Canada’s new marijuana laws set stage for growth

by Will Connors

For 11 years, Brent Zettl and Prairie Plant Systems Inc. cornered the market for government-approved medical marijuana in Canada.

Now, after a change this month in Canada’s production and distribution laws made it legal for any licensed company to grow and ship medical marijuana to patients, and illegal for patients to grow their own, Zettl finds himself competing with a dozen new entrants in an industry that could be worth as much as $1.2 billion in a decade. Already, it is drawing investments from hedge funds and private-equity firms in the U.S. and Canada.

Unlike the U.S., where a patchwork of laws vary from state to state, Canada’s new pot laws are federally regulated and uniform, making it more palatable to institutional investors, who have already taken notice. While Colorado and Washington have gone further by legalizing recreational marijuana, the Canadian prime minister’s office has said it would not seek to decriminalize the drug.

The 12 companies that have been granted licenses by Health Canada, the government body overseeing the program, are now turning away potential investors, whereas just a year ago they were struggling to get potential backers to return their calls.

“It’s a much different time now than it was a year ago,” says Mark Gobuty, the chief executive of Peace Naturals Project Inc., a medical marijuana company based in Clearview, Ontario. “Before, it was a reputational risk. Today they’re lining up and telling me I’m very tall and handsome.”

Peace Naturals, which is already shipping marijuana to patients across Canada, has so far raised $3.5 million to expand its production facilities, and expects to raise another $6 million soon, according to Gobuty.

The licensed companies include a Canadian firm using Israeli technology; a family-owned operation on a rural British Columbia farm; and a company that will grow its marijuana in a former Hershey’s chocolate factory outside Ottawa, directly across the street from the local police station.

That company, Tweed Inc CA:TWD +6.35% , earlier this month listed its shares on the Toronto Stock Exchange’s Venture Exchange, the first marijuana company to do so in Canada. Tweed, which has raised more than $10 million so far, uses the Royal Bank of Canada as its banker, and hired Deloitte LLP to be its auditor. Its stock listing is sponsored by GMP Securities L.P., a well-known investment bank based in Toronto.

“There’s a whole lot of people who think the framework in Canada is better aligned for a real growth sector, as opposed to south of the border,” says Bruce Linton, the chairman of Tweed, referring to the U.S.

Brendan Kennedy, a Yale business school graduate and former venture capitalist from Silicon Valley, in 2010 co-founded Seattle-based Privateer Holdings, which invests solely in companies in the marijuana industry. Most of the firm’s investments are in the U.S., and are companies that have ancillary ties to the marijuana industry but don’t actually grow pot. The exception is a Canadian company called Lafitte Ventures Ltd., based on Vancouver Island, in which Privateer will soon have invested $15 million.

“Canada is the only place where we actually touch the product,” Kennedy says. “There’s no disparity between federal and provincial law in Canada. That was extremely appealing to us. You would never invest that amount of capital in a facility in the U.S.”

When Tweed’s Linton makes presentations to prospective investors, he highlights the differences between the two countries’ approaches: he makes two columns, one for developments in the U.S. marijuana industry, and the other for developments in Canada. “For each thing happening in one country, it’s the opposite in the other,” he says.

That’s not to say the industry in Canada hasn’t been without its problems. A federal court earlier this year gave medical marijuana growers a temporary reprieve, allowing them to continue growing small amounts of marijuana on their property pending the outcome of a trial set for later in the year. And this month, two licensed marijuana companies had some of their supply seized by the Royal Canadian Mounted Police, thought it’s unclear why.

In the U.S., the market for legal marijuana–in which 20 states allow medical marijuana use and Washington and Colorado allow recreational marijuana use–could be worth $2.5 billion by the end of this year, according to the marijuana industry research firm ArcView Group. Colorado, which started allowing recreational marijuana use in January, earned more than $7 million in tax revenue in the first two months of the year. Washington state is expected to start allowing sales this summer.

Zettl’s Prairie Plant Systems, which had revenue of $12 million last year, raised $20 million two years ago in debt and equity, and is looking to raise another $20 million this year. Pharma Can Capital, a group of former Toronto hedge-fund and tech investors, has spent the past year and a half studying the medical marijuana industry and last month closed a $9 million investment round with the goal of becoming the go-to source of money for medical marijuana startups.

Pharma Can’s CEO Paul Rosen says a significant chunk of the recent investment came from a “large, brand-name” U.S. fund, though he won’t say which, and that they’ve had to turn down other institutional investors. Rosen says that a year ago during pitch meetings, people looked at his firm “like we had a third eye or something,” but that prospective investors are no longer shy about getting involved.Pharma Can has already invested more than $1 million in three different marijuana production companies, and expects to invest more soon.

The medical marijuana market in Canada will be worth roughly $120 million in its first year, according to analysts and executives in the industry, but Health Canada estimates that in 10 years the industry could be worth as much as $1.2 billion in sales.

Aside from the 12 companies that already obtained a license from Health Canada, there are many more applying–more than 500 so far. Those still trying to obtain a license include a former nightclub owner from Quebec and a company in Ontario looking to repurpose an indoor soccer stadium.