A legal mega-grower and a small dispensary owner face off over marijuana legalization

A legal mega-grower and a small dispensary owner face off over marijuana legalization

Last month, Prime Minister Justin Trudeau’s government gave the world a look at the first draft of Canada’s Cannabis Act, a piece of legislation that would, if enacted as written, legalize marijuana for recreational use throughout the country. Beyond the obvious implications for marijuana users—who, for the first time in living memory, won’t have to risk criminal prosecution to get high—the act will also reshape the way marijuana is grown and distributed in Canada.

Currently, the only legal way to grow or sell marijuana at commercial scale in this country is to become a “licensed producer,” or LP. Gaining LP status is an arduous process. Would-be pot moguls have to make a lengthy and expensive application to Health Canada. Almost every application is either rejected outright or returned as incomplete. The 43 producers that have managed to win Health Canada’s approval are allowed to sell their pot only for medical purposes, and only by mail-order.

While licensed producers labour under all these government regulations, hundreds of unlicensed, illegal storefront marijuana dispensaries have opened across the country. Because these stores operate outside the law, they don’t follow Health Canada’s requirements.

The draft version of the Cannabis Act doesn’t specify what will become of LPs and dispensaries once legalization is in full effect. The details still need to be worked out in laws and regulations, both at the provincial and federal levels. Legal pot is bound to be popular and lucrative, and both sides are already manoeuvring to capture their share of a market that could be worth billions of dollars.

To get a sense of the state of the debate, we set up a conference call with two very different pot entrepreneurs.

Mark Zekulin is the president of Canopy Growth, which, through a network of subsidiaries, grows legal medical marijuana and sells it throughout Canada. Canopy is traded on the Toronto Stock Exchange (ticker symbol: WEED), and currently has a market capitalization of over $1.5 billion. Zekulin got his start in the cannabis industry as counsel at Tweed, Canopy’s flagship brand. Tweed is most famous for its high-profile branding partnership with Snoop Dogg.

Imre Kovacs is an entrepreneur who has had ownership stakes in a number of dispensaries, both in British Columbia and in Toronto. His venture capital fund, Quintet Ventures, invests in cannabis-related businesses.

 


 

Mark, you’re a licensed producer. Canopy has jumped through the government’s hoops and won the right to grow and sell pot legally. How do you feel about dispensaries?

I think you have to come back to looking at what Canadians want, and what serves them best. I believe people want regulated, reliable product and regulated, reliable distribution. People also want retail distribution sites. That is clear. And people want the option of going online and buying as well. I think as long as the customer has product they can rely on and feel good about—within that, there are a lot of good solutions.

We got our first look at the wording of the Cannabis Act a few days ago. What about it do you like?

I think it’s quite great. There are obviously a lot of regulations to follow, but I think the core points are good: an established, regulated system for production, putting the decision on distribution to the provinces so each can make the choice that is right for their communities. And there’s also a focus on things like impaired driving, which Canadians have clearly said is something of concern.

Imre, does the legislation do enough to protect the rights of people who are trying to sell pot out of storefronts?

The short answer is no, the legislation doesn’t address any of that, because the distribution question is going to be handed down to the provinces. The draft legislation really only speaks to production at this point. So far we don’t see much clarity on a plan to allow what people would call the “black market” to transition into the legitimate cannabis economy. People need to have a way to transition reasonably into a legitimate cannabis economy. Currently, that mechanism doesn’t exist.

The black market represents most of the cannabis industry in Canada. Those people are not going to just go away. A lot of them are generational growers, and they’ve got a lot invested into their businesses. The LP system doesn’t allow your average individual to participate, because of its very onerous application process.

Mark, do you see a place for smaller growers in the post-legalization world?

Certainly, I think there’s a place for a lot of producers. This week, we reached out and partnered with some of the smaller licensed producers in our sector to try to work with them and sell their products through our store. There definitely is a desire to have a lot of players come into the system. I think that’s healthy and I hope to see it happen.

It sounds like we’re in agreement on that. The concern is that the federal government hasn’t given any detail on the mechanism by which an illegal growing operation or an illegal production facility or enterprise could become legal, other than the LP application route. And that LP application route is just not feasible for 99 per cent of the industry. There are currently over 1,000 LP applications still in process. And the reason they’re still in process is because they’re very expensive to pursue.

