rules. Noting his company offers organic pot certified by the Fraser Valley Organic Producers Association, he argued regulation is what’s required to help clean the industry of unchecked pesticides and chemical fertilizers.
Pelz argued the most determined can make it, but he agreed regulatory costs will likely weed out most mom-and-pop shops.
“The evolution of the business after 12 months here [since the MMPR took effect] is showing that the capital costs are favouring the bigger companies,” he said. “What likely will start to happen is you’ll maybe see the bigger companies start to absorb the people that are in the lineup.”
A trend towards a smaller number of larger producers
Health Canada has long refused to grant the Straight an interview on the topic of marijuana. A bolded message at the top of its website on marijuana emphasizes the Conservative administration’s opposition to the medical applications of cannabis. “The Government of Canada does not endorse the use of marijuana, but the courts have required reasonable access to a legal source of marijuana when authorized by a physician,” it reads.
The B.C. Ministry of Finance declined a request for an interview on the taxation of marijuana. According to spokesperson Jamie Edwardson, Ottawa’s system dictates medicinal marijuana is taxed based on a person’s province of residence. B.C. does not collect provincial sales tax on medicines and, since marijuana sold under the MMPR is classified as such, the province is seeing little in the way of financial benefits from medical cannabis. (Marijuana sold for recreational use would be a different story. When the previous minister, Kevin Falcon, was in office, he shared his thoughts on pot’s potential: “The revenues are very enticing to this particular minister of finance,” Falcon said in 2012.)
The MMPR is presently in the courts, subject to a lawsuit that claims a prohibition on cultivation for personal use is a contravention of the Canadian Charter of Rights and Freedoms. John Conroy, the lawyer arguing that case, told the Straight a victory for his clients wouldn’t necessarily disrupt the business of Health Canada’s established growers.
“A lot of people make their own beer, a lot of people make their own wine—it hasn’t been a problem for the brewers,” he said. “I don’t see personal production preventing the development of the market.”
B.C.’s authorized growers have so far mostly decided to remain private companies. But a number of MMPR–licensed operators across Canada have gone public. A look at three Ontario businesses reveals the value of legitimate operations and a licence from Health Canada.
When in August 2014 Bedrocan Cannabis Corp. appointed a trio of former life-science executives to its board of directors and went public through a reverse takeover, the company’s stock price tripled, from 40 cents a share to $1.17, on the first day of trading. In October 2014, Mettrum Health Corp. debuted on the TSX and its stock price jumped from 15 cents to $2. And when Tweed Inc. named a former DelMar Pharmaceuticals executive to its board of directors, its stock recovered from a near low of $1.80, surging to $2.88.
Tilray is owned by Lafitte Ventures, a Nanaimo company that in turn is owned by Seattle-based Privateer Holdings. Privateer has made headlines for an influx of cash worth millions it received in January from Founders Fund, a major financial player in Silicon Valley run by PayPal founders Ken Howery and Peter Thiel.
Financing a number of B.C.’s other private marijuana operations is a group of investment bankers and entrepreneurs based in Toronto. According to the website of PharmaCan Capital, the group owns 100 percent of In the Zone Produce, which is located in the Okanagan Valley; holds a 21.5-percent stake in Whistler Medical Marijuana Corporation; and has the option to acquire a 25-percent interest in Evergreen Medicinal Supply, an MMPR applicant based in Victoria.
On the phone from Toronto, PharmaCan president and CEO Paul Rosen said investing in cannabis is just like investing in other sectors in which he’s had dealings.
“Marijuana as a black-market industry is probably very different from other industries,” he said. “But participating in the delivery of a regulated program where government is giving licences to companies—the fundamental principles that would guide a business to success or failure are highly relevant to the emerging legitimate medical-marijuana industry.”
Marijuana sellers in U.S. states that have legalized pot for recreational use have encountered trouble banking on account of federal laws that still outlaw the drug. But in Canada, Rosen reported, that hasn’t been a problem. He noted Toronto-Dominion Bank handles the money for two of PharmaCan’s marijuana investments, the Bank of Nova Scotia deals with a third, and Moneris Solutions processes credit-card payments. “We don’t have issues opening bank accounts at all,” he said.
Where does Rosen see the industry headed?
“There is a trend line forming towards a lesser amount of larger licensed producers rather than a larger amount of smaller licensed producers,” he concluded. “I’m quite confident Health Canada wouldn’t look credibly at any company if they were not larger in scale. I think the likely minimum capital to get a licence is measured in millions, not hundreds of thousands, of dollars.”