The last four years have been a whirlwind for the cannabis sector; especially for me. There has never been a birth of an industry quite like cannabis. Maybe in 2030 when magic mushrooms finally get decriminalized. But even when (if?) that happens, it won’t have the medicinal backing that cannabis has today. Cannabis has been the long-awaited ingredient that has been banned for rather uncertain reasons, despite its commong use. This article is my personal musings in the space, please interpret them as such.
I remember in 2013 when one of the first LP’s (then a client of NHP Consulting my other firm) approached me about helping them with a cannabis licence. We weren’t ready, we declined the project. Over the following six months, and after they were one of the first companies to achieve a production licence, I began seeing how fast this industry was growing. I have always been a passionate believer in herbal medicine – and an avid gardener – but this was an eye-opening moment for me. We retooled our team, based on pharma and health products, to get to work on cannabis licensing. We were one of the first firms to offer this.
From 2014 to 2015 there was a lot of anxst around how many companies Health Canada would license for cannabis production. There was a flood of applications, many from the former MMAR program, who were refused. Towards the end of 2016 the level of sophistication grew among cultivators, and we were seeing a new trend in applicants.
This was the first “race”. In those days, it was certainly a race to get to the finish line – and the finish line in those days was the cultivation licence and taking the company public. There were only a handful of licensed producers, and they were soaring. In late 2015, Justin Trudeau was elected as Prime Minister, and who had a platform of cannabis reform – to legalize the medical and adult-use cannabis market. Trudeau’s government created a new industry almost overnight, and within a matter of months our office was flooded with inquiries.
In those days, there seemed to be a special secret in achieving an LP licence. After all, very few companies were awarded this. Those that did, demonstrated competencies in quality assurance and security. While there were few (if any) firms providing robust quality assurance programs for cannabis, security was being led by David Hyde & Associates, a long-time industry colleague of ours.
Fast forward to 2018 when adult-use cannabis is being entrusted with the provinces for distribution and retail, opening a very large door to mass market consumption. Ontario and Quebec, two of the largest markets in Canada, placed their bets on crown corporation models of retail. Ontario, after all, is the largest single purchaser of alcohol in the world, and cannabis made sense to follow suit. However, Western Canada (especially Alberta) was moving towards a private retail model. At the same time, as of late 2017 Health Canada started accelerating its LP licensing activity and we started seeing many more producers come to market. Also in late 2017, the Government of Canada announced its new framework for adult-use cannabis sales – which was a groundbreaking (and bold) proposal for allowing the production, distribution and sale of cannabis in Canada. For the first time in global history, a G7 nation was setting the stage for a legal, national, and privatized cannabis industry.
So, it was a big deal getting to the LP stage for a long time. It drove late-stage applicant valuations (insane numbers) and our clients were being hunted by investors. Selling an application for $5M seemed like a low offer in those days. And given there were only 100 or so late-stage applicants, the investor world was in a flurry to discover who these applicants were. For the most part, they remained invisible and hard to find. These were entreprneurs by and large who (somehow) gathered some initial funding together to get their application and initial construction underway.
Since the Fall of 2017, however, this race has slowed down. Health Canada has licensed many more LP’s, driving down the valuations of late-stage applicants. Apparently getting to the LP stage was becoming less valuable. At the same time, large LP’s such as Aurora and Canopy were making strategic acquisitions raising more equity to become “super-LP’s” believing the future of the industry was about market dominance. Perhaps they’re right, but this isn’t decided yet.
It should be clearly noted that now the OMC is not capping the number of licensed producers in Canada (even despite the recent shyness around licensing more companies). Technically they never were, but there were apparently concerns previously around over-supply of a previously-scheduled narcotic. While the government does not want to encourage excess supply, it is also struggling with how much supply is actually enough. Nobody knows. I don’t care how much market research is done, nobody really knows. If the goal is to stamp out the black market (the #1 objective of the Trudeau government), there is a great deal of debate amount supply-demand these days.
Today, there is a new cannabis “race” – supply agreements with resellers. In 2014-2015 the competitive game was around securing the licence – permission to grow. Today, the race is more about securing supply agreements with resellers including the crown corporation resellers such as Ontario and Quebec. But it’s also now (very recently) about the supply agreements with private retailers. A great example is National Access Cannabis (NAC), a publicly traded clinic/retailer which CCI supported in achieving their master licence in Manitoba. For perhaps the first time in Canadian history, here we have a private enterprise needing to negotiate private supply agremeents with the LP’s. There are many others besides, many to be determined. But the new “race” in 2018-2019 is now around supply. Is there enough product to go around, and who gets what supply?
Right now, from what we can see, there isn’t enough supply for 2018. So few LP’s have enough supply to direct to the adult-use market, and/or they aren’t risking their medical cannabis business to redirect more product. I believe it will be like Target launching stores into Canada, with empty shelves and consumers left scratching their heads.
If I had to guess, I would predict that 2018-2019 is going to be a huge shock to the industry as to how much product is needed. We’re talking about a globally consumed product that is in high demand and which is now suddenly legal. The “race” of 2018-2019 is definitely going to be around supply agreements between producers and resellers.
Fast forward to 2019 and 2020, when there’s enough supply of dried flower – and when there are 500+ licensed producers keeping their lights on – and the regulations allow for finished products. My prediction is that most consumers will drift away from the dried flower, and will prefer other dosage forms than smoking/vaporizing. Cannabis oil is already outpacing flower in sales, which is a clear marker of consumer trends. Imagine when consumers can walk into a pharmacy or cannabis shop and purchase an oral cannabis product. Think cannabis low-dose chocolates (alternative to wine), infused beverages, baked edibles, and other discrete consumables. Never in the history of our culture will there have been a product as discrete and easy to consume as cannabis finished products.
We’re seeing some early signs of the gear-up right now. My other company, NHP Consulting, has licensed over 66,000 health products since 2004 – a pedigree no other firm has in Canada – and which will play a strong role in the new cannabis finished products space. Right now, we are getting inquiries from many (if not most) of the licensed producers regarding how they can start manufacturing cannabis health products. This is the new “race” of cannabis, beyond the LP stage (yesteryear) and supply agreements (today). For the very talented few growers out there who are phenomenal at growing exceptional bud, the ultimate business end for the LP’s right now is to develop, formulate and manufacutre cannabis finished products that stand apart in the crowd. The market is wide open right now. There are no products yet. Of course, getting into the finished products space requires different tiers of facility (and product) licensing, which are barriers to some, but opportunities for others.
It makes me wonder what the next “race” will be. I’m thinking it’s edibles, which in my opinion need a lot more research and policy development before legalizing. Maybe that’s 2021. After that? Cannabis lounges? Cannabis restaurants? Cannabis vending machines? Hard to say. But the next four years are going to be amazing to witness, no matter what the future holds.