Canada: Cannabis: A Budding Canadian Industry

Last week, we covered EY's recently released report (the Report) surveying the bourgeoning cannabis sector in Canada.

The impending legalization of cannabis has weighty implications for the Canadian economy, but may also impact the global markets more broadly. Capital markets, the jobs market, mergers and acquisitions activity and intellectual property, among others, stand to be significantly affected.

Review

Following the most recent federal election, a task force was created to report on the legalization and regulation of cannabis. This task force delivered its report in November 2016. Shortly thereafter, on April 13, 2017, the federal government released the proposed Cannabis Act (Bill C-45) to legalize the production, distribution and sale of cannabis for recreational purposes, which largely implemented the recommendations of task force in its 2016 report. The target launch for Bill C-45, subject to parliamentary approval is slated for July 1, 2018. Oversight of the industry will be jointly administered by the federal and provincial governments. The federal government will oversee production, packaging and labelling, and licensing matters relating to cannabis while the provincial government will have domain over distribution and retail sales.

Challenges

The Report identifies and discusses two major barriers for the upstart cannabis sector:

• Unclear regulatory environment: The legislative framework remains unclear and the timelines for implementation and enforcement of Bill C-45 are uncertain. The Globe and Mail recently published an article discussing potential roadblocks to the proposed launch date of July 1, 2018, specifically noting that Bill C-45 may require more time for deliberation in the Senate, which could effectively push existing timelines back.
• Capacity crunch: A protracted licencing approval process has led to concerns over whether there will be sufficient licenced producers, with adequate capacity, to meet demand once legalization is formalized. Production capacity will need to catch up in order to ensure that the predicted supply shortage is addressed.

Opportunities

The Report fleshes out five key themes that represent potential opportunities for companies in the cannabis space:

• Strategy and operations: Similar to other industries, cannabis companies will need to foster and sustain competitive advantage, tap into economies of scale where possible, differentiate offerings, maintain stable supply chain management and effectively capitalize on domestic and international opportunities. Branding and marketing initiatives will also require particular attention and will need to be tempered by stringent regulatory constraints mandated by the legislation.
• Technology and innovation: Given its broad application in the modern economy, technology and innovation-related opportunities can be amorphous, however, three areas primed for significant attention by cannabis companies include: 1. Improvements in cultivation and processing, 2. Improvements in extraction to increase quality and reduce waste, and 3. Improvements in the variety of delivery methods and speed of activation and metabolism of cannabinoids in the human body.
• Investment strategies: Allocation of capital to build or improve facilities and maximize operations represents one of the keys to success for companies in the cannabis sector. Attracting and retaining top talent will also shape the ability of companies to maintain growth, remain competitive and take full advantage of potential prospects.
• Consolidation and competition: A high barrier to entry in the cannabis space is the up-front investment required to be competitive. This front-loaded investment, coupled with the slow licence awarding process to cultivate and distribute cannabis, may inevitably lead to consolidation. This may lead to a relatively small but concentrated group of big players that pioneer the future of the industry.
• Customers and stakeholders: While there are normative and customary barriers to the nascent cannabis industry, opportunities abound to de-stigmatize the consumption of cannabis and shape market sentiment to drive market opportunities.

Conclusion

Legalization of cannabis appears to be around the corner. While many question marks relating to specifics of the industry remain, Canada is primed to play a major role in legally bringing cannabis to market, all the while engineering a new industry that was unthinkable in the not-so-distant past. The final picture that the legislation takes is still up in the air, and stakeholders will need await further certainty to react optimally, but legalization appears to be here to stay and the implications for the Canadian (and perhaps global) economy are anything but burning out.

The author would like to thank Peter Valente, Articling Student, for his assistance in preparing this legal update.

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