I suspect we’ll see a much quicker pace of approvals. If you look at the past six months, you’re now seeing a few approvals come out at least every month. My take, from what I’ve heard the government saying in the last few weeks, is that we’ll probably see that speed up even more. How far that goes, I obviously don’t know.

I agree we’re going to see more LP approvals. But I also think there has to be a separate stream, other than the current LP application process, whereby an existing production facility or group can apply for some form of licensing. We need a separate application process that would be considerably less onerous, but still address health and safety concerns and maintain high standards. I think all of those that are currently LPs or LP applicants would agree that the existing standards for becoming an LP are hysterically high.

I just want to clarify what you mean by “separate stream.” Are you talking about a separate type of growing license for people who currently are producing cannabis outside the law?

A separate stream for the production of cannabis for recreational purposes, versus the production of cannabis that is going to be sold for therapeutic use. I’ll give you a hard example. Cannabis that is produced under the LP system has to be lab-tested by an accredited third-party facility. One of the things they test for is a bacterial count. Those tests don’t tend to differentiate between harmless and harmful bacteria. And this is a problem, because if you want to have an organic growing environment, or you want to have an environment where you’re not going to have to irradiate your product, then you run the risk of having higher bacterial counts. And there’s no evidence to show that that’s actually a health problem.

Mark, would it be reasonable for the government to relax some of these standards for the recreational market?

It is true, there is a large amount of testing we have to do on our produce. There are some patients who want products that are irradiated and some who don’t. I’m not sure that there’s anything wrong with the testing levels we have to meet, and I generally think we do have to operate to meet a high standard for the medical market. And I do think that that’s a standard that you want to still have for the recreational market. No matter what product you’re talking about, whether it’s cannabis or anything else, you want to know that there are certain standards in place. I’m not sure about separate streams for medical and recreational.

I’m not suggesting that there shouldn’t be high standards. I’m suggesting that the existing standards are hysterical. These are knee-jerk reactions. The reality is that cannabis has been used for generations and thousands of years, and it’s not poisoning people. These bacterial counts are forcing people to use pesticides to control infestations and moulds, rather than healthy, biological control.

We don’t use pesticides. We do use biological control agents. And while we irradiate some of our product, because patients want it, there’s a whole bunch that we don’t. There are a bunch of production standards I don’t think are necessary, but the overall point is that it’s good to have standards, and it’s good to have high standards.

Let’s use a farmer’s market analogy. I think we all like to go to a local farmer’s market and buy product that was grown on small farms, using organic growing philosophies, and enjoy the quality of that product. Cannabis is produce. It’s a plant. And there’s really no difference between cannabis and a tomato at the end of the day. And those tomatoes that we’re buying at the farmer’s market aren’t going through extensive tests, and they’re not being irradiated. Do you know what I mean?

I agree with you up until a certain point. I think the key point is that there’s a place for everybody. There’s a place for small growers, for large growers, and I think it’s a great idea for the system to be set up to allow all kinds of people to participate.

We’ve talked a lot about the production side of things. Let’s talk about retail. Imre, you run dispensaries. Mark, you sell cannabis legally online. What do you see as the ideal retail mix?

Ideally, independent retailers could sell products that come from many sources. You see that sort of model successfully operating in many other industries, whether it’s produce or other consumer goods. There’s no reason a system like that couldn’t be run safely. In fact, I would argue that it is currently running quite safely. Any issues with dispensaries are because of the legislation—not, generally, because of the dispensaries themselves.

If there are storefront dispensaries in the future, who should get to run them?

There have to be some sort of standards and licensing put in place for the distribution and the retail. If people can demonstrate their ability to operate by those standards, then there’s no reason why independent business owners and independent shops shouldn’t be able to participate in the market.

I fully agree. You need a system in place to control the people who are selling cannabis. Certainly, current dispensary owners should be able to apply, and I hope that our company will have the opportunity to apply. And there will hopefully be the correct number of distribution points to ensure Canadians will have access to the product that they want.

