Licensed holders (LHs) have had the ability to produce and sell recreational cannabis since October 17th, 2018. However, despite expectations of continued profit and bottomless pockets of investors, many producers, and their investors have suffered. The network of authorized cannabis retail stores has not grown quickly enough to reach consumers, meet demand, or completely curb the illicit market, yet. There is a fundamental disconnect between the federal, provincial, and municipal levels of government where cannabis rollout is concerned. It’s time to have a conversation about how legal cannabis sale transcends every level of government and why this looks much more like an argument than constructive discourse.
Assessing the Challenges
There are several key areas that illustrate the difficulty in understanding the current rules and regulations surrounding legal cannabis. To begin, the federal government allows for legal possession to persons aged 18 years or older, yet the provinces remain free to set their own minimum legal age for use. For example, Quebec, the second-most populous province, bans the sale of cannabis to those under 21 years of age. The rest of the provinces have set the minimum age to 19 years old.
There are also the provincial cannabis retail store licensing differences to consider. Most provinces in Canada only allow stores run by the province to sell cannabis, but in others, private owners are at times limited to acquiring property at inflated prices from a limited selection and to then upgrade their stores with the required security, which in some provinces are not clearly defined. Private owners in these provinces then must apply for licenses with costly application and renewal fees — and this is in addition to the property taxes. As it happens, the latter case applies to Ontario, by far Canada’s most populous province with some 14.5 million inhabitants, and by far the largest cannabis market in terms of province. As of April 2020, there were only 25 shops in Ontario and the biggest competitor to the licensed cannabis retail stores (besides the illicit market) is the provincial wholesaler. The Ontario Cannabis Store can sell cannabis for less money than private retailers and they offer same-day/next-day delivery.
Indeed, Health Canada has been effective at ensuring consumers have access to the safest products, but safe is not synonymous with quality. The craft, micro-cultivators that produce the highest-quality, small-batch products have struggled to get their products to market as they cannot obtain a sales amendment from Health Canada without first having applied for and been issued a processing license, and as a result often have to lean on many of the other big LHs to assist with the packaging process to get their flower to the adult-use market in the interim, which cuts into their margins considerably. This landscape so far has made market access for smaller cultivators more difficult overall.
Increasing Risk
The cannabis industry has become a much riskier proposition for new entrants, who will have to raise an estimated 1.5 million before they can even secure a Health Canada micro-cultivation license at a site that would be robust enough to mature a standard license one day. Planning with any less in the bank would typically mean cutting corners and potentially creating unwanted compliance issues down the road during audits and inspections. To address such risks, cannabis market participants should either have supply agreements or letters of intent with existing licensed holders or applicants, which can be difficult for companies that do not yet have a cannabis license from Health Canada in hand.
The Goal Posts Are Moving
We coasted through the pandemic to October 2020, and we hit the end of the 12-month mark transition period with five provisions in the Cannabis Regulations being enacted. These changes include:
- No “oil” produced in compliance with the previous regulations can be available for sale to the public;
- All microbial and contaminant testing must comply with intended use;
- Cannabis sold by the license holder must comply with current label requirements and health warnings;
- Only one immediate container can be used for cannabis products; and
- Flower and seed products must include equivalency factors on the label.
Notably, Health Canada has said in a recent communication to licence holders that they will not enforce a select section of the provisions until March 31 of next year.
Though items three to five are relatively minor changes, enforcement to points one and two are going to have major impacts on cannabis processors by way of new labelling and packaging and testing specifications respectively. In addition, the new product notifications that must be submitted to Health Canada invoke a 60-day waiting period — if this needs to be again submitted as some products are reclassified then that is two more months the product will sit on the shelf before hitting consumers.
Marketing Products
Budtenders need to be extremely careful what they say and how they say it. One of the main regulatory issues surrounds packaging and marketing content. Health Canada is very strict on product health claims even where there is significant anecdotal evidence to suggest therapeutic benefits. This regulation affects both the license holders and budtenders in retail stores. Patrons looking to sleep better or treat arthritic ailments can only be generally directed to product categories. Even citing an experience of another patron with a similar issue and perceived success is non-compliant and could lead to serious penalties.
Still, cannabis-derived products have no shortage of market momentum. Cannabis 2.0, the term that refers collectively to cannabis-based drinks, eats, and derivative products, is attracting interest all over the world and especially in Canada. Despite the advertising and promotion restrictions, LHs have been credited with being very creative in their product brand names using terms like “Night” or “Enlighten” to describe an inference or possible use case.
The Right Price
A major obstacle for the legal cannabis market right now is that regulations differ from province to province in Canada — and from state to state in the U.S. Canada has not decided to regulate recreational cannabis in the same way it does tobacco or alcohol, from cultivation to final sale. For example, bars are not required to report how many bottles they have in their fridges every week. We have yet to see legislation for consumption lounges and how those will be framed considering they will have to adhere to the Smoke-Free Act, at least in Ontario, and how special permits will work for festivals and special events. There is still plenty of time to figure this out during the pandemic, and hopefully, by the summer of 2021.
