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The professionalization of pot is well on its way to becoming a major game changer

pot factory
 

Written By Miroslav Tomoski

Hovering on the edge of a major paradigm shift for decades, cannabis is now just one year away from entering a new era of legal recreational use in Canada. For the thousands who have been stigmatized through prohibition the new regime will find them standing on the right side of the law for the first time since before the Great Depression. According to a 2017 Globe and Mail/Nanos Research poll, public opinion has shifted overwhelmingly in favor of legalization with 68 percent of Canadians agreeing that a regulated legal system is preferable to the black market. The government’s announcement of a bill to regulate consumer sales and an already booming medical system have paved the way to a more professional face for pot. A face which is now attracting a wider range of consumers and drawing new investment on a global scale.

As Cam Battley, Executive Vice President of the medical cannabis giant Aurora, puts it, “People have come to understand that the days of ‘Reefer Madness’ type scares are over.”

With grow operations that would put cartels to shame, companies like Aurora are at the forefront of the transition from black market production to a legally-regulated system. These companies are also led by people like Battley, a scout leader, soccer coach, and a father who is sometimes referred to as the “squarest man in the business.” But his position as an executive at one of Canada’s largest licensed producers is indicative of a major shift in attitudes toward the industry.

“When I first got into this sector I was hesitant to talk about what I did,” Battley says. “These days I’m not hesitant at all, in fact parents from my scout troop and soccer coaching will take me aside and will talk about how things are changing.”

 
This is the new cannabis and it wears a suit on the floor of the TSX.
 

Battley’s experience is just one among a greater culture of openness around cannabis. It’s a new normal in which Jon Liedtke, Director of the advocacy group Cannabis Confederation of Canada, found himself speaking about investment opportunities with family at Passover Seder.

“I believe the culture is changing,” Liedtke says, “it’s becoming more professional due to legalization and regulations.”

That once feared plant is now an ordinary part of Canadian life and culture as the country has taken its time to nurture a steady transition for its black market. Canada has cracked the code with a world class medical cannabis system and the commercial bedrock of ancillary businesses which are lying in wait for a new legal structure. Brands like Tokyo Smoke, a retailer in cannabis-related accessories, which caters to the sophisticated smoker covering everyone from soccer moms to the average millennial. Indeed, everything down to the use of the plants biological name – cannabis – which most companies have adopted in favor of stigmatized black market slang is aimed at winning the hearts and minds which foster business relationships that have made legalization possible.

Making Friends with the Man

The transition has not been easy and the new law which is set to take effect on the July 1, 2018 will surely have some kinks to work out. After all, the business has been operating underground long enough to establish its own culture and expertise – all of which will have to be brought to the surface in order for a successful legal system to work.

“Canada has a rich and robust $8 billion in annual revenue black market. And they need to give consumers a reason to turn away from that market,” says Brendan Kennedy, CEO of Seattle-based Privateer Holdings, one of the first global investors in the cannabis industry. “It’s about bringing people out of the shadows and into the light, elevating the conversation, and creating jobs and opportunities within this new legal system.”

Nearly a decade ago, Kennedy found himself at a crossroads between the financial industry and what he saw as an excellent investment opportunity. Inspired by what he considered to be the inevitable end of prohibition, he went on to explore the world’s cannabis industry traveling to Canada, Jamaica, Israel, and the Netherlands before returning to the US to launch Privateer.

“Banks are typically not first movers,” says Kennedy. “It’s about establishing relationships and trust so that investors realize that companies like ours exists and people like us are part of this industry and that we aren’t the ubiquitous cliché that people picture.”

Today that industry’s ties to the world of finance have expanded beyond the private investment of a few brave firms to publically-traded brands on the Toronto Stock Exchange. On April 5th, the TSX welcomed the world’s first cannabis themed Exchange-Traded Fund (ETF) courtesy of Horizons ETFs. This new bundle of stocks is known as Horizons Medical Marijuana Life Sciences (TSX: HMMJ) and is meant to offer a diversified and more secure method of investing in canna-businesses.

While the financial industry still considers it something of a volatile sector, those who know the business understand that cannabis consumers don’t always follow the trends of the market. “It’s a high growth industry that may also be countercyclical and immune to larger macroeconomic trends,” Kennedy says.

Uncertainty remains for those who are unfamiliar with a business that has spent nearly a hundred years in the shadows. Though as a medical and consumer product, the demand for cannabis has a tendency to be inelastic and consistently higher than its supply, which makes its producers excited to see their product breaking some major institutional barriers.

“When you create an investment vehicle that your average investor can participate in without having to choose the individual stock, and investors are able to gain exposure to the industry in a more diversified yet simplistic way it’s a really important step for the industry,” says Aaron Salz, Chief Financial Officer of Tokyo Smoke.

Since its initial launch HMMJ has hovered at around $10 after experiencing a spike—as most cannabis stocks do—around the unofficial marijuana holiday of April 20th. And while the hype around 4/20 has passed, many investors still see this as an opportunity to get in on the ground floor for what might someday be household brands.

“What it comes down to is people have an opportunity here to purchase huge amounts of stock in Bell or General Motors or IBM at the beginning of their days,” says Liedtke, who is also the co-owner of Canada’s largest cannabis lounge, Higher Limits, in Windsor, Ontario.

