Canada is jumping into the deep end of the international law pool with its move away from prohibition and towards the regulation of adult-use cannabis outside of medical use. This change in course is expected to more effectively curb cannabis use by children and remove a source of revenue held exclusively by criminals. It will also open an enormous new adult-use market alongside the already robust medical market for Canada’s growing cannabis industry. This industry is about to become much more visible and far larger and significant opportunities exist for both ancillary businesses and new technologies aimed at quality, compliance, and efficiency.
For context, Canada has regulated production of medical cannabis in a commercial and competitive system since 2013 under the federal Access to Cannabis for Medical Purposes Regulations, SOR/2016-230 (the "ACMPR") (and its predecessor regulations, the Marihuana for Medical Purposes Regulations, SOR/2013-119 (the "MMPR"). As of June 29, 2018, there were 112 entities licensed to cultivate cannabis plants, sell cannabis products, or both, in commercial medical channels regulated by the ACMPR.1 As of December 31, 2017, there were 269,502 Canadians purchasing medical cannabis products from these licensed producers.2 Soon the Cannabis Act will remove cannabis from Schedule II of the Controlled Drugs and Substances Act, SC 1996, c 19 (the "CDSA"). With that change, cannabis will be regulated by default in Canada rather than prohibited. Three important outcomes are that (1) cannabis will be available for unqualified adult use in addition to medical use; (2) it will be saleable in storefronts; and (3) products will diversify. Product diversification is expected with the onset of the Cannabis Act and while such diversification will be significant, this article is primarily focused on new classes of cannabis, which are generally expected to expand in late 2019 to include concentrates and edibles.
In the Canadian medical market, dried flower is gradually losing market share to cannabis oil. "Cannabis oil" in Canada is for eating, not for vaping – think of it as edibles without food. Cannabis would be purchased in a dropper bottle, capsules, or in a mouth spray format. Cannabis oil offer consistent dosing and remove the need to vaporize or smoke cannabis. Cannabis oil is also recognized as a higher-margin class of cannabis, making it more attractive to licensed producers. Both the consistency of dosing and the margins are further increased when cannabis oil is encapsulated in gelcaps or softgels. Similarly to cannabis oil in Canada, edibles and concentrates in Colorado and other more mature markets in the United States are likewise taking market share from dried flower, and offering industry participants higher margins. Products developed under loosely-regulated state markets are very likely to have more consistent production standards under Canadian federal regulations than state regulations. The result will be greater consistency in user experience, whether adult use or medical.
With classes of cannabis to choose from including dried cannabis (intact flower, milled, decarboxylated, pre-rolled, in pods), cannabis oil (in a dropper bottle, in capsules), concentrates (whether in cartridges or in a container), and edibles (which include beverages), there will be many ways to define a cannabis product in the cannabis industry under the Cannabis Act. Further increasing options is the fact that not all cannabis products are focused on psychoactivity. Some cannabis products sold under the ACMPR include significant amounts of and lower amounts of delta-9-tetrahydrocannabinol ("THC"), and are not realistically identified as psychoactive. Higher CBD products will open new demographics in adult use markets with people looking to steer their experience, without a medical motivation and yet not focused on strong psychoactive effects associated with THC. In addition, beyond CBD and THC, there are many other chemicals that in combination determine the subjective qualities of the psychoactive effects of cannabis. This ingredient is extremely variable.
Another source of both complexity and options for defining a niche is our soon-to-be split industry. In Canada, cannabis will be unique among all substances in that it will be made available for medical use outside the prescription drug system, but also purchased by adults for reasons of their own choosing. Currently cannabis is not prescribed in Canada. A physician writes a medical document for their patient, and the medical document is sent to a licensed producer, making the physician’s patient a client of that licensed producer and allowing them to purchase cannabis directly from the licensed producer by mail delivery. Mail delivery was required for an exclusively federal system that avoided any discussion with the provinces on implementation when the MMPR was first established. There is no other product with that split market, or any comparable split market, in Canada.
With so many classes and dosage forms of cannabis, the user experience and the brand associated with a cannabis product can be well-defined by the product itself – happily in the face of extremely restrictive labeling requirements. In addition, the concept that stores fulfilling a social role similar to that of a liquor store will also be free to sell products with little or no psychoactivity will itself present new avenues to brand a retail business according to the particular cannabis products that it chooses to stock.
Adjacent to the products themselves is the manufacturing process. Technology is constantly improving how we cultivate, dry, cure, roll, extract, formulate, encapsulate, package, and label cannabis to prepare destination products. The efforts of nurseries, cultivators, and processors each contribute to defining a product and the experience associated with it.
The regulation introduced can diversify the split in the market by allowing new economic opportunities to companies to increasing their product matrix as well as in branding their products accordingly. Regulations permit the cultivation of various flowers and seeds giving plant breeders the opportunity to vary the strains produced. There is also an opportunity to produce a brands related to form in conjunction with the product. The ability to cultivate a range of psychoactive or non-psychoactive strains in a variety of forms lets companies specifically target different segments of the adult-use market and create a more niche brand element.
In an industry that is based on an ingredient, any technology that contributes to or facilitates maintaining quality and compliance, while increasing efficiency will select the winners. As the products diversify, as our understanding of the potential benefits and psychoactive properties of cannabis improves, and as the technologies used to manufacture the products evolve, we will see an industry grow and a new fixture of the Canadian economy settle into place over about the next five years. The economic opportunities are significant, as is the possibility for positive social change that a responsibly-regulated industry can provide by competing with the illicit market and increasing access to education about cannabis.