The consumers’ behaviour remains just as predictable as the regulators; making a viable business plan has never been so difficult as it has in the wake of legalization. The fact that the regulatory processes are moving in step in the U.S. and on both sides of the Atlantic means that competition will be high, as market dynamics are unknown and it’s unclear how well even the best-placed players might compete. What has been often spoken about throughout the industry is Health Canada’s protectionist approach to Canadian cannabis. To date, there have been minimal instances of approved importation of cannabis and no permits approved outside of medical, testing, or research purposes — ever. Whether the conversation is about CBD, THC, or locations such as the U.S. or Columbia, the only legal way to move those products over the border is from licence holder to licence holder (and certainly not to an individual) and with a Health Canada Import/Export Permit. These permits are transactionally based so each exchange would require its own separate permit. If ever presented with a business opportunity that depends on the scalability of importation or exportation of cannabinoids, do not walk, run. This model does act as a fail-safe to our industry, when the U.S. legalizes federally, which is promising based on recent results from the federal election. And thankfully, we will likely not see the same crash in prices per gram that the U.S. is seeing, which is pennies per gram in some states, at least not for a few more years.
Pharma’s Slow Roll Out
With all of the anecdotal evidence from users about the benefits of cannabis, some may wonder why there have not been any associated health claims made yet. Why can producers not label CBD products as “helps you sleep”? There’s a good answer. Marketed products that make a health claim require Health Canada approval and issuance of a Drug Identification Number (DIN). To acquire a DIN, clinical trial research must be done on the product to support this claim through safety and efficacy data. The application and review process are extensive and can be fairly onerous. Still, pharma is an industry that is no stranger to scrupulous record-keeping and rigorous quality practices. However, companies producing and selling cannabis products with approved health claims have been slow to roll out in the cannabis sector. Why is this? Despite the different licences they might consider applying for, such as a cannabis processing licence or cannabis drug licence, which are both compatible licence types that can be held at one facility, there is an ongoing confusion about which licence applies based on a company’s specific activities. These range from what they can produce and sell, how they label and market, and which businesses that they can buy from and sell to — and they all present serious challenges.
One of the most, if not the most, significant challenges for a pharmaceutical company entering the cannabis industry remains to be the cannabis licensing process. From an activation energy perspective, it takes a fair amount of inertia to overcome the momentum required to change direction to accommodate the challenges in adapting to cannabis-specific regulations in an industry that has been relatively well established for decades. Imagine telling a pharma facility to install a cannabis cage in a level 9 vault because Health Canada requires cannabis to be physically segregated from non-cannabis products. Compounds that have an illicit street value of 10x cannabis have less nuanced storage requirements. Moving into the cannabis space means making improvements to already robust physical security measures, separating areas that are designed to be used for cannabis, limiting employee access to those who are directly manipulating the cannabis, and creating extensive security clearances that go all the way up the corporate flagpole. As many pharma companies have a base in the U.S., several officers and directors would be required to seek these clearances. In a landscape in which cannabis is not federally illegal, such as the US, there are few in the pharma space that are comfortable with the potential risk.
Achievements and Improvements
Health Canada has attempted to incite a strong legal cannabis regime by including individuals from the unregulated cannabis market in the regulated commercial production system. For example, those who have previous cannabis-related offenses in their background may be allowed to obtain security clearance and bring forward their practical knowledge and experience to benefit the legal industry.
Health Canada has also made allowances for “sick genetics” to transition to the legal regulated market. “Sick genetics” is a term often used by master growers to describe the elaborate process of selective breeding of cultivars of cannabis for the expression of desired physical or chemical traits. These traits have led to plant genetics that are typically characterized by high levels of THC and the ability to thrive under their unique growing conditions.
During the application process, applicants can submit a one-time Declaration of Starting Material. This declaration provides a channel of preferred phenotypes of cannabis bred over decades to enter Health Canada’s regulated channels. It contains a list of the type of starting material, such as plants and seeds, as well as the quantity. The advantage is clearly that the new licence holder does not have to declare a source. Once these new plants and seeds are declared and brought in, they will be part of the federally regulated channels and can be sold to other licence holders.
Cannabis legalization has achieved the goal of increasing consumer access to quality products and accurate information about the levels of THC and CBD being consumed. These details were not available before, and they make for a healthier and safer way to enjoy cannabis.
The regulatory allowance of various product formats has also been positive for the industry, and instrumental in curbing the illicit market. Encouraging alternative methods of cannabis consumption can allow more consumers to learn about the rich character of the cannabis market and understand the different ways legal cannabis can be enjoyed in a safe manner.
While there is still work to be done in demystifying legal cannabis regulations to the regulated parties and broader community, discussing and agreeing upon the areas where the regulatory landscape can be improved, and implementing change, will allow the industry to begin keeping pace with consumer demand.