Much more than a basket of Canadian companies, HMMJ is a global fund which Liedtke expects to offer the best that the business has to offer from around the world.

 
pot factory worker
 

Catching up to Canada

Yet before cannabis stocks go truly global the rest of the world has to catch up with Canada. Today, only four of the 14 companies listed on HMMJ are based outside of Canada. Among these is International Cannabis Corp, a company based in Uruguay which established the first nation-wide legal system in December, 2013.

Many countries are still hesitant to take that step and are waiting on the sidelines until the Trudeau government can prove that it works.

“What the Trudeau government has done is they’ve legalized cannabis the only way that they could. They had to go over the top in terms of restrictions and regulations because they had to be able to mitigate the voices of their opponents,” says Liedtke. “It’s restrictive, but it’s not restrictive to the point that people can’t get involved.”

For Canada’s neighbors to the south, what seems like a leap forward for several states has been stifled by the fact that cannabis remains illegal federally. The opposing state and federal laws have left American canna-businesses to operate within a grey market that limits growth. “In the US it is still extremely nascent,” Kennedy points out, “Things that are typical check-in-the-box items for entrepreneurs are much more difficult. Whether it’s hiring a law firm or an accountant or getting insurance coverage.”

Operating largely through cash transactions, the eight American states and the District of Columba that have entered the world of legal cannabis have done so in such a way that makes it difficult to pin down a consistent American model.

“It’s definitely more of a wild west in states like Colorado where there are hundreds and thousands of growers and distributors and they’ve had to reel it in” says Salz, whose company also operates in the United States. “Canada is doing the opposite and starting with a tightly regulated system that can be loosened over time.”

With American companies on a tight leash and a new Justice Department headed by vocal pot opponent, Attorney General Jeff Sessions, Canadian companies have been given the unique opportunity of a head start.

The Advantage of Canadian Capital

The Canadian approach has allowed its companies to professionalize rather than focusing on survival by navigating legal loopholes. It’s an inside-out approach which has offered unprecedented access to institutional channels like the financial backing required to launch a successful business.

“The creation of shareholder wealth is simply undeniable,” says Battley. “When I joined Aurora in 2016 our market capitalization was about $70 million, today it’s about a billion and we are listed on the TSX venture.”

Canada’s system has been a prime example of the industry’s potential if it’s allowed to operate within a free market structure rather than the single producer government-led programs in the countries like Netherlands and Uruguay. It’s a model that the black market has already proven can work and one which the legal system has embraced.

“The genius of that is what has unlocked the economic potential,” says Battley, “because there are now 43 licensed producers. There is competition and competition drives innovation.”

With over 160,000 medical patients in the country—growing at a rate of 10 percent a month—and the recreational industry on the verge of legalization, the legal market is expected to bring in sales of $20-30 billion annually. (Though it’s difficult to predict just how much potential there is since a legal market on this scale is a world first.)

Still, Canadian companies have a history of giving way under international pressure. Companies like Nortel and Blackberry were pioneers of their day before collapsing under the competition of international giants.

“The question will be whether or not Canada is able to seize this opportunity,” says Kennedy. “If you look at the 80s and 90s I would have said the same thing about the Netherlands. In the 2000s, Spain and Jamaica had their opportunities as well and didn’t capitalize on them.”

But cannabis is not the tech industry and Canadian producers are the world’s cannabis giants; poised to grow stronger with the advantage that forward thinking law makers have given them.

“I think you might even see the reverse of what happens in Canada,” says Liedtke, “which is Canadian industries moving out of Canada and setting up offshore operations and bringing that wealth back.”

 
pot factory 2
 

Canada’s Going Global

In fact, that international expansion has already begun. In addition to blazing the trail in the financial sector, Canada has become the first country to export their businesses around the world.

“We have a significant head start because we have the regulatory system in place and other countries do not,” Battley insists. “We’ve been able to access the capital that we need to grow and to grow quickly, and to spread out beyond our origins into other areas and other jurisdictions.”

Aurora has established international relationships with companies as far as Australia in order to conduct research on and cultivate medical cannabis. Other Canadian companies, like Tilray, a BC-based medical producer owned by Privateer, have hosted governments from around the world and have been readying themselves for the legal market in Germany since the summer of 2016.

“You’ll see several other countries in South America like Uruguay that will have a lower cost of production,” says Salz, “but when it comes to a sustainable advantage for Canadian companies it all comes down to the intellectual property that we have a head start in developing and that are already being exported around the world.”

With licensed producers taking on a massive scale of production, Canadian companies may grow so large that they become staples of the global industry. New production facilities like Aurora Sky in Edmonton promise to be the world’s largest and most advanced automated cannabis facility with a size of 800, 000sqft. (16 football fields) and an output of 100, 000kg per year.

“The intention,” Battley says excitedly, “is to deliver the same level and quality of service as retail giants, such as Amazon.”

Yet the true potential is unknown since cannabis is about much more than what’s rolled in a joint or smoked in a bong. This includes the companies that will create extraction tech and automated production tech, the jobs created from retail shops, cafés, and even unusual hemp products such as toilet paper.

“Beyond recreational sales there is the full pet industry where there are 11 million cats and dogs in this country alone and they can be transitioned off many medications that veterinarians proscribe and onto cannabis,” suggests Leidtke, pointing out the far reaching potential of cannabis to have a truly disruptive effect.

All of which is to say that Canada is entering some seriously uncharted waters, while those at the forefront see clear skies ahead. “I’ve never operated in an industry where I’ve rooted so much for my competitors,” says Brendan Kennedy. So while the cannabis world’s eyes are locked on Canada, it’s time to show our friends abroad that a new world waits where the maps once claimed, “here be monsters.”