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How Profitable is Cannabis for Canada’s Licensed Producers?

Kelly Weimert

February 8th, 2017

Policy, Top News

In recent months, the Canadian stance on marijuana reform—both medically and recreationally— has become more crystalline as Health Minister Jane Philpott stated to the UN Special Session on Drugs that the country would introduce new legislation for legalization this spring.

These developments bode well for Canada’s economy as studies project marijuana sales, even at the start, to reach $5 – $8.7 billion—mirroring wine and liquor sales numbers in the country. Moreover, projections that extend beyond sales and factor in growing and distribution, paraphernalia, increased tourism, and business taxes estimate the total economic impact to amount to $12.7 billion to $22.6 billion annually.

However, despite the impending legislation and optimistic economic projections, quite a few gray areas remain that make it difficult to say for certain what cannabis profitability will look like for Canada’s licensed producers.

For instance, Ontario politicians are proposing that provincially-run liquor stores be used as pot sale ports, but public polls show most citizens favor storefronts and drug stores. Additionally, the proposed amendments to the Smoke Free Ontario Act would eliminate vape lounges and treat medical marijuana the same way tobacco is treated, causing a reduction in protected spaces for connoisseurs to convene.

Still, doors for cannabis profitability and accessibility are continuing to open, most prominently being the birth of the Access to Cannabis for Medical Purposes Regulations (ACMPR).

The ACMPR was introduced to replace the Marihuana for Medical Purposes Regulations (MMPR) in response to the Federal Court of Canada’s decision, which stated that requiring individuals to get cannabis only from licensed producers violated liberty and security rights, preventing “reasonable access”.

The ACMPR is comprised of four parts:

  1. It establishes a framework for commercial production by licensed producers responsible for production and distribution of quality-controlled cannabis and starting materials in secure and sanitary conditions.
  2. It introduces provisions for individuals to produce a limited amount of cannabis for their own medical purposes or to designate someone to produce it for them.
  3. It includes updated definitions and a broader scope of products beyond dried cannabis, such as oil.
  4. It lists transitional provisions that relate to the continuation of MMPR activities by licensed producers.

What does this mean for ACMPR licensed producers?

Part 1 of the ACMPR states the following as permitted activities and general responsibilities of licensed producers:

  1. Requirement to obtain and maintain a license
  2. Establishment of business and personnel security measures
  3. Adherence to good production practices, packaging, shipping, labeling, import and export requirements, and record-keeping requirements
  4. Client registration and ordering requirements

In addition to these permissions, the ACMPR allows for newly-permitted activities such as the production and sale of starting materials to those who have registered under the aforementioned Part 2 of the act, and the ability to sell cannabis to those registered in the interim as they wait for plants to grow.

The ACMPR also introduced additional changes, such as: new labelling requirements to include THC and CBD percentage yielded; provisions that enable individuals to receive a 30-day supply of cannabis within each 30-day period beginning on the date of the first sale; and a requirement that all analytical testing be done using validated methods.

How are these changes impacting cannabis profitability?

Long-term impact on profitability for publicly-traded licensed producers remains to be seen, but examples of the recent financial growth of prominent cannabis companies help to paint a clearer picture.

Canopy Growth Company saw their second quarter revenue, ending September 30, 2016, reach $8.5 million compared to the $2.5 million in revenue they received at the same time a year prior. Moreover, the revenue the company received in the six months prior to September 30, 2016 totaled $15.5 million, compared to the $4.2 million it received in the same period last year.

Another prominent cannabis company, OrganiGram, reported net sales of $6.1 million for the fiscal year ending August 31, 2016, which is more than six times what the company saw a year earlier with net sales of $986,676 ending the 2015 fiscal year. The company’s CEO, Denis Arsenault, is optimistic about future profitability stating, “We believe [the emerging cannabis industry] is one of the most exciting commercial events in the history of the capital markets.”

While these figures appear promising, investors should keep in mind that profit margins have a high potential to be squeezed as the number of ACMPR licensed producers increases over time.

In fact, while the cannabis industry is projected to bring in more than $20 billion in five years, the increase in supply is driving prices down, and they’re falling anywhere from 25% on the retail side to nearly 50% for wholesalers, which is already putting a strain on profit margins.

Still, the increase in competition isn’t necessarily a major cause for concern as the high revenue growth projected has the potential to offset lesser profit margins. Additionally, the supply increase is expected to diminish over time as the market balances out, so the significant declines seen early on might be less dramatic in future years.

This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.

About Kelly Weimert

Kelly is a full-time freelance writer based in Austin, TX. A happy hybrid of geek and hippie, when she's not nestled into her couch crankin' out crafty prose with her miscreant Chihuahua, you can find her frolicking outside to keep her sanity in check.

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