The draft legislation restricts how sellers are allowed to advertise cannabis. Mark, your company has been more focused on branding than a lot of other licensed producers. You’ve done partnerships with Snoop Dogg. Do you see the proposed restrictions as being reasonable?

In the legislation, they laid out some principles, and all of those make sense. You don’t want to advertise to children, you don’t want to promote irresponsible use, you don’t want billboards on the street. All of that makes sense. Now they need to take that and translate it into very specific rules, and that’s where we’ll see if they’ve set up the right system. What’s important to us is not about advertising or promoting the product; it’s about making sure that the customer has the right information to make that decision. Once they’ve walked into the place of sale, you want them to be able to make the right choice. You want them to be able to compare one brand versus the other. Proper branding leads to accountability for the product, which should lead to better quality. Whereas if you have all white labels, that’s not going to give the right incentive for people to have the best possible product to give to customers.

I think we’ve learned some lessons from the marketing that has happened around alcohol, cigarettes and prescription pharmaceuticals. We’ve seen that some of the kinds of marketing that was allowed to happen haven’t benefitted our society. I think we need to be careful about that. I’d also caution against a hysterical approach, because cannabis isn’t tobacco, and it isn’t alcohol. You can’t even talk about those things in the same sentence, because cannabis is so much more beneficial than it is harmful. But at the same time, I agree that we need to have standards for labelling, marketing and advertising, and we need to make sure that we’re not trying to market to kids. As long as there’s a fair and level playing field, I think we’ll see a natural evolution in advertising, and I do support that.

The draft legislation sets out some pretty harsh penalties for cannabis violations, up to 14 years in prison. Does that seem out of proportion?

If you look at the draft legislation, there’s actually much more severe implications than just 14 years in prison. Some of the punishments are calculated per infraction, per day—so there’s a chance you’d find yourself in jail for a really long time. The jail time is really out of line, considering that we’re now recognizing that cannabis isn’t as bad as people have been told it is for generations. Suggesting that people should go to jail for 14 years for something to do with cannabis doesn’t really fit where our values are at as a society. I view it as protection of corporate interests, rather than a protection of health and safety of society.

The government has stated what they’re trying to do, which is keep cannabis out of the hands of children—remove the criminal element. I think what they’re trying to do is set up a system that will provide what Canadians want, which is to know that any product they’re buying has gone through a particular system, has been grown to a particular standard, and they can rely on what they’re buying.

You want to set up a regulatory framework that incentivizes people. These harsh sentences anticipate that people are not going to respond positively to legalization and regulation as it’s being presented. It’s like the government is saying, “If you don’t play ball with us, then we’re going to crush you.”

One of the reasons the government is doing what they’re doing is that there will always be a supply and demand for cannabis. The question is how you get all of that supply and demand within a regulated system. And I think that’s the difficult task that is ahead of us for the next couple of years: to get to that point where this becomes a normal product.

I think it’s not jail time that’s going to help legalization and regulation to succeed; it’s the freedom of choice of consumers, and the ability of people to participate in that marketplace. There’s really not that much incentive to produce black-market product if you have a pathway to participate in the industry in a legal way.

If you could change one thing about the law, what would you change?

The one that comes to mind is just getting the right product balance. What we’ve seen thus far is that the current products that are allowed to be sold in our system—dry products, capsules and oils—will be allowed under the new system. And it appears the government will ensure new products come online over the course of time. The big piece of advice I have is: that has to happen sooner rather than later. There is a demand for a lot of cannabis products that goes beyond just those three things I’ve mentioned. I think it’s very important that we quickly establish the set of products that people are allowed to produce and sell, whether it’s vape pens or edibles or whatever it is. There is a need to get that into the system, because it will exist regardless. If you can’t do it legally, then people will do it illegally, which will defeat the purpose of what we’re trying to do.

I have to agree. That’s certainly one of the things that I would change. If you walk into a dispensary, you can get a cross-section of cannabis products. Most new cannabis users aren’t stuck on just smoking it. They want to vaporize, they want to use extracts, they want to consume edibles, they want to use convenient capsulized formations and topical creams and all kinds of different forms and things we haven’t even come up with or imagined yet. If you don’t have those things available in the regulated environment, then people will get them elsewhere. There needs to be a level playing field where everyone can address consumer demand at a high level of sophistication.