Canadian pot growers eyeing medical marijuana free market

Now that the federal government has opened up the production of medical marijuana to the free market, scores of entrepreneurs have begun the race to vie for a piece of the billion-dollar pie in this new commercial industry.

171 individuals and corporations have applied to become medical marijuana producers

Businesses, especially medium-sized ones, will benefit from the federal government's new medical marijuana program that uses large indoor farms by licensed producers, Health Canada says. (Pawel Dwulit/Canadian Press)

Now that the federal government has opened up the production of medical marijuana to the free market, scores of entrepreneurs have begun the race to vie for a piece of the billion-dollar pie in this new commercial industry.

"This is a very rare moment when you start to look at the beginning of a brand new market space," said Anton Mattadeen, chief strategy officer of MediJean, a British Columbia-based company that has recently received a research and development licence under the new regime.

Starting April 1, 2014, the only legal source to obtain medical marijuana in Canada will be through producers approved by Health Canada.

Businesses, especially medium-sized ones, will be among the beneficiaries of the change, the ministry says.

Since the ministry made this announcement in June, 171 parties have applied to become licensed producers. Of these applications, 40 are from individuals and 131 are from corporations, according to the most recent numbers obtained from Health Canada by CBC News.

Under the old regime, which will be gradually phased out over the next six months, licensed medical marijuana users were able to grow their own cannabis or purchase from Health Canada's sole supplier, Saskatoon-based Prairie Plant Systems.

Since Health Canada started issuing medical marijuana in 2001, the number of users has grown exponentially from 500 to over 37,000 today. Health Canada forecasts that the number will increase to as many as 450,000 by 2024.

This rapid growth is one of the reasons behind the program’s overhaul — Health Canada says it has led to "unintended consequences" and "abuse" — but it also means the commercial industry could be worth $1.3 billion by 2024, according to the forecast.

Personalized pot

While interested players are hoping to tap into this potentially lucrative industry, critics such as the Medicinal Cannabis Patients Alliance of Canada and the B.C. Compassion Club Society say that the cannabis supplied by sanctioned producers will be more expensive than homegrown yields.

If sellers are to woo medical marijuana users to the new program, they can distinguish themselves by providing supply of better and more consistent quality, said Paul Grootendorst, an expert in health economics at McMaster University.

The quality of homegrown weed, he said, was "rather haphazard."

Samples of medical marijuana are shown at a health centre in California. Canadian pot growers will also be supplying more strains of cannabis with varying amount of cannabinoids under the federal government's new medical marijuana program. (Jeff Chiu/Associated Press)

Producers are also working on offering personalized cannabis with varying amounts of active ingredients, such as tetrahydrocannabinol (THC) and cannabidiol (CBD), to cater to specific health conditions.

"Sellers would want to distinguish their product from their competitors' product," Grootendorst said. "One way of doing so is to modulate their THC content to make it more attractive to users."

MediJean is one of the growers taking this approach. Based in Richmond, B.C., the company has just received a research and development licence and it is waiting for the result of its licensed producer application.

"If … you can provide [patients] with substances that really target their specific ailment, it's much better for patients," said Mattadeen.

When asked about competition, Mattadeen said he expects the market to be robust enough to have room for different types of producers.

"This could potentially be quite a significant industry,” he said. “So it doesn’t surprise me that there are over 150 different organizations that are interested in taking a look at it and becoming involved.”

Economies of scale?

In addition to better quality and more variety, switching to larger growers makes economic sense, according to Grootendorst, as the "mom-and-pop-ish" production under the old regime can be cost intensive.

Changing price of pot

Here's a look at the costs per gram of medical marijuana under the old and new systems.

Current price if buying from Health Canada's supplier: $5

Health Canada's projection of profitable private-sector price in 2014: $7.60

Projection of average price as market matures in several years: $8.80

Advertised price of products of CannaMed, the first licensed distributor in the new system: $9 to $12

Current estimated cost of black-market dried marijuana purchased on the street: $10 to $15

"As you get bigger, the cost per gram produced would go down. That should be another [piece of] good news for consumers," he said.

Health Canada’s cost-benefit analysis shows that dried marijuana will be selling for about $7.60 per gram in a year, but Grootendorst said the price could be lower as more firms enter the market.

However, for patients who require several grams of cannabis a day, buying from licensed suppliers will prove to be much more expensive than growing their own supply, according to Zachary Walsh, assistant professor of psychology at the University of British Columbia.

After the initial setup investment, the cost for someone to grow plants in their home is minimal, he said.

"They can harvest their own seeds and just keep replanting it," he said. "Those costs [such as fertilizers] are far less than even the low estimates for the new program."

Security, safety requirements

Health Canada offers a list of the approved licensed producers on its web site, but only those who have provided their consent to share their contact information will be made public.

Licensed producers must meet security and quality control requirements, including:

  • Employing a quality assurance person to approve the quality of dried marijuana.
  • Providing the production site location to local police and fire departments, as well as the local government.
  • Ensuring the production site has 24/7 surveillance systems.
  • Ensuring the site is indoors and not in a private dwelling.

These safety and security measures come at a price for growers, said Brent Zettl, CEO of Prairie Plant Systems, Health Canada's supplier for the past 13 years.

The company and its subsidiary, CanniMed, received the first two licenses from Health Canada last month to produce medical marijuana as the new regime kicks in.

Zettl said making medical marijuana affordable should be a discussion for the politicians, not entrepreneurs.

“The debate about affordability is an evolutionary thing. We can see probably in time those folks who want to have access should be having some form of compensation, but that should be more of a political discussion,” he said.

Health Canada's new regime allows dried marijuana to be sold at whatever price the market will bear, leading many to label it a free market. But what can businesses and entrepreneurs really expect?

"It's a modestly free market,” UBC's Walsh said. “It's still going to be pretty tightly regulated, but it's a freer market than the single monopoly in production that was available before.”

With files from Canadian Press


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