By unlocking the once-obscure medical marijuana market,
Canada has created a fast-growing, profitable and federally
regulated industry with a distinct appeal to the more daring
About a dozen producers of the drug will find themselves in
the spotlight this year as they consider going public or
prepare to so through share sales or reverse takeovers to
capitalize on recent regulatory changes, investment bankers
The Canadian companies are in a race to raise money to build
facilities, attract patients and grab shares in a market
projected to grow to C$1.3 billion ($US1.20 billion) in the
next 10 years.
Despite facing considerable risks, they have the advantage of
being in one of the few countries where medical marijuana is
legal nationwide and where licensed operators can
In the United States, the drug remains illegal at the federal
level. Some 20 U.S. states have legalised medical marijuana,
but investors worry about the prospect, however remote, that
the federal government may strike down those laws.
Although the U.S. market is home to companies including
Medical Marijuana Inc and Cannabis Science Inc , their
northern counterparts are likely to benefit from greater
legitimacy and legal clarity. Sources said much of the
private equity investment in the Canadian industry had come
from the United States.
"Canada is one of the few countries anywhere where its
citizens have a constitutionally protected right to access
medical marijuana with a physician's consent," said Paul
Rosen, chief executive officer of PharmaCan, a holding
company with large stakes in four producers. "And you've got
the government trying to create an industry around it."
Tweed Marijuana Inc, which converted an old chocolate factory
into a marijuana farm, led the pack by becoming the first
publicly held Canadian company in the sector. Its April
offering was oversubscribed within 15 minutes of being
announced, sources said.
Inspired by Tweed, PharmaCan plans a listing in the next
month or so. Producers Organigram, Aphria and Bedrocan expect
to go public in the next three months, while CannMedica and
others are looking at doing so.
Highlighting the industry's mainstream allure, Tweed's
listing was led by two highly respected Bay Street firms,
mid-sized investment bank GMP Securities and boutique adviser
Other banking firms involved in the sector include Dundee
Securities, Bloom Burton, PowerOne Capital Markets, Jordan
Capital Markets and Delavaco Group.
RISKS AND REWARDS
An April overhaul by regulator Health Canada has thrown the
market open. More than 850 companies have applied for
licenses to produce the drug, and 13 have obtained them so
"This is Health Canada's realisation that medical marijuana
deserves to have a space in the treatment paradigm," said
Bloom Burton President Brian Bloom. "What they're asking in
return is that the standards of manufacturing, distribution
and vigilance are similar to what is seen in the
Analysts expect only a few major companies to remain standing
a few years from now.
"The winners will be the ones that are going to have a strong
brand, a strong customer acquisition strategy, and have the
ability to scale up quickly," said Jacob Securities analyst
Health Canada estimates the sector will grow tenfold in its
first 10 years, reaching about 450,000 users and C$1.3
billion in sales.
Malik says that is only half of the market's potential
because the same number of people already use medical
marijuana through the black market and Health Canada's
measures will bring greater access and lower prices.
"It's an industry that has been born out of almost nothing,
and it is moving very rapidly into something very large," he
said. "The flip side is you're also going to have a lot of
Indeed, a list of risk factors takes up about half of the 22
pages in Tweed's latest quarterly filing.
Potential industry pitfalls include legal changes, resistance
from home growers suing for the right to keep producing their
own pot and physicians who are not convinced about the drug's
"We believe that there's not enough evidence out there that
shows us that we could use this product safely," said Dr.
Louis Hugo Francescutti, president of the Canadian Medical
Association. "We're actually being asked to authorise use of
a product blindfolded."
Michael Krestell, president of investment bank M Partners,
says investors betting on the sector at this stage are
looking for "high-risk, high-reward" opportunities.
He expects the planned offerings to be in the C$5 million to
C$20 million range, with the companies valued at C$60 million
to C$100 million.
Tweed, which has a market capitalisation of $108 million,
raised C$15 million when it went public through a reverse
takeover of a listed entity.
Bankers expect most of the medical marijuana companies to
take this approach since it is often faster and cheaper.
For despite the potential of the industry, its biggest
challenge is to establish credibility among patients, doctors
and more-cautious investors.
"I don't care if we're the biggest seller of medical
marijuana in the first year or two," said Aphria CEO Vic
Neufeld, who previously led vitamin maker Jamieson
Laboratories, "but I want to make sure that we are the most