By Alice Tseng

On April 1, 2014, the new Marihuana for Medical Purposes Regulations (MMPR) supplanted the 13-year-old Marihuana Medical Access Regulations (MMAR). The MMPR overhauls Health Canada’s medical marijuana program by replacing a system of small-scale home growers with a commercial network of licensed producers. Although a recent Federal Court decision has temporarily exempted certain home growers from the repeal of the MMAR, licensed producers are now set to engage in the large-scale production, packaging, and distribution of medical marijuana to patients across Canada.

The nascent medical marijuana supply industry is expected to generate over C$1.3 billion in domestic annual sales by 2024. In addition, the MMPR contains import and export provisions that can potentially position Canada as one of the world’s top exporters of an increasingly legalized commodity. Despite these promising projections, the medical marijuana industry raises a number of difficult legal questions for industry, investors, health-care professionals and established businesses alike as they attempt to navigate an unfamiliar and untested regulatory landscape.

PATH TO COMMERCIALIZATION

The federal government took its first tentative step towards the regulation of medical marijuana 13 years ago with the enactment of the MMAR. The MMAR eventually established a program under which individuals authorized by Health Canada were permitted to grow their own medical marijuana, whether by themselves or through a designated person, or purchase directly from Health Canada.

That two-pronged program was riddled with problems. For one, the proliferation of small-scale grow-operations in residential areas created safety hazards and a high risk for diversion of the narcotic into the illegal market. Further, Health Canada’s own supply and distribution branch became increasingly expensive to administer as the number of program participants swelled. Stakeholders also complained about both the low quality of available stock and the high barriers to access, ultimately launching several court challenges that invalidated sections of the MMAR and kept the program in flux.

The new regime arose as a result of these challenges. In particular, the MMPR brings the supply and distribution system for medical marijuana closer in line with similar systems for pharmaceutical products by replacing in-home and government-subsidized grow operations with regulated commercial enterprises, and permitting doctors and some nurse practitioners to issue “medical documents” that allow patients to purchase designated quantities of medical marijuana from licensed producers.

The MMPR came into force on July 7, 2013 and was due to replace the MMAR in full by April 1, 2014. However, a recent Federal Court decision, Allard et al. v. Her Majesty the Queen in Right of Canada, has allowed certain home growers to continue small-scale operations pending the outcome of their constitutional challenge to the new regime. That decision is now under appeal.

IMPACT ON BUSINESS

The announcement of the MMPR regime in 2013 triggered a flood of licence applications and capital-raising activity. The current crop of licensed producers, which stands at 12 and increases on an almost-weekly basis, ranges from niche operations to sophisticated enterprises with sprawling production facilities and aggressive marketing strategies. One licensed producer is poised to go public on the TSX Venture Exchange after successfully completing a private placement with an investment dealer; several more have received funding from private equity investors.

The creation of a for-profit medical marijuana industry is likely to resonate through a number of ancillary industries, including security, software, equipment and logistics providers. These service demands will arise from both the normal course of business and the MMPR itself, which imposes stringent operational requirements on licensed producers.

LEGAL ISSUES AND CHALLENGES

Familiarity with the MMPR’s legal framework will benefit both investors and established businesses. In particular, businesses that are in a position to service the medical marijuana sector can ensure regulatory compliance or offer value-added service by familiarizing themselves with requirements under the MMPR. Similarly, it is important for potential investors to conduct appropriate due diligence into issues such as the likelihood of a licence grant (if the investment target is an unlicensed entity) and the prevailing legal landscape. Unexpected developments, such as the recent Federal Court decision allowing certain patients to continue growing marijuana privately for the time being, can undermine the commercial market and dramatically reduce the value of an investment.

The new medical marijuana regime also raises difficult questions for health-care professionals. By allowing doctors (and nurse practitioners in some provinces) to issue medical documents for marijuana directly to patients, the MMPR effectively turns health-care professionals into the new gatekeepers for the narcotic. Several physicians’ associations have spoken out against this enhanced role, citing efficacy and liability concerns. But others seem to be embracing the regulatory transition; over the past week, several physicians have announced plans to open specialist medical marijuana clinics.

Licensed producers themselves also face a host of legal issues and impediments. To start, Health Canada’s threshold approval requirements, such as the establishment of quality control systems and standard operating procedures, can seem insurmountable to individuals without prior experience in the pharmaceutical sector. Moreover, some regulatory challenges will persist even after approval – for instance, although the Narcotic Control Regulations prohibit the advertising of narcotics to the general public, Health Canada’s position on this issue is unclear, at least with respect to enforcement. As the industry develops, it is expected that Health Canada’s well-established policies and enforcement practices with respect to the advertising of pharmaceutical products will come to inform its position with respect to medical marijuana. As such, industry participants should seek legal advice before proceeding with marketing or advertising campaigns, since the sanctions for noncompliance are onerous and may include the revocation of a producer’s licence.

The regulatory scheme under the MMPR also exposes licensed producers to legal issues not routinely faced by pharmaceutical companies. For instance, since licensed producers will typically deal directly with patients or consumers rather than with hospitals and pharmacies, they must comply with requirements relating to the collection, use and disclosure of patient/consumer personal health information and with Canada’s new anti-spam legislation as it relates to interactions with such individuals.

Finally, as the industry develops, licensed producers and third parties will likely enter into partnerships to streamline the processes of production, testing, packaging and distribution. Given that both producers’ licences and patient registrations (i.e. the submission of a medical document by a patient to a licensed producer) are non-transferable, it is crucial for industry participants to properly structure contractual relationships, including partnerships and joint ventures, to avoid running afoul of the MMPR.