On October 1, 2013, the new Marihuana for Medical Purposes Regulations (MMPR’s) came into force. The MMPR’s are replacing the Marihuana Medical Access Program (MMAP), which will be phased out completely by March 31, 2014. Under the existing MMAP, authorized individuals can grow their own medical marihuana (or have a designated person grow it for them) or they can purchase it from Health Canada. Under the MMPR’s, however, individuals will have to purchase their medical marihuana from a “licensed producer”. Essentially, the medical marihuana business is being privatized.
Although there are over 180 licensed producer applications in the queue with Health Canada, for the first month after the MMPR’s came into force there were only 2 approved licensed producers (being CanniMed Ltd. and its related company, who are Health Canada’s exclusive supplier of medical marihuana under the MMAP). Late last week, 2 additional licenses were granted.
Many of the applicants who are in the licensing process are seeking financing from private investors. Investors are attracted not only to the healthy profit margins projected in business plans, but also to the future potential. Many feel it is only a matter of time before Canada decriminalizes marihuana completely. Licensed producers of medical marihuana will be well positioned to seize a share of the virtually unlimited market if and when that occurs.
Over the past few months, our firm has received many requests for advice from clients who are considering an investment in a ‘licensed producer’ operation. If you are considering such an investment, here are a few due diligence issues to chew on:
1) Advertising/Marketing. How will the licensed producer promote itself and achieve the market share forecasted in its business plan? The fact that CanniMed was the only licensed producer listed on Health Canada’s website for an entire month after the MMPR’s came into force gave it a significant competitive advantage. Further, the Narcotic Control Regulations contain an absolute prohibition on advertising to the “general public” regarding narcotics (which includes marihuana). This would seem to conflict with the fact that licensed producers are permitted to have websites (since most would consider a website to be an advertisement to the general public). Thus far, however, Health Canada has not offered any specific guidance on what (if any) advertising to the general public will be permitted, beyond having a website. How will licensed producers be permitted to drive traffic to their websites? Can they purchase Google AdWords? Can they host discussion forums? Can they advertise their ‘brand’ without reference to any indications or the efficacy of their product? To what extent and in what manner can licensed producers market directly to prescribing physicians? Undoubtedly, some licensed producers will attempt to push the envelope with creative advertising and promotion. But remember that Health Canada has the ultimate enforcement tool to address those who cross the line...revocation of their license.
2) Production and Security Costs. The MMPR’s restrict the production of medical marihuana to highly secure, indoor facilities. Any potential investor should seek confirmation that the security system and quality control systems proposed by the applicant will meet stringent Health Canada requirements and that the cost of such systems has been reasonably forecasted.
3) Security Clearances. The success of the application will be largely dependent upon the acceptability of the individuals put forward in the application, who include (in the case of a corporate applicant) all officers and directors of the applicant, the senior person in charge, the responsible person in charge and any alternate persons in charge. All of these individuals must obtain Health Canada security clearance before a license will be granted. Thus, it is imperative that these individuals are ‘pristine’...and that means more than confirming that they have no criminal record. The Minister has a great deal of discretion in granting security clearance and may consider factors including whether there are “reasonable grounds to suspect” that the individual has been involved in the trafficking of controlled substances, has any connections to a criminal organization or “might constitute a risk to the integrity of the control of the production and distribution of cannabis”. The mere existence of a name in an RCMP file, even where no charge or conviction resulted, could be sufficient to deny security clearance.
4) Uncertainty of License Grant. As stated above, only 4 licensed producers have been approved thus far by Health Canada. It remains to be seen how many licenses Health Canada will grant, how soon they will be granted or where any particular applicant stands in the queue of submitted applications. Do not be fooled by the fact that the language in the MMPR’s states that the Minister “must” issue a license in certain circumstances. This does not mean that every complete application will result in a license being issued. There are several bases on which the Minister “must” refuse to issue a license and some of these bases import discretion on Health Canada’s part. For example, the Minister may not issue a license where such issuance would “likely create a risk to public health, safety or security, including the risk of cannabis being diverted to an illicit market or use”. Bottom line: There is some degree of risk that the licensed producer application will not be granted. Each investor will have to determine their own tolerance for such risk and how much they are prepared to invest during the application (pre-license) phase.
By no means is this list exhaustive. All of the traditional due diligence issues remain relevant and, as always, legal and accounting advice is highly recommended before making any business investment.
One final thought: This new industry has given rise to all sorts of ‘consultants’ and ‘experts’ willing to assist with the application process. Ask probing questions about experience and expertise and carefully check references before retaining any service provider.
Trina Fraser is a partner with BrazeauSeller.LLP. Trina's practice focuses on business and commercial law, Internet and e-commerce law and trade-mark law. She serves as 'virtual in-house counsel' for businesses by providing them with responsive, practical, cost effective advice on all of their legal and business issues. Trina is also a registered trade-mark agent.
To contact Trina Fraser call 613-237-4000 ext. 232 or e-mail email@example.com
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